Statute of Repose: Is Equipment Installed as Part of Building Renovations Considered a “Product” or “Construction”?

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Donald A. Rea | Construction Industry Counselor | November 1, 2018

Resolution of the question is critical to the application of product liability statutes or construction law and their often differing statutes of limitation and repose.  It was recently addressed in Puente v. Resources Conservation Co., Int’l, No. 76604-0-I, 2018 WL 5146983 (Wash. App. Oct. 22, 2018).  There, the personal representative of the estate of Javier Puente sued several parties under product lability law when he suffered fatal boric acid burns while performing maintenance on a pump system installed in a manufacturing facility.  The estate sued under product liability law, but the trial court granted summary judgment based upon a six-year statute of repose governing construction related to “any improvement upon real property.”  Id. at * 1.

The State of Washington Court of Appeals reversed, and held as follows:  “With respect to those who service or design items installed within a building, … they could easily avoid product liability law, if they desired, by simply bolting, welding the equipment or fastening it in some other manner to the building…. Mechanical fastenings may attach a machine to the building, but they do not convert production equipment into realty or integrate machines into the building structure, for they are not necessary for the building to function as a building.”  Id. at * 4 (internal quotation marks and citations omitted).  While integral to the manufacturing process at issue, the faulty equipment installed in the facility was not so integrated into the facility as to render it part of the structure.  Indeed, the court held that the equipment was “simply ‘house[d]’ within the environmental building.”

Because the court deemed the equipment unnecessary to the function of the building (unlike an HVAC system for example), it concluded that it was not “construction” and was, therefore, subject to product liability law, and not subject to a six-year statute repose that would bar the claim.  When considering actions and defenses arising out of the installation of equipment in construction projects that is not integral to building operations, counsel should carefully consider whether product liability or construction law applies in each jurisdiction.  Varying applications will have significant effect on the law governing particular claims and defenses.

Teaching An Old Dog New Tricks: The Spearin Doctrine and Design-Build Projects

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John Castro | Construction Law Blog | October 5, 2018

The United States District Court for the Southern District of California has now held that the Spearin doctrine applies to design-build subcontractors where the subcontractor is expected to design a portion of their work. The case is United States for the use and benefit of Bonita Pipeline, Inc., et al. v. Balfour Beatty Construction, LLC, et al. (“Bonita Pipeline”) (Case No. 3:16-cv-00983-H-AGS).

In Bonita Pipeline, a subcontractor sued the general contractor and its sureties alleging breach of contract, breach of implied warranty, declaratory relief, and recovery under the Miller Act. The subcontractor then filed a motion for partial summary judgment against the general contractor on its declaratory relief cause of action, seeking a finding that the general contractor could not shift legal responsibility for its defective plans and specifications to the subcontractor.

The evidence presented in support and opposition of the motion showed that the general contractor provided incomplete design documents to the subcontractor at the bid stage, and expressly stated they were incomplete. The subcontractor was ultimately awarded the bid, which included design-build structural steel, metal decking, and other amenities. The parties admitted that the plans and specifications could be refined with further design, whereby the subcontract contained language stating that the subcontractor would assume risk of further change (“refinement”) of the plans and specifications. Further, the subcontract stated that the subcontractor was not entitled to additive change orders or an increase in its bid price for “refinements” resulting from the design-build process. Instead, the subcontractor would only be entitled to additional compensation for enhancements requested by the owner.

During the project the subcontractor sought additional compensation for design errors and changes, with the court noting 93 requests for information and 37 change order requests. The subcontractor also finished its work 290 days late.

The Spearin doctrine (named after United States v. Spearin (1918) 248 U.S. 132) generally holds that an owner (or here, general contractor) impliedly warrants the information, plans, and specifications it provides to the general contractor (or here, subcontractor). Citing case law that state law controls the interpretation of Miller Act subcontracts to which the United States is not a party, the Bonita Pipeline court noted that the California Supreme Court approved and applied of the Spearin doctrine, citing Souza & McCue Constr. Co. v. Superior Court of San Benito County (1962) 57 Cal.2d 508, 510 and E.H. Morrill Co. v. State (1967) 65 Cal.2d 787, 792-793. Citing Coleman Eng’g Co. v. N. Am. Aviation, Inc. (1966) 65 Cal.2d 396, 404, the Bonita Pipeline court also noted that the California Supreme Court has extended application of the Spearin doctrine to construction contracts even where there is no government entity involved.

The general contractor argued that the Spearin doctrine did not apply because the project was one of design-build, and the parties expressly acknowledged that the plans and specifications were incomplete at the time of bidding. The subcontractor, in turn, argued that it acknowledged it assumed the risk that the plans and specifications would be “refined,” but the general contractor nonetheless still impliedly warranted that the plans and specifications provided would be correct, even if incomplete.

Ultimately, the Bonita Pipeline court found the subcontractor’s position persuasive, finding that the Spearin doctrine applies to design-build projects. Regardless, the Bonita Pipeline court denied the plaintiff subcontractor’s partial motion for summary judgment, finding that there were insufficient facts in the record to determine whether the contractor’s extra work was due to errors in the plans and specifications, or whether the extra work was due to the design work expected of the subcontractor.

In support of its ruling, the Bonita Pipeline court relied on a United States Court of Federal Claims case, AAB Joint Venture v. United States, 75 Fed.Cl. 414 (Fed.Cl. 2007). In AAB Joint Venture, the plaintiff contractor won a bid to construct a military storage base in Israel, whereby the project was in a design-build format. The plaintiff was provided specifications from the government, and after construction commenced the plaintiff contractor submitted a request for information questioning the accuracy of the specifications. After further requests for information and responses thereto, the plaintiff contractor (and its subcontractors) performed earthwork using 3-inch stone fill, as opposed to a 6-inch maximum stone fill as specified in the contract. The use of the smaller fill, however, precluded use of the contract-specified density test, as the test could not be used on the smaller fill. Thereafter, plaintiff contractor sought an equitable adjustment as a result of the defective specifications and increased costs, which was denied.

The AAB Joint Venture court found that the Spearin doctrine applied to the design-build project. It held that “[t]he purpose of the specifications is to serve as a guide to the contractor … The contractor should be able to rely on a reasonable interpretation of the contract.” “The standard that must be met under the implied warranty is that the specifications will result in a satisfactory, acceptable, or adequate result; short of that, the specifications are defective and the contractor is entitled to an equitable adjustment.” There, the specifications provided a range of sizes for fill that could be used by the subcontractor, though some sizes in turn precluded use of the contract-specified density test. The AAB Joint Venture court held that the fact that the specifications allowed for some satisfactory results did not preclude a finding that they were defective. In other words, “[d]efective specifications may be found when the full scope of the dimension tolerances set forth in the specifications do not produce satisfactory results.”

The Bonita Pipeline court also relied on a Civilian Board of Contract Appeals case, Drennon Constr. & Consulting, Inc. (“Drennon”), 13 B.C.A. (CCH) ¶ 35,213 (2013). In Drennon, the plaintiff contracted with the Bureau of Land Management (“BLM”) to widen a road at a campground in central Alaska. Widening the road required excavating a hillside, and building a gabion wall along the cut. The hillside ultimately collapsed, and the contractor’s work was placed on suspension. Ultimately, the road was widened without the use of a gabion wall, and the contractor sought recovery for its costs during the suspension period, as well as the cost of purchasing gabions for which it no longer had use. The contractor contended that the geotechnical information provided in the BLM’s solicitation was defective. In contrast, the BLM argued that the contract was one of design-build, and that the contractor was not entitled to any recovery because of the contractor’s own faulty design.

The Drennon panel sided with the contractor, finding that the hillside would have collapsed regardless of the approach undertaken by the contractor. The court pointed out that the solicitation included a road design and specifications from the civil and geotechnical engineer. The engineer testified that the digital terrain model it utilized for its design contained inaccurate control points, and that the BLM denied the engineer’s request to perform a survey to address the inaccuracies. On that basis, the engineer testified that they intentionally added language to the solicitation that would have warned potential bidders of the inaccuracies of the model. The Drennon panel found this directly contributed to the increased costs suffered by the contractor. The Drennon panel also found that the engineer’s geotechnical report was defective, noting that the site conditions experienced by the contractor were materially different than what was described in the report.

Bonita Pipeline shows that the Spearin doctrine is still alive and well, and even permeating into modern construction projects. The doctrine’s application to a design-build project at the United States District Court level shows that it is moving of specialized venues such as the Federal Court of Claims and Board of Contract Appeals. The Spearin doctrine reaches its centennial anniversary this year on December 9, 2018.

Contract Scope Limits Tort Liability

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Stan Martin | Commonsense Construction Law LLC | October 26, 2018

From the Massachusetts Appeals Court comes a reminder that a contract scope of services may serve to control or limit the scope of tort liability.

New homeowners sued the contractor and designer, hired by the former homeowner for a replacement septic system, when that system failed only a few years after installation. Turns out the contractor had placed “construction and other debris in the leaching fields” (apparently as “filler”), instead of using only sand.

The designer moved for summary judgment, on the basis that its contract required the designer to view the work when the hole for the new leaching field had been dug (but before placement of the sand and laterals), and again once the leaching field had been completed. It did so. But of course the designer was not present, and did not see, when the contractor used improper materials.

The trial court dismissed the homeowners’ claims against the designer, and the Appeals Court upheld the dismissal. If the designer was obligated to view the site on two occasions, and did so, the new homeowners could not establish that the designer had any other duty to inspect or observe the conditions. And thus they could not establish that the designer had failed to carry out its duty, in a tort sense. Per the court: “we would conclude, given both the scope and the limitations of the Design Team’s contractual responsibilities, that laymen could not reasonably infer without expert evidence that its failure to learn of the deficiencies constituted professional malpractice.”

This is a reminder – more for designers than contractors – that the scope of services being undertaken may serve not only as a restriction on contract obligations, but also on tort liability or exposure. An important lesson to keep in mind. The case is Van Sicklin v. Nantucket Surveyors, LLC, 2018 Mass. App. Unpub. LEXIS 777 (Oct. 23, 2018).

Construction Law Practice Tip: The Discovery Rule Bar is High for Breach of Contract Claims

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Pierre Grosdidier | Haynes and Boone LLP | November 5, 2018

Two cases from Houston appellate courts show the relatively high bar that breach of contract claims must meet to satisfy the discovery rule. The cases show that parties in the construction industry must mind the details and cede no opportunity to confirm contractual performance – or risk waiving potential breach of contract claims that will materialize years after the project’s completion.

Accrual, Limitations and the Discovery Rule

“A claim for breach of contract accrues when the contract is breached.”[1] But, in the construction industry, breaches can remain hidden for years. For example, a contractor might take a shortcut and sink fewer or shorter piles than specified, and let the owner discover the breach years later when the building’s façade starts to crack. Accordingly, in construction-defect cases, the general rule is that “limitations begin to run when an owner becomes aware of property damage.”[2]

The limitations clock starts ticking as soon as the claimant becomes “aware of enough facts to apprize him of his right to seek judicial remedy.”[3] Knowledge of an injury, “‘however slight,’” triggers accrual and the duty of reasonable diligence to inquire, “‘even if the fact of injury is not discovered until later, and even if all resulting damages have not yet occurred.’”[4]

The discovery rule tolls the accrual date of a cause of action “until the injured party learned of, or in the exercise of reasonable diligence should have learned of, the wrongful act causing the injury.”[5] Importantly, the limitations clock continues to run even if the plaintiff still ignores:

  • The specific cause of the injury
  • The party responsible for it
  • The full extent of it
  • The chances of avoiding it [6]

The judicial intent is to apply the discovery rule “in limited circumstances where ‘the nature of the injury incurred is inherently undiscoverable and the evidence of injury is objectively verifiable.’”[7] “‘An injury is inherently undiscoverable if it is, by its nature, unlikely to be discovered within the prescribed limitations period despite due diligence.’”[8]

The “discovery rule is a plea in confession and avoidance.”[9] Whether it applies is a question of law.[10] The Texas Supreme Court has expressly opined that it did not hold that the rule could “never apply to breach of contract claims.”[11] Instead, whether the rule applies “is decided on a categorical rather than case-specific basis; the focus is on whether a type of injury rather than a particular injury [or cause of action] was discoverable.”[12] Some contract breaches may qualify under the discovery rule, “[b]ut those cases should be rare, as diligent contracting parties should generally discover any breach during the relatively long four-year limitations period provided for such claims.”[13]

The discovery rule does not toll claims when facts are included in the contract that would place the plaintiff on notice of a potential injury.

In Ammerman v. Ranches of Clear Creek Cmty. Ass’n, Inc., the trial court granted summary judgment to the community association and one of its homeowners on limitations grounds, and the First Court of Appeals affirmed.[14] The Ammermans purchased a 30.6-acre parcel in a gated community in 2006 and built their residence in 2008. Each parcel in the community was sold with a pre-defined and carefully located “building envelope,” i.e., perimeters within which owners had to build their residences. The subdivision’s developers and the association had drawn the building envelopes with the intent of maintaining the secluded nature of the overall community, and had done so before placing the first parcel on sale.

The Wilsons also purchased a 16.8-acre parcel adjacent to the Ammermans’ in 2006, but waited until 2015 to build their retirement home within its three-acre envelope. In 2016, the Ammermans sued the community association, its architectural review committee, and the Wilsons for breach of contract, declaratory action, injunctive relief, and other claims. The Ammermans alleged that the Wilsons’ building envelope and residence location both violated the association’s covenants.

The trial court held that the Ammermans’ claims were time-barred, and the court of appeals agreed. The record showed that the Wilsons’ residence was within its prescribed envelope, and that the latter was established and disclosed when the Ammermans purchased their parcel in 2006. Any potential breach of the association’s covenants was discoverable by the Ammermans by 2006, at which time the limitations period started running. The Ammermans’ 2015 breach of contract and other claims were, therefore, past the applicable limitations periods.

The discovery rule does not toll claims when facts are discoverable in storage that would place the plaintiff on notice of a potential injury.

In B. Mahler Interests, LP v. DMAC Constr., Inc., Mahler sued DMAC for breach of contract and warranty for alleged defective construction of an event center.[15] Substantial completion occurred on October 25, 2006, but DMAC continued to work on punch list items and change orders into 2007. Mahler made its final payment in January 2008. An engineering firm it hired in August 2007 flagged several construction problems with the building. Additional building problems began to materialize in late 2010 and Mahler requested a second inspection in May 2012. Mahler sued DMAC on October 26, 2012, asserting breach of contract and warranty claims regarding issues with a porch roof, outside doors, and indoor flooring. Mahler invoked the discovery rule. The trial court granted DMAC’s limitations-based summary judgment motion.

The Fourteenth Court of Appeals affirmed. It held that the breach of contract “occurred at the latest by January 2008 when all construction was completed and final payment was made.”[16] Mahler’s claims were, therefore, time-barred unless the discovery rule applied. The court held that it did not. The record showed that by January 2008 at the latest, Mahler had been informed by the August 2007 report about the issue that formed the basis of his porch roof claim, that he actually knew about the issue behind his outside door claim, and that he had enough information to discover the issue behind his indoor flooring claim. As to the latter, Mahler claimed that he learned in 2012 that the contractor had installed residential-grade floors after he had allegedly represented and warranted to install commercial-grade floors. But, DMAC had left behind at the event center a box of surplus residential-grade flooring material. The court held that Mahler’s injury was, therefore, “not inherently undiscoverable” because Mahler could have contacted the manufacturer to confirm the flooring material’s grade. Mahler could not avail itself of the discovery rule because it had taken no measures to verify DMAC’s contractual performance.

Procedurally, a plaintiff seeking to avail itself of the discovery rule must affirmatively plead it, “either in its original petition or in amended or supplemental petition, in response to defendant’s assertion of limitations defense as matter in avoidance,” or it is deemed waived.[17] In Shipp v. O’Dowd, the Shipps signed a residential construction contract in February 1964.[18] The house was completed in May of that year. The subcontractor sank twelve fewer piers than the construction plans specified. The Shipps apparently discovered the alleged construction legerdemain, and resulting house settling and damage, in late 1966. They sued for breach of contract on November 1, 1968 but did not affirmatively plead the discovery rule. The court found that the suit was, “on its face . . . not filed within the statutory period” and held that it was barred by limitations.[19] One can infer that the court reasoned that the completion of construction marked, at the latest, the start of the limitations period, as in Mahler.

Florida’s Fourth District Appeals Court Clarifies What Actions Satisfy Florida’s Construction Defect Statute of Repose

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Rahul Gogineni | The Subrogation Strategist | October 30, 2018

In Gindel v. Centex Homes, 2018 Fla.App. LEXIS 13019, Florida’s Fourth District Court of Appeal recently concluded that the date on which the plaintiffs provided a pre-suit notice in compliance with §558.004 of Florida’s construction defect Right-to-Cure statute, Fla. Stat. §§ 558.001 to 558.005, et. seq., is the date on which the plaintiff commenced a “civil action or proceeding,” i.e. an “action,” within the meaning of Florida’s construction defect statute of repose, Florida Statue § 95.11(3)(c). Thus, reversing the decision of the trial court, the Fourth District held that the plaintiffs timely-filed their construction defect action against the defendants.

The Gindel case arises from the allegedly defective construction of a group of homes by Centex Homes. On March 31, 2004, Mr. Gindel (the lead plaintiff) as well as the other homeowners (hereinafter collectively referred to as either “plaintiffs” or “homeowners”) took possession of their homes. After discovering an alleged construction defect, the homeowners provided a pre-suit notice of defect to Centex on February 4, 2014. After being notified that Centex would not cure the defect, the homeowners filed suit on May 2, 2014, against Centex and its subcontractor, Reliable Roofing and Gutters, Inc. Upon motion, the district court dismissed the case against Centex, finding that: (1) Florida’s 10-year statute of repose applied; and (2) the plaintiffs failed to bring their action within 10 years of taking possession of their homes.

Statute of Repose

In the United States, almost all states have adopted a statute of repose in connection with improvements to real property. Similar to a statute of limitations, a statute of repose imposes a time limitation within which a plaintiff has to file suit. However, a statute of repose is different from a statute of limitations in that it can start to run even before the plaintiff’s claim arises. Accordingly, a plaintiff’s claim may be barred by a statute of repose before the plaintiff is even aware of the latent construction defect giving rise to the plaintiff’s claim.

In Florida, there is a 10-year statute of repose for claims brought in connection with an improvement to real property. Under § 95.011 of the Florida Statutes, “[a] civil action or proceeding, called “action” in this chapter… shall be barred unless begun within the time prescribed in this chapter.” That time is further defined in §95.11(3)(c) of the Florida Statutes, which states:

“An action founded on the design, planning or construction of an improvement to real property… must be commenced within 10 years after the date of actual possession by the owner, the date of the issuance of the certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest.” (Emphasis added).

In overturning the lower court’s decision, the appellate court concluded that, by including both “civil action” and “proceeding” within the definition of the term “action,” the statute contemplated that more than the filing of a civil action would satisfy the time requirement for the Statute of Repose. It further concluded that, because the Right-to-Cure statute, §558 of the Florida Statutes, sets out a series of mandatory steps that must be taken prior to bringing a judicial action, it sufficiently constituted an “action” for purposes of Florida’s Statute of Repose. Accordingly, the appellate court found that the plaintiffs, through their pre-suit notice sent on February 4, 2014, brought their “action” against Centex within 10 years of taking possession of the property. Thus, the court held that the plaintiffs were not time-barred from bringing their claims in a subsequent civil action.

This case serves as a good reminder to review the applicable statute of repose for any possible exception that may apply to your case. Additionally, it should be noted that some jurisdictions have “Right-to-Cure” statutes, which should also be reviewed prior to bringing litigation related to a construction defect.

Post-Opinion Motions

As of this writing, the parties have filed post-opinion motions related to the case, including a motion to certify the matter for appeal to Florida’s Supreme Court. Thus, the precedential value of the case, whether in the Fourth District or in other Florida appellate districts, is subject to change. Accordingly, until the Supreme Court of Florida addresses this issue, subrogation practitioners should contemporaneously file both the pre-suit notice required by Florida’s Right-to-Cure statute and a civil suit in the appropriate court. To the extent that the defendant contends that the suit is premature, a court should, pursuant to Florida Statute § 558.003, stay the suit to allow the parties time to comply with the Right-to-Cure statute.