On August 8, 2010, in Mattingly v. Palmer Ridge Homes LLC, Division II of the Washington Court of Appeals reversed summary judgment in favor of builder Palmer Ridge Homes. A copy of the decision may be found here: Download file The decision is significant for what it says about the enforceability of limitations contained in third-party warranties and by demonstrating the difference between "completion" and "substantial completion" -- and what consequences might follow.

The Mattinglys contracted with Palmer Ridge to build a custom home. The contract contained explicit undertakings that all systems would be in good working order, all work would be completed in a workmanlike manner and comply with applicable codes, and that Palmer Ridge would undertake repairs necessary to comply with the contract documents. The contract purported to restrict Mattinglys' ability to sue Palmer Ridge by stating that Palmer Ridge would extend a one-year warranty at completion, such warranty would prevail, and that no legal action could be brought by either party "after one year beyond the completion of the project or cessation of work."

After signing the contract, the Mattinglys signed an application for enrollment in the 2-10 Home Buyers Warranty New Home Warranty program. The application acknowledged falsely that the Mattinglys had received and read a booklet containing the terms of the warranty purporting to limit their ability to claim under the construction contract.

The Mattinglys signed a certificate of substantial completion on April 1, 2007, accepting the project "as is" except items included in a punchlist. The certificate acknowledged a one-year limitation on implied warranties from date of final payment or occupancy, whichever came first. It established the date of "substantial completion" as March 30, 2007.

The Mattinglys identified additional punchlist items on April 16, paid the balance on April 23, and obtained a final certificate of occupancy on May 14. Palmer Ridge continued at least until October 2007 to work on punchlist items.

The Mattinglys hired a civil engineer to inspect the home. The engineer reported that construction was not in compliance with the contract documents, was not done in a workmanlike manner, and failed to comply with codes. Because punchlist items remained, the engineer concluded that Palmer Ridge failed to "complete" the residence. The Mattinglys asserted a construction defect in February 2008 and arranged a joint inspection with Palmer Ridge's attorney in May 2008. On July 30, 2008, the Mattinglys submitted a claim to the warranty company, which denied the claim as untimely. (The warranty company first told the Mattinglys the one-year warranty would expire June 5, 2008, then changed the effective date to April 17, 2007.) The Mattinglys sued.

Palmer Ridge moved for summary judgment, arguing that the suit was untimely and that the third-party warranty excluded any remedy the Mattinglys had under the construction contract. The trial court granted the motion.

The Court of Appeals, citing authorities from California and Nevada, first held that the limitations stated in the third-party warranty agreement were procedurally unconscionable because the Mattinglys did not receive a copy of the warranty booklet until after they had signed the application and they had no notice that the third-party warranty would in fact limit their rights under the construction contract. Because these limitations thus were unenforceable, the court proceeded to consider what the Mattinglys' rights were under the construction contract.

The contract required suit to be brought within one year of "completion" or cessation of work. Despite the contract language, Palmer Ridge argued that the one-year limitation commenced at "substantial completion." The Court of Appeals found this argument to be meritless. Had Palmer Ridge intended "substantial completion," it should have used that term in the contract.

The Court found that although Palmer Ridge effectively disclaimed implied warranties, it did not effectively disclaim express warranties. As for implied warranties, because the certificate of substantial completion stated that the Mattinglys accepted the project "as is" and limited implied warranties to a period of one year from "date of final payment," the Mattinglys' implied warranty claims were barred by their failure to file by April 23, 2008, one year after final payment.

Although the Mattinglys' implied warranty claims were barred, their express warranty claims were not. An "as is" acceptance may bar implied warranties, but will not bar express warranties without explicit reference to them. Accordingly, Palmer Ridge continued to be liable for breach of the express undertakings in its construction contract -- e.g., workmanship, compliance with codes, compliance with plans/specifications, systems in good working order. A claim for breach of express warranties nonetheless had to be brought within a year of "completion" or cessation of work.