Trendy Building Material May Cause Future Problems

J. Spencer Cook and Bryan G. Scott | Spilman Thomas & Battle | November 30, 2017

We all remember the litigation nightmare surrounding synthetic stucco or EIFS (exterior insulation finish systems) in the recent past. Now, commentators worry that Adhered Concrete Masonry Veneer, also known as manufactured stone veneer (pictured below), when installed improperly, poses the potential to cause widespread litigation similar to EIFS.

In case you do not recall, EIFS became a popular exterior on residential structures in America during the 1980s. However, in the mid-1990s, home inspectors noticed some EIFS-clad homes experienced significant amounts of moisture damage, particularly those on the coast of North and South Carolina. News and media outlets began to widely publicize extensive litigation over EIFS-clad homes.

With the cloud surrounding EIFS, builders shifted to other exterior building materials to provide an upscale and appealing appearance on buildings. Manufactured stone veneer in recent years has seen a dramatic rise in use on residential and commercial buildings because, like EIFS, it enhances a building’s aesthetics by giving it an upscale, trendy, and modern look that many builders and owners seek. Notably, Remodeling Magazine recently published a report noting that adding manufactured stone veneer holds the third best ratio for cost to value received on home remodeling projects. Given these attributes, manufactured stone veneer appears positioned to continue to rise in popularity.

Manufactured stone veneer is a fabricated alternative to using natural stone on either the exterior or interior of homes and is composed of cement, natural aggregate, and iron pigments that are molded into natural-looking stone shapes using molds of natural stones. Manufacturers create manufactured stone veneer to be a lighter weight material than natural stone. Therefore, using manufactured stone veneer is preferable to natural stone because it is less stressful on foundations and does not require additional strengthening of walls or foundations.

Despite manufactured stone veneer’s increase in popularity, some home inspectors worry it will be prone to the same moisture damage risks as EIFS if it is improperly installed. Because manufactured stone veneer is applied in a similar manner as EIFS, improper installation potentially can cause water to infiltrate the veneer. Proper installation of manufactured stone veneer requires implementation of adequate installation protocols to prevent the moisture from becoming trapped behind the stone veneer. Otherwise, a structure will be at risk for mold, rot and other moisture-related structural damage. Proper manufactured stone veneer installation may often require builders to implement additional drainage measures to limit water infiltration. Additionally, manufactured stone veneer is prone to cracking from improper mortar or sealant materials utilized during installation. Any cracking may exacerbate water infiltration and moisture damage issues.

Despite these concerns, manufactured stone is an upscale and value-adding material that, when properly installed, is an effective exterior building material. The Masonry Veneer Manufacturers Association has published an installation guide for the installation of manufactured stone veneer on buildings. Contractors and owners should take care to ensure manufactured stone veneer installed on their projects complies with all manufacturer’s installation requirements, and also meets applicable building codes and industry guidelines.

Federal Court Holds That, Under Louisiana Law, a Contractor Need Not Show a Total Work Stoppage to Recover Extended Home Office Overhead Under Eichleay

Jane Fox Lehman | Pepper Hamilton LLP | December 7, 2017

Team Contrs., L.L.C. v. Waypoint NOLA, L.L.C., No. 16-1131, 2017 U.S. Dist. LEXIS 162172 (E.D. La. Oct. 2, 2017).

Waypoint NOLA (“Waypoint”) was the owner of a hotel construction project in New Orleans (the “Project”). Waypoint contracted with Team Contractors (“Team”) to serve as the Project general contractor and HC Architecture (“HCA”) to serve as the Project architect. HCA, in turn, subcontracted with KLG to prepare the mechanical, electrical, and plumbing (“MEP”) plans.

HCA delivered a complete set of specifications, including KLG’s MEP plans, to Team, and Team began work. It was later discovered that the MEP plans did not comply with code requirements. Team was forced to remove and reconstruct the MEP work before proceeding with its work as scheduled.

Team filed suit for breach of contract against Waypoint and for negligence against Waypoint, HCA, and KLG. Team alleged it experienced delay and incurred damages when it was forced to remove and reconstruct the MEP work. Its damages included extended home office overhead related to the delay. Team’s expert used the Eichleay formula to calculate these damages.

In Louisiana, courts apply a three-prong test to determine if a claimant is entitled to recover damages under Eichleay: First, the contractor must demonstrate that there was an unexcused delay. Second, the contractor must show that it incurred additional overhead expenses. Third, the contractor must establish that it was required to remain “on standby” during the delay. To show that it was “on standby,” a contractor must show (1) the delay was of an indefinite duration, (2) the contractor was required to return to work at full speed and immediately during the delay, and (3) most, if not all, of the contract work was suspended.

The Defendants filed a motion for summary judgment, arguing that Team could not recover damages under Eichleay, because there was no suspension or stoppage of the work. In response, Team presented evidence that there was, at minimum, a “functional” stoppage of “all or most of the work performed” pursuant to the contract.

The District Court determined that Louisiana court decisions had not decided whether a “functional” work stoppage would satisfy Eichleay, and if so, what degree of work stoppage would be sufficient. As such, the District Court was required to predict how the Louisiana Supreme Court would resolve the issue. The District Court noted that the Louisiana courts which had decided the application of Eichleayhad adopted the doctrine from the federal courts without alteration, and accordingly, federal analyses of this issue should weigh heavily in a prediction of what the Supreme Court of Louisiana would hold.

Because the federal courts applying Eichleay had held that a claimant need not show a total stoppage of work to recover extended overhead damages, the District Court held that it is sufficient, for purposes of establishing standby, if a contractor can demonstrate that work has stopped or significantly slowed. Because Team had presented evidence of such a functional stoppage, the District Court denied the Defendants’ motion for summary judgment.

The Paradigm Shift on Risk in Construction

Joseph A. Cleves, Jr. | Taft Stettinius & Hollister LLP | November 7, 2017

Many owners still rely on heavy-handed contracts to provide them with risk certainty. The goal is to reduce their risk by shifting it to designers and contractors.

While this approach has a certain logical appeal, it has the paradoxical result of increasing risk instead of eliminating it. A review of case law shows that careful drafting of contracts does not provide the imagined protection. The reason is found in the contradictory, unpredictable results that reported decisions reveal on provisions that either limit or shift liability. For example, a limitation on delay damage claims may cancel an owner’s implied warranty in one court’s estimation. Yet another court may nullify such a clause, citing the owner’s planning and design deficiencies as the root cause of the delay. More and more litigation of bedrock cases and principles, such as Spearin and the Economic Loss doctrine, have resulted in a proliferation of inconsistent decisions. The deeply fractured landscape of legal precedent has resulted in an environment where the outcome of disputes and impact of contract terms are unforeseeable. Rather than placing a premium on careful contract drafting, this approach renders careful contract drafting useless in the circumstances for which it was intended.

The search for stability calls for a dramatic change in approach — a paradigm shift. Among the possible solutions on the horizon, only an approach that eschews claims-making and litigation seems to offer the potential for success. Integrated Project Delivery (“IPD”) provides a radically different approach to construction. It supplants adversarial and fragmented relations with a contractual commitment to incentivizing collaboration among project participants. Strong consideration of IPD becomes essential in light of recent case law and recurrent conflicts spawning litigation among owners, designers and contractors.

Can an Architect be Held Liable for Defects in Construction?

Sean M. Golden | Vandeventer Black LLP | November 7, 2017

It is common on commercial construction projects for the owner to hire the architect to perform services during construction, in addition to designing the project. Among other things, the architect’s construction phase services will typically consist of periodic observations and evaluations of the progress of the construction work. An architect may be charged with observing the work to determine whether or not the building is being constructed in accordance with the contract documents, including the drawings the architect has prepared.

When there are defects in the construction, an owner may attempt to hold the architect liable (usually in addition to the contractor) for said defects, even if there are no errors or omissions in the architect’s design or specifications. The theory behind such an assertion is typically that, even if the defect was caused by the contractor, the architect was charged with observing the work and should have called out the contractor’s defect and seen that it was corrected.

In such a situation, can the architect be held liable for defects in the contractor’s work? The answer – as is so often the case – depends on the architect’s contract with the owner. While many owner/architect agreements contain provisions requiring the architect to make periodic inspections of the work, it is typical for the agreements to contain language limiting the architect’s responsibility, such as the language used in the AIA Document B101-2017 Standard Form of Agreement Between Owner and Architect:

“The Architect shall not have control over, charge of, or responsibility for the construction means, methods, techniques, sequences or procedures …, nor shall the Architect be responsible for the Contractor’s failure to perform the Work in accordance with the requirements of the Contract Documents.”

AIA B101-2017, at § 3.6.1.2.

An architect in this situation would likely argue that this provision is exculpatory in nature, i.e., that it relieves the architect from any liability for the contractor’s acts or omissions. The argument, according to the architect, is that the language “nor shall the Architect be responsible for the Contractor’s failure to perform the Work in accordance with the requirements of the Contract Documents” truly means that the architect cannot be responsible for the contractor’s failure to perform the work in accordance with the contract documents. Some courts have adopted this position, and have dismissed claims by owners suing architects for construction defects.

But the majority of courts have taken a more nuanced view of this often-used contract language. These courts have found that exculpatory language such as the quoted-language from the B101 doesn’t necessarily mean the architect is off the hook. The Supreme Court of Alabama explained this distinction in one such case:

While the agreement may have absolved the Architect of liability for any negligent acts or omissions of the contractor and subcontractors, it did not absolve the Architect of liability arising out of its own failure to inspect reasonably. Nor could the Architect close its eyes on the construction site and not engage in any inspection procedure, and then disclaim liability for construction defects that even the most perfunctory monitoring would have prevented, or fail to advise the owner of a known failure of the contractor to follow the plans and specifications.

Watson, Watson, Rutland/Architects, Inc. v. Montgomery Cty. Bd. of Educ., 559 So. 2d 168, 173 (Ala. 1990) (emphasis added). In other words, while the architect is not responsible for the contractor’s negligence, the architect is required to perform its construction observation services reasonably, as required under its contract. Further, when the architect actually observes deviations from the contract documents, it is required to report these to the owner.

There are several takeaways respecting such designer liability:

First, courts distinguish between full-time construction observation, and periodic evaluations of the work. Courts will hold the architect to a higher standard vis-à-vis construction defects in the latter situation. Architects should make sure that, unless they are truly being engaged to perform full-time observation, their contracts require observations of the work to occur only at periodic, reasonable intervals.

Second, the contract language matters. For example, an obligation to notify the owner of any defects in the work, whether or not observed by the architect, can be interpreted as something more akin to a guarantee of the contractor’s work; which is at odds with the exculpatory language, discussed above.

Lastly, performance matters. Whatever the contract language, all parties to the contract must perform as contracted, and if they do they have meet their obligations. Even the strongest exculpatory language will absolve an architect for failing to perform the construction administration services it agreed to perform. But performance as agreed shields that architect when performed as agreed.

Objectors Beware – Exposure to Claims Brought by Adversely Impacted Developers is Alive and Well

Carl A. Rizzo | Cole Schotz PC | October 31, 2017

Parties objecting to development projects have traditionally been immunized from liability for common law torts, such as malicious prosecution, abuse of process and tortious interference.  This immunity, grounded in the well-recognized Noerr-Pennington doctrine, affords immunity to those who petition the government for redress.  (See  Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc.365 U.S.  127 (1961); United Mine Workers of America v. Pennington, 381 U.S. 657 (1965) (holding that parties seeking relief from the government are generally afforded immunity unless such actions are objectively baseless).

While the immunity afforded objectors has been a difficult one to breach, recent decisions suggest that actions brought against these objectors require careful review of the facts and underlying circumstances before they can be summarily dismissed.  In order to overcome Noerr-Pennington immunity, a litigant must satisfy a two-prong test:  First, proof must be established that the actions of the objector were “objectively baseless,” meaning no reasonable litigant could realistically expect success on the merits of its claims.  Second, proofs must also establish that the conduct in question was brought with the specific intent to further wrongful conduct through the use of the governmental process – as opposed to the outcome of that process.  Importantly, the second prong is only considered if the challenged litigation is first found to be objectively meritless.

Recently, however, meeting the first prong has been made easier by our court’s consideration of an objector’s track record and the presence of other repeated failed filings.  (See Main Street at Woolwich, LLC v. Ammons Supermarket, Inc. 451 N.J. Super. 135 (App. Div. 2017).  In Main Street, the court relied upon a Third Circuit decision in holding that the trial court failed to properly consider the defendant’s alleged pattern of sham litigation.  Hanover 3201 Realty, LLC v. Village Supermarkets, Inc. 806 F.3d 162, 180 (3rd Cir. 2015), cert. denied __ U.S. __, 136 S.Ct. 2451 (2016).  By demonstrating that an objector has engaged in a series of unsuccessful administrative and/or court challenges, developers can establish that this activity represents a pattern of utilizing the process to serve the anticompetitive purpose of injuring market rivals.  Under such circumstances, a court could very well conclude that the claims of such objectors were not brought to redress any actual grievances, but rather to promote delay and cause injury.  Accordingly, this broad immunity can be lost where the conduct at issue is merely intended to interfere directly with the business relationships of a competitor.

As a consequence, before filing any action seeking government redress, a putative objector, much like any other litigant, should carefully evaluate the bases for its objections with a legal professional to ensure that they are both grounded in fact as well as supported by sound legal underpinnings.  To do otherwise is to invite abuse of process type claims that now have a much greater likelihood of success.  Reviewing any possible strategy that involves objecting to a rival’s application for development is now, more than ever, a critically important step to insulating the objector from exposure to counter-suits that were previously viewed as questionable nuisance type actions.