Utah Appellate Court: Homeowners’ Claim for Defective Construction Against Geotechnical Engineer Dismissed Due to Lack of Contract and the Economic Loss Rule

Patrick Johnson | Construction Industry Counselor | July 8, 2019

A recent Utah Appellate Court upheld the dismissal of a homeowners’ claims against a geotechnical engineer because the homeowners did not have a contract with the geotechnical engineer and therefore their claims were barred by the economic loss rule. See Hayes v. Intermountain Geoenvironmental Services, Inc., 2019 UT App 112, 2019 WL 2621931.  In Utah, the economic loss rule only allows lawsuits for defective design or construction to be based on a breach of contract.  Such a claim cannot be brought under a general negligence or tort theory where there is no contract.  Many states have a similar, but often not identical, economic loss rule.

In this case, the plaintiff homeowners purchased land from a developer and constructed a home.   The defendant geotechnical engineer prepared a report for the developer  concluding that the parcel of land was stable and suitable for development.  Fourteen months after construction had concluded, cracks were observed in the foundation of the home and the home began to settle rendering it unlivable.  Because the homeowners did not have a contract with the geotechnical engineer, they could not file a breach of contract claim against the geotechnical engineer. As a result, the homeowners tried to bring a claim under a general negligence theory against the geotechnical engineer for their damages.  The trial court and appellate court agreed that the homeowners were barred from asserting a negligence claim due to the economic loss rule. 

This case serves as a reminder that, in many states, recovery of purely economic losses based on theories of tort are generally not recoverable. Developers and parties to a construction project should  document their agreements in writing.  Likewise, a purchaser of a construction project should receive assignments of the developer’s and/or seller’s written contracts with third-parties involved in the development.   

Construction Defects: Things to Remember to Make Sure You Can Get the Problem Fixed

Joshua D. Kipp | Carrington Coleman | July 3, 2019

Construction projects take a lot of time, cost a lot of money, and often result in more than a few headaches along the way. When the project closes out, most people are relieved. The business finally gets to use the new facility and enjoy the benefit of all of that time, money and headache. Then it happens. The business starts to notice problems. Good contractors typically address the smaller problems with slight inconvenience to the owner. But more significant problems resulting from construction or design defects must be managed correctly to ensure that the problems get fixed by the contractor or the owner receives compensation. Here are some things to remember when you discover a potential problem.

1. Don’t destroy anything relevant. Notify any parties who may be responsible for the problem and allow them the opportunity to inspect before you change the conditions as a part of an investigation or repair. Failure to do so could result in a court entering a spoliation instruction. Spoliation is the destruction or failure to preserve evidence in your possession when a party knew or should have known that a claim would be filed and that evidence would be material. A spoliation instruction is a statement from the judge to the jury that it may presume the destroyed evidence would have been unfavorable to the party who destroyed it. Even in the rare instances when you need to immediately repair the problem to avoid a shut down or further damage, a simple email notifying the other parties can help avoid a spoliation instruction.

Retaining experts early will also ensure that they have the opportunity to observe the conditions as they exist at the time the problem is uncovered. Savvy experts will also provide invaluable guidance in the investigation and preservation of evidence. It may make sense to have legal counsel retain a consulting expert with responsibility to coordinate the work of other experts who are likely to testify. Communications between the legal team and a consulting expert may remain protected, unlike communications with those experts who are designated later as testifying experts.

Of course, you also need to notify employees to preserve anything related to that project. Remember to include IT folks to stop any automatic deletion programs until after emails are preserved.

2. Document the problem and send appropriate notices. Take photos and videos immediately to preserve a visual record of the condition. With assistance of counsel to ensure privilege, prepare a written description of the problem and interview key people to capture information about when the problem arose and the impact. Review the contract and provide notice to the construction and design professionals. Most contracts, including industry forms such as the AIA general conditions, include contractual notice provisions. Failure to provide the notice may waive your right to require correction or to make a claim for breach. Prompt notice also positions you best to get the problem fixed quickly. Consider whether notice should be sent to manufacturers or suppliers under warranty provisions. Evaluate whether any carriers should be put on notice of a potential claims, including under any policies that many cover business interruption.

3. Time is of the essence. In addition to contractual deadlines for warranty repair claims (often one year), you need to watch the statute of limitations for asserting claims. Construction defects typically give rise to claims for breach of contract, breach of express warranty, breach of an implied warranty, or professional liability. The limitations period and when the claim accrues differ based on the claim and also by jurisdiction. In Texas, for breach of contract or breach of express warranty, a four year statute of limitations applies. For breach of an implied warranty, limitations may run in either two or four years depending on whether it is predominately an issue of tort or contract. When exactly the timeline begins to run will also depend on the type of claim and type of injury. Generally, limitations for contract claims starts at the time a breach occurs. In other words, you could have less than four years from when you discover the problem to pursue a claim if the discovery rule does not apply. The discovery rule applies when an injury is inherently undiscoverable and objectively verifiable and sets a different start date for limitations running—when you did or should have discovered the problem. Determining exactly when limitations started and whether the discovery rule applies can be tricky. If the claim arises many years after substantial completion, pay attention to the statute of repose. In Texas, for example, you must bring claims within ten years of substantial completion of a construction project regardless of whether the discovery rule applies, although that timeline can be extended by sending a notice within the ten years. Although public owners are exempt from certain statutory limitations periods, the statute of repose does apply to both public and private owners. If you think you have a claim, acting fast and reaching out to a lawyer, if necessary, may be the best thing you do to make sure you preserve your claims stemming from a construction defect.

Preserving evidence, properly documenting the problem, providing appropriate notices, and being conscious of timing considerations will go a long way in helping to preserve your rights and ensure you get the problem fixed or get compensated. While this overview provides an outline of steps and considerations, the devil is in the details. Engaging an attorney and consulting experts early will help you to navigate these details. Attention to detail when you run into a construction or design defect very well may be the difference between getting your problem fixed by the contractor or design professional instead of having to dig into your own pocket to fix it.

Contractor Liable Thirteen Years After the Fact??

Earl K. Messer | Taft Stettinius & Hollister | June 28, 2019

Imagine you built a school back in 2005. Years go by. Many employees who worked on the project are gone. Their emails are no longer available to review. Most other records are buried somewhere, maybe. The owner has handled maintenance year after year without your input. The building has aged and felt the effects of changing weather. And then, you are sued, thirteen years after the job is complete—for moisture intrusion. What a nightmare.

The Ohio Court of Appeals for Stark County has just considered such a case and affirmed the trial court’s application of the ten-year statute of repose to bar the claim. Unfortunately, it’s not over yet. The appellate court ruled on May 6, 2019, and the local school district has filed motions to have that ruling reversed. There is probably plenty more litigation to come in this case. Stay tuned.

In the meantime, though, it is constructive to consider what issues are at stake, for both contractors and owners. Ohio has a statute of repose. This is different from a statute of limitations. Most people understand that a statute of limitations sets a time within which a lawsuit must be filed or the claim is lost. The thing that fewer fully understand is that the clock for the statute of limitations may not start to tick until the injured party has reason to believe it has been damaged. In other words, defective construction that a reasonable person would not detect for a while does not start the statute of limitations clock ticking until something occurs to give the owner reason to believe there may be defective work. Think a slow leak inside a building wall that causes wood to rot and mold to grow, but otherwise does not become evident to the owner for five years. Typically, the statute of limitations clock would not begin to tick during those five years. Since the current statute of limitations for breach of contract in Ohio is eight years, the contractor would be exposed to suit for defective work for at least thirteen years.

That would only be the case, though, if the statute of limitations was the only time cut off for construction claims. It is not. Ohio, as well as many other states, also has a statute of repose. The statute of repose in Ohio basically cuts off any ability to sue after ten years following substantial completion. There is an exception if the owner discovers the defects in the final two years of the ten-year period. If the owner does discover defects in those last two years, it gets two more years before it no longer has a claim against the contractor.

So, what does the Stark County case have to do with this? In that case, the contractor, the architect and the contractor’s bonding company were sued for moisture intrusion related issues over thirteen years after the project had been completed. The owner alleged that the Ohio School Design Manual required the defendants to warranty their work for forty years for minor repairs and, astoundingly, one hundred years for major structural or exterior enclosure repairs. The defendants filed motions to dismiss arguing that the statute of repose barred the school district’s claims because it was filed thirteen years after substantial completion, three years beyond the expiration of the statute of repose. On appeal, the appellate court, so far, has affirmed the trial court’s dismissal.

The school district made several arguments as to why the appellate court should have reversed the trial court. The most troublesome for contractors was that when the contractor and the architect agreed in their contracts to be bound by the Ohio School Design Manual, they were more or less agreeing that the school district could make claims against them for up to one hundred years despite the statute of repose. The appellate court did not reject that argument. Instead, it avoided it on a technicality. The school district had not raised that argument with the trial court, and an appellate court will not consider any argument on appeal that a party failed to make first to the trial court. So, contractors can expect owners in the future to test that argument in another case.

Having said that, it seems fairly clear that if the argument had been made to the trial court, the appellate court would have rejected it. The school district’s warranty claim is nothing more than another kind of breach of contract claim. The appellate court affirmed all the good reasons why a breach of contract claim cannot be brought after ten years. All those reasons would apply just as well to a breach of warranty claim, since the warranty was part of the written contract between the parties. Those reasons were that the architect and contractor had no control over the building or its maintenance for all those intervening years. They had no control over extreme weather events that may well have affected the building over thirteen years. Much of the relevant evidence would simply be gone after thirteen years.

So, what is the practical import of all of this?

  1. Both the contractor and the owner should hang on to their written records, including electronic records, for at least ten years, and possibly up to twelve, following project completion.
  2. Owners need to keep their eye on the clock up to ten years after the project is complete in case they may have any viable claims.
  3. Remember that the longer it takes to litigate a matter, the more unclear many things become. For example: what really caused the moisture problems—was it defective work, poor maintenance, natural wear and tear? The owner has the burden of proof to show that it was defective work that caused the problem.
  4. And the longer it takes to litigate, the fewer witnesses that will remain available and the more distant and foggy the memories will be.

Construction Defect Dispute Governed by Contract Disputes Act not yet Suited to being a “Suit”

William S. Bennett | SDV Insights | May 14, 2019

The Southern District of California recently held that a series of demands for a general contractor to investigate and repair several construction defects at a U.S. Army facility did not constitute a “suit” within the meaning of the general contractor’s commercial general liability (“CGL”) policy.

In Harper Construction Co., Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., the U.S. Government hired Harper Construction Company (“Harper”) to construct a U.S. Army training facility for the Patriot Missile System in Fort Sill, Oklahoma. No. 18-cv-00471-BAS-NLS (S.D. Cal. Mar. 28, 2019). During the project, Harper hired Harper Mechanical Contractors (“Harper Mechanical”), an independent company, as a subcontractor “to perform demolition, grading, and other work at the Project.”

After Harper completed the project, the government informed Harper of property damage at the project, “including, but not limited to, gypsum wallboard cracks and binding doors.” Harper attempted to repair the issues, but the problems continued. The issues were apparently the result of Harper Mechanical’s grading work. Subsequently, the government sent two letters requesting an investigation and asking Harper to “propose a plan to correct the issues.” As Harper undertook an investigation spanning multiple years, the government became increasingly frustrated with the delays. The government threatened to initiate “formal administrative recourse” and to demolish the project, forcing Harper to re-build from the ground up. It also sent Harper another letter requesting Harper submit a formal proposal to correct the issues.

Harper’s general liability carrier was National Union Fire Insurance Company of Pittsburgh, PA (“National Union”). Harper Mechanical was listed as an additional insured on Harper’s policy. Four years after the government’s first notification to Harper of the issues with the project, Harper’s broker submitted a claim to National Union. The broker noted that Harper was seeking additional insured coverage for Harper Mechanical under Harper’s own policy for investigation and repair costs resulting from Harper Mechanical’s work.

National Union issued a reservation of rights letter and sought more information from Harper. The parties corresponded for the next year and half, until National Union issued a denial letter indicating that there was not a “suit” against Harper seeking damages because of “property damage,” based on the policy’s definition of “suit.”

The policy contained the standard ISO CGL definition of “suit,” which is defined, in pertinent part, as “a civil proceeding in which damages because of … ‘property damage’ to which this insurance applies are alleged. ‘Suit’ includes: … b. Any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.”

Harper sued National Union. National Union moved for summary judgment. In opposition, Harper argued that the government’s demand constituted a “suit” because the demand falls within the Contract Disputes Act (“CDA”), which includes administrative and court proceedings and qualifies as “any other alternative dispute resolution proceeding” under the policy definition. The CDA applies to “contracts made by an executive agency for, among other things, the procurement of construction … of real property.”

The court acknowledged that the CDA applied to the contract, given the Army’s status as an executive agency. However, the CDA does not automatically consider all disputes to constitute a “claim.” A dispute does not become a “claim” unless one of the contracting parties issues a “[w]ritten demand or written assertion … seeking … the payment of money in a sum certain,” at which point “each claim by the Federal Government against a contractor relating to a contract shall be the subject of a written decision by the contracting officer.” Without the claim being “submitted for a written decision by the contracting officer, which is the first step in the dispute resolution process under the CDA,” the court determined that there was “no evidence that Harper was faced with a “civil proceeding in which damages … are alleged” or “any other alternative dispute resolution proceeding,” as required by the policy’s definition of “suit.” The court also noted that there was no evidence that National Union had consented to any of the processes involved in the dispute, which is a further requirement of the definition of “suit.”

The court granted summary judgment for National Union based on the conclusion that the CDA demands did not constitute a “suit.” This case is an unfortunate example of what can happen when a contractor does not consider coverage when making strategic decisions throughout the process of investigating and repairing construction defects. The result could potentially have been favorable for Harper had it notified National Union early (and often) of the issues, involved coverage counsel to work with its defense and/or general counsel to strategize about how to cast the proceedings as a “suit” under the CDA, and followed the proper channels under the CDA to solidify its position that the parties were involved in ADR proceedings under existing California law.

Property Damage to Insured’s Own Work is Not Covered

Tred R. Eyerly | Insurance Law Hawaii | April 22, 2019

    The Michigan Court of Appeals found there was no coverage for a lawsuit filed against the insureds for faulty workmanship. Skanska United States Bldg. v M.A.P. Mech. Contrs., 2019 Mich App. LEXIS 529 (Mich. Ct. App. March 19, 2019).

    Contractor Skanska United States Building was the construction manager on a renovation project for the medical center. The heating and cooling portion of the project was subcontracted to M.A.P. Mechanical Contractors (MAP). MAP had a CGL policy from Amerisure Insurance Company. Skanska and the medical center were named as additional insureds on the policy. 

    After installation of the steam boiler and related piping, it was discovered that the heating system did not function property. Skanska discovered that MAP had installed some of the expansion joints backward, causing damage to concrete, steel, and heating system. The medical center sent a demand to MAP. Skanska performed the repairs and replaced the damaged property. Skanska then submitted a claim to Amerisure, which was denied.

    Skanska filed suit against MAP and Amerisure. The trial court denied Amerisure’s motion for summary judgment. The court found that the parties injured by MAP’s negligence did not anticipate, foresee or expect backward expansion joints or property damage to the entire length of the underground steam lines. Michigan courts had consistently focused on the particular property damaged to determine whether an “occurrence” had happened. The unforeseen incident meant an “occurrence” may have happened, which triggered Amerisure’s duty of coverage. 

    The court of appeals found that the trial court had erred. It was well established that an “occurrence’ could not include damages for the insured’s own faulty workmanship. Consequently, there was no “occurrence” here. Amerisure presented evidence to demonstrate that all of the repair and replacement work was within the scope of Skanska’s original project. Once Amerisure presented this evidence, the burden shifted to Skanska to present evidence that the repair and replacement work included tasks or property beyond the scope of the original project. 

    Amerisure was entitled to judgment as a matter of law because coverage was not triggered due to lack of an “occurrence” and there were no genuine issues of material fact that the only damage was to Skanska’s own work product, or that of its subcontractor.