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.

No. 8 of the Top 10 Horrible, Terrible, No Good Mistakes Lawyers Make in Mediations

David K. Taylor | BuildSmart | July 3, 2019

This post is a continuation of the 10 most horrible, terrible, no good, “bang your head against the door” mistakes that I have seen lawyers make before, during and after mediations in which I was the mediator. As stated in previous posts, it takes more than throwing together a mediation statement at the last second and showing up at the mediation. Doing it right requires the same kind of due diligence and work that goes into preparing for a key deposition or even trial. Great “mediation” lawyering is essential and is the best way to get to an acceptable deal.

Number 8: Failing to Prepare the Client and Not Having a Plan

How experienced is your client representative? If she’s an in-house counsel who has attended scores of mediations, there may not be a need for much preparation, other than to make sure she has the authority to settle and understands the dispute and the issues. But if the client has limited experience, and this is a “bet the business” case, counsel MUST spend time (and that means in person, not via email or calls) to explain the process and to try to manage the client’s expectations. I have had clients think that mediation was a trial and were furious at their counsel for not “trying” the case during the mediation. The definition of “settlement”: No one is happy. The real world applies. I have yet to walk into the room of a party after a few sessions and the client say, “I now realize I was wrong; here’s a check; you are the greatest mediator in the world.”

The goal of any mediation is not to “win” but to resolve the dispute. What can your client “live with?” Talk with the client before the mediation about all possible outcomes, which can include losing at trial (even though you are, of course, the best lawyer in the world). Have a plan going into a mediation, but anticipate the need for some flexibility in case something new is revealed by the opposition or the client, such as telling the lawyer at the mediation (it’s happened more than once), “By the way, I forgot to tell you that I fired our primary fact witness last week for theft, and she hates our guts.”

Be realistic about the consequences of not getting a deal, especially future legal fees, expenses and the impact on your client’s business (including how much time the client’s key employees are going to have to spend on the case). It is amazing how many times I ask a party/counsel what their best and worse case scenarios are, including estimated legal fees/expenses. I often get a blank look. I then have to estimate legal fees and expenses through trial, and no matter what the counsel’s hourly rate is, the final number can put a client on the floor.

To be clear, great mediation advocacy is not the most important element in getting a deal done; pre-mediation planning is equally important.

Read numbers 9 and 10 on the list.

Some Thoughts on Appealing an Adverse Ruling from a Magistrate Judge

Ian Dankelman | Property Insurance Coverage Law Blog | July 7, 2019

Adverse rulings are always possible in federal litigation. This post explores how insureds can respond to adverse rulings issued by federal magistrate judges during pretrial litigation.

Congressional statute assigns magistrate judges broad authority to issue pretrial orders and opinions. In first-party property cases, magistrate judges often issue (1) orders on discovery issues and (2) reports and recommendations on case dispositive motions. Case dispositive motions include motions for summary judgment and motions to dismiss. If insureds receive an adverse opinion from a magistrate judge, insureds have the right to petition the district judge to reject the magistrate judge’s position.1

One of the most important considerations when determining whether to seek review of a magistrate judge’s opinion is the standard of review that the district judge must employ. Standards of review are important because they inform the district judge’s decision on how much deference to provide to the magistrate judge’s opinion.

The district court’s deference to the magistrate judge is at its zenith when the magistrate judge enters an order that is not case dispositive. For non-dispositive motions, the district court reviews the order under the clearly erroneous standard. To prevail, the petitioning party must leave the district court with a definite and firm conviction that the magistrate judge made a mistake or failed to apply (or misapplied) the correct law or procedural rule. The standard of review is extraordinarily deferential to the magistrate judge’s order. Under this standard, the petitioner must essentially convince the district judge that the magistrate judge’s order was so incorrect that no reasonable judge applying the correct law could have arrived at the same decision. If a party does not object to the magistrate judge’s order within 14 days, all objections to the order may be waived.

Magistrate judges often issue their opinions through a report and recommendation. In a report and recommendation, the standard of review often depends on whether the petitioner filed a timely objection to the order. Parties must lodge objections to the magistrate judge’s report and recommendation within 14 days. For issues that drew objection, the district judge must look at the entire relevant record and make its own determination of the correct outcome. This means that no deference (with the potential exception of witness credibility) is afforded to the magistrate judge’s determination. Any portion of the report and recommendation that drew no objection is reviewed under the clearly erroneous standard. After review, statute authorizes the district court to accept, reject or modify the magistrate judge’s findings.

Insureds and their attorneys must also consider the issue of issue waiver for circuit-level appeals. In some circumstances, failing to object to a magistrate judge’s order or report and recommendation can deprive the litigant of the opportunity to submit the error to the federal circuit courts of appeal or seek appellate review under a more favorable standard.

One other consideration insureds must consider is whether the adverse ruling really affects the ultimate merits of the case. Sometimes, a magistrate judge’s ruling on discovery or other issues provides clarity to the parties on important—but not dispositive— issues. Even if the insured’s requested relief was denied or the magistrate judge decided contrary to the desires of the insured, sometimes the best course of action is to move on and litigate the next issue. But if the magistrate judge issued an opinion that negatively affects the case, an insured might have no option but to appeal to the district court.
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1 This discussion assumes that the parties have not consented to the jurisdiction of the magistrate judge to enter all orders and judgment in the case.

Appraisal and the Impartiality of Appraisers

Timothy Burchard | Property Insurance Coverage Law Blog | July 6, 2019

Recently, the Colorado Supreme Court issued its opinion in Owners Ins. Co. v. Dakota Station II Condominium Association,1 on appraiser impartiality. Specifically, the court discussed the meaning and interpretation of impartiality under the insurance policy and whether a contingent-cap fee agreement between the appraiser and Dakota Station rendered the appraiser not impartial as a matter of law.

The story starts off in a very familiar way. Dakota Station made two insurance claims for weather damage to its property, a dispute arose, and Dakota Station invoked the appraisal clause in the insurance policy. The appraisal clause stated:

If [Owners] and [Dakota] disagree on the value of the property or the amount of loss, either may make a written demand for an appraisal of loss. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the value of the property and amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding.

Both appraisers prepared estimates, but could not come to an agreement, so the appraisal decision went to an umpire. The appraisers’ estimates considered six total repair categories. The umpire agreed to four out of six repair categories in Owners appraiser estimate and agreed to two of six repair categories in the Dakota Station appraiser’s estimate, one of which was for the roofing system. The umpire drafted an appraisal award, which was signed by the umpire and Dakota Station’s appraiser. Owners paid the appraisal award.

Months later, “Owners called foul”2 and challenged the appraisal award in the lower courts. Owners challenged the appraisal award through a motion to vacate, claiming Dakota Station’s appraiser did not act impartially as required by the appraisal clause in the policy. The lower court disagreed, dismissed Owners motion to vacate, and a division of the court of appeals affirmed the dismissal. Owners then appealed to the Colorado Supreme Court.

The Colorado Supreme Court set out the issues it would review in the appeal:

[H]aving agreed to review the case, we must interpret the policy’s impartiality requirement and determine whether a contingent-cap fee agreement between Dakota and its appraiser rendered the appraiser partial as a matter of law.

Here are takeaways from the Colorado Supreme Court opinion:

  • The appraisal clause language noted above does not require appraisers to act with the same level of impartiality as arbitrators. Owners relied on Providence Washington Insurance Co. v. Gulinson3 to claim that it does, but the Colorado Supreme Court found that Providencedid not apply here. Further, the court stated Providence “didn’t establish a general duty of impartiality applicable to appraisers. We simply concluded that an [appraisal] award is invalid when one appraiser and the umpire agree to an award without notice to the second appraiser.”
  • The appraisal clause language noted above requires that appraisers do not advocate on behalf of either party and be unbiased, disinterested, and unswayed by personal interest. The Colorado Supreme Court said, “[t]he language of the appraisal provision doesn’t create an ambiguity as to whether the meaning of the word ‘impartial’ could encompass advocacy … [t]he provision certainly contemplates that the appraisers might submit conflicting values, but a difference in opinion could result for many reasons … [n]othing in the language suggests that values will be put forth on behalf of a party …” The Colorado Supreme Court remanded to the lower court to review whether Dakota Station’s appraiser acted impartially.
  • The contingent-cap fee agreement didn’t result in partiality on the facts presented in this case. While Dakota Station’s appraiser’s contract included a provision allowing a 5% contingent-cap fee, it required a Dakota Station representative to initial the contingent-cap fee clause. The clause was not initialed by Dakota Station and the court determined that no one believed the clause was applicable here. As such, the court provided an extremely narrow review of the contingent-cap fee agreement which unfortunately does not provide direction, generally. However, the court did offer that, “while we are wary of the possible incentives these [contingent-cap fee] agreements create, we decline to hold that they render appraisers partial as a matter of law.”

The Colorado Supreme Court opinion provides a distinction between appraisers and arbitrators and the definition of impartiality but falls short of a final decision on whether Dakota Station’s appraiser acted impartially or if the appraiser’s contingent-cap fee agreement impacted the appraiser’s ability to act impartially as a matter of law in this case. What this opinion does provide is that the actions of appraisers during an appraisal should be appropriately scrutinized and that taking a position with an estimate cannot be based on the interests of an appraiser’s client, whether the insured or insurer.
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1 Owners Ins. Co. v. Dakota Station II Condo. Ass’n, No. 17SC583, 2019 CO 65 (Colo. June 24, 2019).
2 Id.
3 Providence Washington Ins. Co. v. Gulinson, 215 P. 154, 155 (Colo. 1923).