No Rest for the Weary: Project Completion Is the Beginning of Litigation

Albert Li and Bob Fitzsimmons | Construction Executive | April 30, 2019

In today’s environment, most construction projects end up in some form of litigation. Construction is full-time employment for lawyers – from contract negotiation to project management, lien and payment issues. Years after project completion, a company still can face construction defect litigation and be served with a Notice of Opportunity to Repair, which in most states is now codified into statute. This is the beginning of what most likely will become a lawsuit, involving many of the subcontractors.

WATCH OUT FOR THE CONSTRUCTION CONTRACT BLAME GAME

The first phase of post construction litigation involves the review of contract and insurance policy language in an attempt to transfer responsibility in the litigation to other parties.

Before construction began, contract negotiation focused on budget and timeline. In the post-construction phase, two less noticed provisions of the contract are critical – indemnity and insurance.

Indemnity is a contractual obligation of one party to compensate the loss occurred to the other party due to the act of the indemnitor or any other party. The duty to indemnify is usually, but not always, coextensive with the contractual duty to “hold harmless” or “save harmless.” Many states have restrictions that must be observed in order to enforce a right to indemnification. Some states prohibit it altogether, and some allow the indemnitee to be indemnified for its own negligence. Frequently, standard contracts run afoul of state restrictions. Consequently, it is critical that local law be considered in the contract negotiation phase.

PROPER INSURANCE COVERAGE IS IMPERATIVE

Insurance can also provide an alternative means to transfer responsibility to another party in the litigation. Many construction contracts contain a provision requiring that one party make the other party an “additional insured” on its policy. Most insurance policies issued to construction companies contain a provision that automatically makes a company an additional insured if the contract requires it. The contract and policy language encounter are endless in their variety. The extent of the coverage provided may be dictated by contract language, so it important to be well advised in the contract negotiation process.

Obtaining the benefit of being an additional insured can get extremely complicated. Commercial general liability policies usually cover damages that occur within the policy period. In construction defect cases, the damage may have occurred in any of the years between the certificate of occupancy and the first notice of any problems. 

Generally speaking, all of the policies that provide coverage between the certificate of occupancy and first notice of damage would be “triggered.” For example, a general contractor in a litigation involving the work of 10 subcontractors, where the certificate of occupancy was five years before the first notice of damage, may be covered under 50 different policies (10 subcontractors multiplied by five years of policies), all with different coverage provisions.

The insurance industry has attempted to address some of the insurance complexity by offering wrap-up policies such as owner controlled insurance programs (OCIPs) and contractor controlled insurance programs (CCIPs), in which all of the contractors on a project are required to obtain coverage through one program. 

POTENTIAL FOR CONFLICT OF INTEREST

This concept works well in case of a single occurrence, such as a personal injury or property damage incident. All of the project contractors are covered under the same policy and, therefore, have the same interest and can be represented by the same lawyers. However, in construction defect cases, there are frequently issues that may affect the coverage provided under the policy. For instance, the type of damage may not be covered by the insurance, leaving the contractor responsible. If the damage is not covered, one contractor may want to argue another contractor is responsible. Consequently, a joint defense, even though agreed to in the contract, cannot ethically be provided by one law firm.

Most importantly, keep in mind that these issues need to be addressed before engagement with the owners concerning the alleged deficiencies. 

The Economic Loss Rule and Why It Matters in Construction Litigation

William S. Durr | Ward and Smith | March 20, 2019

In its broadest sense, the “economic loss rule” prohibits recovery in tort for purely economic loss incurred under contract law. 

The Merriam-Webster Dictionary online defines tort as “a wrongful act other than breach of contract for which relief may be obtained in the form of damages or an injunction.”  Negligence, the most common tort claim, is the failure to exercise the care that a reasonably prudent person would exercise in similar circumstances.  Thus, where a contract exists governing the subject matter of the dispute, claims between the parties must be based on the contract terms, and a tort-based claim between the parties will typically be barred.

The rationale for the economic loss rule is that where a contract exists, the parties have freely negotiated to include or exclude terms governing the parties’ respective rights, obligations, and remedies.  If a party to that contract could extend its remedies beyond those set forth in the contract, this would effectively allow the party to obtain something more than (or inconsistent with) what they bargained for in the contract.  This is especially true in the products liability context, where the economic loss rule first arose.

In 1978, some twelve years prior to the express adoption of the economic loss rule, the North Carolina Supreme Court addressed the essential elements of the rule (without referring to it by name in the decision) in a dispute between an owner and general contractor.  The case, North Carolina State Ports Authority v. Lloyd A. Fry Roofing Co., et al., 294 N.C. 73, 240 S.E.2d 345 (1978), involved a claim for damages arising from leaking roofs.  The owner, the North Carolina State Ports Authority, asserted two claims against the general contractor, as well as other project participants.  One claim was for breach of the construction contract, the other for negligence in constructing and installing the roofs.  The Court found that a tort claim is unavailable “against a promisor for his simple failure to perform his contract, even though such failure was due to negligence or skill.”

The North Carolina Court of Appeals expressly adopted the economic loss rule in a 1990 products liability case, Chicopee v. Sims Metal Works, 98 N.C. App. 423, 391 S.E.2d 211 (1990).  Since Chicopee, case law has intertwined the concepts set forth in Ports Authority and Chicopee and extended the economic loss rule to a number of other substantive areas.

There are exceptions to the economic loss rule.  Ports Authority identifies the following exceptions:

  1. The promisor’s negligent act or omission in the performance of the contract caused injury to the person or property of someone other than the promisee.  By way of example, if a crane falls over and injures a third party who had no connection to the promisee, a claim for negligence brought by the third party against the crane supplier would not be barred by the economic loss rule, as there was not a contract between the crane supplier and the third party.
  2. The promisor’s negligent, or willful, act or omission in the performance of his contract, caused injury to property of the promisee other than the property which was the subject of the contract, or personal injury to the promisee.  Thus, if a crane fell over and damaged the utility lines of the building and the contract with the crane supplier did not involve work on the utility lines, a claim for negligence against the crane supplier for damage to the utility lines would not be barred by the economic loss rule.  This makes sense as the contract with the crane supplier did not include or govern the utility lines and, therefore, there was not a contract that applied to the specific subject matter of the dispute (the utility lines that were damaged).
  3. The promisor’s negligent, or willful, act or omission in the performance of his contract, caused loss of or damage to the promisee’s property, which was the subject of the contract, and the promisor had a legal duty, as a matter of public policy, to use care in the safeguarding of the property from harm, as in the case of a common carrier, an innkeeper or other bailee. 
  4. The injury caused by the promisor to the promisee was a willful act.  

In applying and, in many cases, expanding these exceptions, the relevant inquiry under North Carolina law is whether the injured party has a basis for recovery in contract or warranty.  If there is a basis for recovery under a contract or warranty provision, then the Court will generally recognize and apply the economic loss rule, provided that there is not an independent legal duty which is identifiable and distinct from the contractual duty.  See, Bradley Woodcraft, Inc. v. Bodden, 795 S.E.2d 253, 258-59 (2016).  By way of example, an architect is held to a professional standard of care.  While this professional standard of care may be referred to in the contract between owner and architect, the duty to adhere to a professional standard of care is an independent legal standard and the owners’ tort claims against the architect are not barred by the economic loss rule. Put simply, the architect cannot contract away its obligations to perform at a minimum professional standard of care.    

In Bradley Woodcraft, the homeowner entered into a contract with the general contractor to undertake some interior finish work and kitchen remodeling.  The homeowner became dissatisfied with the contractor’s work.  After meeting with the contractor the homeowner paid the contractor an additional sum, using two credit card transactions.  The homeowner testified that payment was made with the understanding that the contractor would complete the project.  The contractor took the funds but never returned to the job.  The homeowner disputed the two credit card charges, which were reversed by the credit card company.  The contractor sued the homeowner for breach of implied and express contract, and the homeowner counterclaimed, alleging among other claims, breach of contract and fraud.  The homeowner argued that their fraud claim should survive the economic loss rule defense.  The Court agreed, “…while claims for negligence are barred by the economic loss rule where a valid contract exists between the litigants, claims for fraud are not so barred…”  Bradley Woodcraft at 259.  Bradley Woodcraft seems to suggest that a tort claim, other than negligence, will survive in an otherwise clear contractual dispute and not be subject to the economic loss rule. 

Fortunately, a 2018 federal case rejected the broad statement that the economic loss rule barred only negligence claims and distinguished Bradley Woodcraft by stating that the proper inquiry is whether there is an independent legal duty, which is identifiable and distinct from the contractual duty.  Legacy Data Access, Inc. v. Cadrillion, LLC, 889 F.3d 158, 166 (4th Cir. 2018).      

An earlier construction case, Lord v. Customized Consulting Specialty, Inc., 182 N.C. App. 635, 643 S.E.2d 28 (2007), allowed the owners of a home to pursue a tort claim against a subcontractor, holding the economic loss rule did not bar claims of negligence given the particular facts of the case.  In this case, the homeowners (Lords) discovered the trusses used to construct their home were defective.  The Lords sued their contractor (Customized Consulting Specialty, Inc.) and the subcontractor who designed the trusses.  The claims against the subcontractor included a negligence claim.  The subcontractor argued the economic loss rule applied to bar the homeowners’ negligence claim, relying on the holdings from several cases involving damage resulting from the use of synthetic stucco, some decided in Federal Court. The North Carolina Court of Appeals rejected the subcontractor’s arguments.  The Court found that no contract existed between the subcontractor and the homeowners, that the economic loss rule did not apply and that the economic loss rule did not operate to bar the homeowners’ negligence claim.     

In summary, while the economic loss rule does not provide an absolute defense to all tort claims, it must certainly be considered in litigation that involves claims sounding in both contract and tort. 

More importantly, the protection of the economic loss rule begins with the contract itself.  Creating, maintaining, and properly executing well-drafted contracts is a foundational requirement to controlling and allocating risk in the construction industry.  If you give less attention to your contracts than you do other details of a project, you are placing your company at risk, as you may find yourself defending both contract and tort claims.

Avoiding ‘E-trouble’ in Construction Litigation

Judah Lifschitz | Construction Executive | August 14, 2018

During the 2016 presidential election, the FBI subpoenaed Hillary Clinton’s emails after she used a private email server during her time as Secretary of State. Separately, the more recent investigation into Donald Trump’s campaign policy adviser, George Papadopoulos, resulted in scrutiny over both his email and social media.

As shown the above examples, there are damaging effects of electronically stored information in politics, but how does it impact the construction industry?

If not used carefully and properly, emails will serve as “truth serum” in court. Attorneys can simply read an email to know employees’ thoughts or actions, meaning an impulsive email or social media post will most likely come back to haunt the company. Requests for ESI are inevitable in litigation today and the production of inappropriate emails and other ESI open the door for an opposing attorney to argue that a company fosters a culture of uncouth, unprofessional and unfocused project management.

REQUESTS FOR ESI ARE INEVITABLE IN LITIGATION TODAY

It is estimated that 90 percent of all information is now created digitally – the majority of which is never printed. A comparison of the ESI and hard-copy documents produced in a recent construction case revealed that only 25 percent of email communication had been printed to paper. A Duke University survey revealed that the ESI Discovery costs in typical cases range from approximately $600,000 to just less than $3 million. And in large cases, the costs average from $2.3 million to $9.7 million.

ESI is created and stored in a variety of places, including computers, fax machines or copiers’ internal hard drives, voicemail, web pages, smartphones, jump drives, memory cards and external hard drives. It is important to remember that all of the data and information created and stored in these various places is subject to being produced to a litigation adversary in discovery, granting them access to a significant volume of information – some of which is produced in a very informal setting.

Opposing attorneys acquire this information through the discovery process, which includes:

  • The obligation to preserve potentially relevant information. Even before litigation is filed, any time that a company has reason to anticipate that it will be involved in litigation it has an obligation to ensure that it takes reasonable steps to preserve potentially relevant documents and ESI.
  • Requests for the production of information. If litigation is filed, the adverse party will be entitled to request the production of relevant information, including documents and ESI, from the company.
  • The obligation to identify, collect and produce relevant information. After receiving requests for production of information, the company will be obligated to identify, collect and produce documents and ESI responsive to the requests received.

In order to produce responsive information, a company will first need to review the ESI and documents collected in order to identify any that may be protected by the attorney-client privilege, work product or another relevant evidentiary privilege. Those documents and ESI should be withheld from the company’s production, but all other responsive documents and ESI must be produced, and through this process the company’s adversary will receive access to a large volume of company documents and ESI. Opposing lawyers will then comb through these materials searching for “ammunition” to use in court or arbitration.

WHAT IS E-TROUBLE AND HOW TO AVOID IT

A company may find itself in E-trouble either because it fails to preserve and produce electronic documents during the discovery process or when ESI is discovered and used against it by an adverse party in litigation. But, E-trouble can be avoided. There are steps to help a company avoid E-Trouble and protect itself from damaging information being discovered and used against it in litigation. Always consult counsel with any questions about the discovery process.

Implement and enforce a document retention policy

Documents should be retained for the duration of their useful life – and no longer. A well-drafted document retention policy is not enough. Implementation and enforcement are critical to avoiding E-Trouble and reducing electronic discovery and document production costs. A recent study found that while two-thirds of the companies surveyed have a document retention policy in effect, almost half of them don’t actively enforce it.

When litigation is on the horizon, a company must suspend its routine document retention and destruction policy and put in place a “litigation hold” to ensure the preservation of relevant documents. In furtherance of the litigation hold, legal counsel must become familiar with the company’s document and information retention policies and data retention architecture.

Counsel must communicate with “the key players” in the litigation to understand how they stored information. Both the company and its counsel should monitor compliance with the litigation hold. This will guard against damaging and potentially expensive monetary sanctions.

Use email appropriately

Do not send “ammunition” that the other side can use against the company. If there are company inside jokes, lingo or nicknames for other staff members, clients or project personnel, do not use them in emails. Additionally, ensure employees are not using company email accounts for inappropriate personal business.

Do not email while angry. Avoid hitting send on an email if upset about something that occurred on a job. At trial, opposition may use an angry email to portray the sender as a bullheaded and unreasonable general contractor who put a project on the fast-track to attorneys and costly litigation.
When searching through ESI, opposing attorneys search for certain phrases in emails. Avoid using the following when emailing.

  • “I could get into trouble for telling you this, but …”
  • “Delete this email immediately.”
  • “I really shouldn’t put this in writing.”
  • “Don’t tell [So-and-So]” or “Don’t send this to [So-and-So].”
  • “She/He/They will never find out.”
  • “We’re going to do this differently than normal.”
  • “I don’t think I am supposed to know this, but …”
  • “I don’t want to discuss this in e-mail. Please give me a call.”
  • “Don’t ask. You don’t want to know.”
  • “Is this actually legal?”

Be mindful of social media

The digital age of communication and information technology has drastically increased the scope and volume of what is now discoverable to include more than just email communication. Today, even personal social media accounts can be used against a company in litigation.

An appellate court in New York ruled that social media posts, pictures and messages may become evidence regardless of the privacy settings status. The court compared Facebook to a diary, stating “the postings on the plaintiff’s online Facebook account, if relevant, are not shielded from discovery merely because plaintiff used the service’s privacy settings to restrict access, just as relevant matter from a personal diary is discoverable.”

There are several ways that attorneys for both plaintiffs and defendants gain access to social media posts for the parties they represent. Attorneys today search social media updates and posts for anything that may be useful in court. For example, the typical fact pattern in a personal injury case is as follows:

  • a plaintiff claims her permanent injuries kept her confined to her home and bed;
  • her public profile page on a social networking internet site shows her smiling and “out and about” outside of her home; and
  • the defendant gets a court order requiring the plaintiff to grant access to her accounts on social networking sites, including her current, archived and deleted information and pages.

Top Five Strategies for Managing Construction Risks

Michael Gibbons | Lowndes, Drosdick, Doster, Kantor & Reed, PA | June 2, 2017

Construction is a risky business.  During construction, claims for personal injury, property damage and economic losses are foreseeable and must be managed.  After completion of construction, warranty claims and claims for latent defects are proliferating.  Owners, developers and contractors must proactively understand and manage these risks if they expect to survive and thrive in today’s increasingly complex construction marketplace.  Discussed below are five important strategies for managing construction-related risks and positioning your company for success in the context of construction claims and litigation.

1.    Avoid Inconsistent Dispute Resolution Contracts.  Owners, developers and general contractors typically find themselves executing multiple agreements relating to the design and construction of improvements.  Whether one is an owner contracting with design professionals and one or more contractors or a general contractor contracting with an owner and various subcontractors, it is important to avoid having some of the contracts call for dispute resolution by litigation while others require arbitration.  Construction disputes typically implicate both design professionals and different contractor trades.  The most efficient way to resolve these disputes is getting everyone in one forum (i.e. either a lawsuit or an arbitration) in order to avoid the added expense and uncertainty associated with pursuing binding dispute resolution in two different forums.  Having construction-related disputes decided in different forums greatly increases the cost of dispute resolution while adding a significant risk of inconsistent determinations.

2.    Contract Tiebreakers.  It is often said that there is no such thing as a perfect set of construction drawings free of conflicts and inconsistencies.  The same may be said of construction contract documents.  It is not unusual for a construction contract to have 15 to 25 separate attachments, including all exhibits, to the base form of agreement.  The documents are frequently prepared by different parties and not infrequently contain conflicting or inconsistent terms and conditions.  Without a contractual term establishing a hierarchy of precedential value among these contract documents, the setting is ripe for disputes as parties will defend their conflicting positions based on inconsistent terms in the contract documents.  Without a precedential hierarchy of documents established there is no ready way to resolve the conflict.

3.    Indemnification.  Owners and contractors traditionally rely on indemnification clauses to transfer risks of claim activity on projects.  In Florida, the content of indemnity terms and conditions is regulated by Florida Statute, § 725.06.  Failure to comply with the requirements of Florida Statute, § 725.06 renders the indemnity paragraph void and unenforceable as a matter of public policy.  Accordingly, it is important to have the indemnity terms reviewed by knowledgeable construction counsel.

4.    Insurance.  Insurance plays an important and increasingly complex role in allowing owners, developers and contractors to transfer risks arising from construction-related claims.  Specifically, the use and import of additional insured coverage provided to the owner by the general contractor and to the general contractor by subcontractors has increased significantly over the past few years.  Insurance carriers, however, have reacted to the increased exposure of such risk transfers by adding Endorsements to insurance policies that restrict the effectiveness of the additional insured coverage.  In the absence of specific terms in the underlying construction contracts, carriers now are frequently denying coverage for the additional insured or claiming their insurance is excess over the additional insured’s own insurance.  Again, it pays here to have a knowledgeable construction attorney review the contract terms to ensure the proper insurance language is present to avoid the coverage defenses frequently now being claimed by the insurance carriers.

5.    Limitation of Liability.  A frequently overlooked clause that can effectively create a significant amount of retained risks for owners and developers relates to express contractual limitations of liability.  These clauses are especially prevalent in professional services agreements prepared by architects and engineers.  For many years now, insurers for design professionals have required their insureds to include express contractual limits of liability in their form agreements for professional services.  Owners and developers not infrequently sign these agreements with little appreciation for the fact that the design professional that may be responsible for millions of dollars in economic losses has a contractual limitation of liability tied to the amount of their professional fees which are typically a small fraction of the damages that may be caused by professional negligence.

Construction Litigation, and How to Avoid It.

Lawsuits about construction defects are a big burden to the homebuilding industry. This is especially true of class action litigation. Of course, good design and construction will substantially reduce the risk of a lawsuit. Construction attorney Douglas Folk explains the problems and pitfalls in home construction and how they can be minimized in this report.

Folk’s approach is to be involved with his homebuilder clients in negotiating the construction contracts. Arizona courts have emphasized that agreements between the various parties to a construction project must be honored. Anticipating a problem in a contract will pay a dividend later if the problem actually arises and ends up in a lawsuit. Folk points out that, in a residential construction project, “the contract is an opportunity to manage risk.” Folk’s office helps the contractor identify potential problems and cover problem resolution in the contract. Folk also works to be sure that insurance will cover the cost of resolving any foreseeable problems.

Folk suggests that an upswing in construction litigation is certainly a possibility now that construction is booming again. During the 1990s, it was common for class action lawsuits to be filed on construction projects in Arizona. “We have homebuilders putting up a hundred, or five hundred, houses in a subdivision, so it becomes a very appealing target.” Folk hopes that the lessons learned during that construction boom can be put to good use during this latest construction boom.

One current problem in the industry is that homebuilders have to rebuild their labor pool. A lot of the talented workers left Arizona during the recession, and they haven’t all returned. As a result, says Folk, there are projects where the trade contractors haven’t worked together before, and that requires some planning. That means, Folk says, that there is a potential for litigation from projects that are just starting.

The Phoenix area has had a lot of home construction over the last thirty years, and “all of the easy projects have been built.” Folk says that new development involves going into land that may have been a farm and that make it less desirable to build on. This provides many engineering challenges for an industry where the pace of new construction is building rapidly. A former cotton field will probably have soil with a high clay content, making drainage a problem. Bad drainage and poor soil preparation for building the foundation can cause problems. Then, when the house settles in, there can be cracks in the foundation or flooring.

Folk also points out that a home is a unique product, not built in a factory and mass produced to fine tolerances. Building a house involves having “all these strangers coming together with construction materials and putting up a one-of-a-kind product just for you.” Sometimes, things happen that can’t be foreseen and arise once the construction process starts.

Folk says that Arizona courts have been very conservative in their approach to resolving construction defect claims. The courts in the Phoenix area are accustomed to dealing with large lawsuits. The courts have recognized that homes are unique products, not like automobiles. So courts have refused to say that homebuilders are responsible for every bad thing that happens in a construction project.

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