How to limit risk as a manufacturer, supplier, and contractor

blake nelson

Risk is like the flu—no one wants it. Most contract negotiations involve seeking to reduce risk and liability. This particularly applies to suppliers in the construction industry, where the players attempt to shed their liability when they hand the product to a company further down the supply chain. Manufacturers, suppliers, general contractors (GC), installers and property owners may all limit their liability through published policies or written agreements.

Manufacturer Liability
A manufacturer can most easily limit its liability because it only makes and sells products and does not provide labor or other services. Product sales are generally covered by the applicable state’s version of the Uniform Commercial Code (UCC). Under the UCC, a manufacturer may limit its liability through published limited warranty policies, even if the end user did not sign anything and never read them. Manufacturers usually disclaim implied UCC warranties through terms and conditions on their websites, on packing slips, or in other literature included with the product. In contrast, limiting liabilities and warranties for labor or other services requires a signed written agreement stating those limitations, and some statutory warranties for labor cannot be waived.

Manufacturers almost always disclaim liability for the labor to replace a defective product. They will supply new or replacement product but will not pay for labor to remove the bad product or install the new product.

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Supplier Liability
A supplier (such as a lumberyard) that purchases product from a manufacturer or other wholesaler and resells it to the public is also covered by the UCC and owes implied warranties unless those are limited or disclaimed in writing. A supplier’s warranty extends to any person who may reasonably be expected to use, consume or be affected by the goods. For example, one court held that even though the GC was the purchaser, a lumberyard’s limited warranty was binding on the engineer and architect working on a project. Like a manufacturer, a supplier may limit its warranties and liabilities through terms stated on its website, on packing slips, or in other documents enclosed with the product. Also like a manufacturer, a smart supplier will limit its warranties to the material itself and disclaim responsibility for labor. Any credit or supply agreements should contain warranty waivers and disclaimers.

Despite any written disclaimers, a supplier’s verbal representations can also become part of the bargain. I once handled a matter where a lumberyard sold siding to a GC for a home in Minnesota. It turned out the siding was not designed to withstand Minnesota’s weather, but the yard’s representative had told the GC and the homeowner the product was fit to install in Minnesota. Despite having disclaimed implied warranties on its website and packing slips, the yard was still potentially liable for the labor costs because the other parties had relied upon the yard’s verbal representations about the product’s suitability. The yard eventually agreed to pay for the labor because of the uncertainty about the alleged verbal warranties.

Where does that leave everyone else?
Who is responsible to pay for the labor to replace defective product if both the manufacturer and supplier disclaim responsibility? The answer depends on how well the GC, installer and customer protect themselves at the beginning of the transaction.

Since installers provide services and not products, they must require customers to sign a document containing waiver and disclaimer provisions. A company installing products should obtain a signed document clearly stating that 1) it disclaims responsibility for defective materials; 2) it is not responsible for labor costs to remove or replace defective materials; and 3) the customer (whether a GC or property owner) must pursue claims for product defects directly against the supplier or manufacturer. If indeed the problem is defective materials and there are no workmanship issues, a properly worded disclaimer document will be enforceable to protect the installer.

Obtaining a signed disclaimer document can be difficult for a subcontractor working for a GC, who will often refuse to sign anything but its own agreement. In turn, a GC’s own subcontractor agreement form almost always shifts as much liability as possible to the subcontractor. These scenarios can create a “tug-of-war” to shift responsibilities and liabilities for potential problems.

Simply put, all parties in a construction project should review their own stated warranty policies, procedures and agreements to make sure they are adequately protected.

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