Megan Ferris and Kristin Tannler | Construction Claims | Winter 2018
There is an ongoing trend in construction-defect litigation where lawsuits or arbitration claims involving contract, payment, or punch-list disputes transform into stubborn, unpredictable, and litigated disputes for which fees and expert costs far exceed the actual issues in dispute. These are not the multi-million-dollar condominium cases with hundreds of units and just as many parties and attorneys, but rather smaller, custom projects for individual homeowners.
The underlying contracts in these matters often contain a prevailing party-fee clause, but little else with respect to key terms.
These matters, because of cost and attorney-fee exposure, rarely go to trial or arbitration, and we don’t have the opportunity to see how courts would rule in such matters if they were given the chance. Recently, the Oregon Court of Appeals issued an opinion in Cedartech, Inc. v. Strader, 293 Or App 252 (2018) that touches on all of these themes.
Defendant Strader owned a historic home with a cedar-shingle roof. Strader contracted with Cedartech to perform certain work on her roof. That work included cleaning and treating the roof. Sometime after the written contract, Strader requested that Cedartech repair two leaks in the roof. However, while attempting to perform those repairs, Strader refused to allow Cedartech to enter the home to investigate the cause and source of the leaks.
The matter proceeded to judgment by way of bench trial. The trial court found in favor of Cedartech, the contractor, for $7,045 (less $1,200 in offset in favor of Strader). The Court of Appeals affirmed the general judgment in favor of Cedartech, finding that Cedartech had substantially performed under the contract.
Even though the Court of Appeals affirmed the general judgment in favor of Cedartech, it remains to be seen if Cedartech will recover substantial prevailing party fees. The trial court denied Cedartech’s petition for $80,829.50 in attorney fees. The trial court held that no factor supported awarding attorney fees and denied Cedartech’s petition in its entirety. The Court of Appeals remanded the attorney-fee issue back to the trial court, which is still pending.
Cedartech does not establish any new significant points of law to guide our practice, but it does inform us that the courts may be willing to enforce contract terms against homeowners and in favor of contractors. Cedartech also serves as a cautionary tale on the attorney-fee issue, which is often the tail that wags the dog in these contractors-versus-homeowner disputes.
These “small” disputes between the contractor and homeowner often land on our desks after the notice of defect period has elapsed, the homeowner has already incurred attorney fees to get the claim to suit, and the contractor has a breach of contract claim for non-payment. On top of that, the dispute has morphed into allegations of over-charging or bad work against the contractor.
Cedartech is a good reminder that the contractor is sometimes right, however obstacles often block the path to a favorable ruling. In addition, there is an ever-mounting fee petition on both sides. As we continue to litigate these contract disputes disguised as construction-defect claims, we should be mindful of the following issues:
- The potential for a myriad of coverage issues to be addressed when reporting, including how to tiptoe around issues such as an unfinished project, allegedly fraudulent accounting, and often a lack of property damage (in the conventional sense).
- Emotional investment of the contractor in the job gone wrong, which often implicates matters of pride, workmanship, and a separate worry that there will not be sufficient coverage.
- Emotional plaintiffs and punitive litigation tactics that are aimed more at punishing the contractor than negotiating a resolution.
- The decision on whether to file third-party claims against subcontractors whose worst offense is that they were not permitted to finish their work. Bringing the third-party claims increases the breadth and scope of issues and adds a whole new layer of expense, but it also may help raise settlement funds to increase the chance of a mediated resolution. These subcontractors may have their own coverage concerns and claims for non-payment to add to the mix.
In undertaking triage and mapping out the initial strategy, the contractor’s counsel may consider these tactics:
- A frank discussion with the contractor client about how to approach a non-payment claim and the likelihood of recovery. This is often where personal counsel may be of aid in either aggressively pursuing a counterclaim or assisting the contractor client in making the decision to forego recovery in exchange resolution of the claim.
- Attempt to outline items that require remediation versus a part of the job that simply has to be finished and arguably is not the basis of a defect claim against the original contractor.
- Develop contractual arguments in the contractor’s favor. Did the homeowner wrongfully terminate? Did the homeowner improperly withhold payment? What was the homeowner’s role in contributing to project delays?
- Engage an expert on behalf of the contractor to immediately document the job-site condition, preferably before remediation or repairs have commenced. Even if repairs have begun or have been completed, a consultant will be able to assist in evaluating reasonableness of cost of repairs and assist in sorting out repair costs from costs to finish.
- Early evaluation if the case requires deposition discovery before attempting ADR. In some cases, even though we all appreciate the need to keep attorney-fee exposure at a minimum, the plaintiff homeowner has to go through a deposition and be forced to appreciate some of its inherent weakness and to educate her own counsel. Further, early discovery assists in identifying facts that can be developed in favor of the contractor client.
Once the initial discovery issues are mapped out and the pressure points are identified, the case can be set on a course for resolution. If resolution is not possible, perhaps certain contract terms can be construed in favor of the contractor, especially where the contractor was improperly terminated before completion of the project or prevented from completing work. If the analysis in Cedartech can be extended to these other instances, then homeowners should be more hesitant to prosecute contract claims where they themselves were in material breach and should be advised that attorney-fee recovery is not always a given.