Verify before you buy when taking on new product lines

Point of law

One of my lumberyard clients in the upper Midwest recently found itself in a precarious situation. I’ll call the client Midwest Lumber, a family-owned yard with annual sales of about $15 million. In business for more than 40 years, Midwest is not inexperienced or unsophisticated when it comes to new products. However, this particular case might have been avoided with a bit more due diligence up front.

One of Midwest’s general contractor (GC) customers built a house for the Smiths in Minnesota. After the house was completed, there was noticeable buckling of the siding and it was eventually believed that the OSB was the problem. The GC had purchased the OSB from Midwest, which was manufactured by “Big National” located in the southern U.S. This OSB was a new product line for Midwest that it had only been selling for about a year.

As is typical, Big National’s warranty allowed for replacing the bad OSB but disclaimed all labor to remove and reinstall it. Often this limited warranty language is stated on a page included with the packaging or on the manufacturer’s website. These types of warranty exclusions are generally enforceable as long as the warranty language was published and available for the public to review, even if the purchaser or end user never actually saw it.

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Legally, Midwest should not be responsible for problems with Big National’s products and the customer’s recourse should be directly against Big National. However, wanting to keep its customers happy, Midwest offered to pay a portion of the labor expense to replace the siding and OSB, with the GC and the Smiths also sharing in the costs. The Smiths objected and argued that they should not bear any of the labor costs. To make matters worse, the Smiths were under the gun to close upon permanent financing for their new home and their interest rate lock was due to expire in three weeks. Midwest asked me for some advice.

Upon further investigation I learned that:

• When Midwest added this product it was marketed as an innovative, non-standard and more energy-efficient OSB board.
• Big National had similar problems with this product and had in fact removed it from the upper Midwest market because it turned out it was not appropriate for the climate.
• There were online postings and reviews about others who had similar problems.
• By the time the materials were installed on the Smith’s home, Big National had already been having problems with the product in colder climates.

I applied some arm twisting to Big National, arguing that its limited warranty excluding labor would not apply if it had continued to sell the product in Minnesota after knowing it might not hold up to the climate. Eventually, the parties agreed to have an OSB sample from the Smith home tested by a professional group focused on engineered wood. If the test found the OSB was suitable, then Big National was off the hook and the GC had an issue with the siding (likely the installation). If the test revealed a problem, then Big National would supply a suitable replacement and the GC, Midwest and Big National would split the labor costs three ways.

Drum roll: The test determined that the OSB was not suitable. The parties scrambled to tear off the siding and OSB and reinstall it in time for the Smiths to close on their loan.

After the saga was concluded, I discussed with Midwest that while technically it did not cause this situation, it perhaps could have been avoided through some additional diligence when Midwest added this “innovative” OSB product sold by a southern U.S. manufacturer. I realize hindsight is 20/20, but checking out whether this new “energy efficient” OSB material was suitable for the cold upper Midwest climate before agreeing to sell it might have avoided the entire mess.