California Limits Indemnification Obligations of Design Professionals

William L. Doerler | The Subrogation Stategist | August 18, 2017

The California legislature recently enacted legislation – SB 496 – limiting a design professional’s indemnification obligations in private contracts related to design services. The term “design professional” refers to licensed architects, landscape architects and professional land surveyors, and registered professional engineers. As revised, Cal. Civ. Code § 2782.8 states that, for all contracts entered into on or after January 1, 2018 for design professional services, all provisions that purport to have the design professional indemnify the indemnitee for claims against the indemnitee – or require the design professional to provide a defense to the indemnitee – are unenforceable except to the extent that the claims against the indemnitee arise out of, or relate to, the negligence, recklessness or willful misconduct of the design professional. In addition, as revised, § 2782.8 limits a design professional’s liability for the cost of defense to the design professional’s percentage of fault.

The revised statute provides two exceptions. Pursuant to these exceptions, the limitations related to the duty and cost to defend do not apply to: 1) design service contracts where a project-specific general liability policy insures all project participants, including the design professional, and 2) a design professional who is a party to a written design-build, joint venture agreement.

Although this change in the law does not go into effect until January 1, 2018, the change serves as a reminder to subrogation professionals that, when faced with indemnification provisions in design or construction-related contracts, they should check local laws to determine the extent to which subrogating insurers can enforce such provisions.

Collapse of Improperly Built Deck Not An Occurrence

Tred Eyerly | Insurance Law Hawaii | August 16, 2017

The court found that the insured’s faulty construction of an outside deck did not arise from an occurrence. Employers Mut. Cas. Co. v. West, 2017 U.S. Dist. LEXIS 113951 (N.D. Miss. July 21, 2017).

D.L. Action Construction Company (DLA) constructed multifamily dwellings. They were sued by the homeowners after a deck collapsed at one of the dwellings. Also sued was the subcontractor, Littrell Construction, who installed the deck. The homeowners alleged that Littrell knew that college students would be residing in the units and that the decks would be heavily used. The decks were attached to the building structure using only nails instead of bolts.

On November 22, 2014, the deck collapsed, causing everyone standing on the deck to fall onto cars parked below. Regarding injuries sustained in the fall, the homeowners claimed against Littrell for negligence, breach of warranty, misrepresentation, fraud, fraudulent concealment, and wanton, gross, and/or intentional conduct. DLA cross-claimed against Littrell, seeking indemnification.

Employers Mutual denied coverage because there was no occurrence. The court granted summary judgment to Employers Mutual. In his deposition, Jason Littrell testified that the method he used to fasten the deck, using nails secured into oriented strand board, would not be an appropriate method of fastening a deck used for live loads. Further, he testified that he knew people would use the deck.

Bodily injury or property damage, expected or intended from the standpoint of the insured, could not be the result of an accident. The result of improperly constructing the deck was the failure and collapse of the deck, which were will within Littrell’s foresight and anticipation. Consequently, there was no occurrence and Employers Mutual had no duty to defend or indemnity.

Nevada Non-Mutual Claim Preclusion Case Effect on Permissive Cross-Claims

James Cavanaugh | Gordon Rees Scully Mansukhani | August 15, 2017

In construction defect litigation, including matters where the contractors are covered by owner controlled insurance policies (“OCIP”) or design professionals are not sued by plaintiff, a question often arises as to whether or not the co-defendants should file cross-claims for indemnity or contribution regarding plaintiff’s defect and damage claims? Notwithstanding the permissive status of such potential cross-claims, the prudent course in Nevada construction defect cases — without a good reason to justify a second lawsuit — is to file cross-claims or third-party complaints regardless of OCIP potential coverage to avoid claim or non-mutual claim preclusion.

Procedurally, parties with permissive cross-claims in the past could wait before proceeding against co-defendants under statute and case law. In Nevada, the applicable rule on cross-claims against co-parties is NRCP 13(g). A pleading may state as a cross-claim any claim by one party against a co-party arising out of the transaction or occurrence that is the subject matter either of the original action or of a counterclaim therein or relating to any property that is the subject of the original action. Such cross-claim may include a claim that the party against whom it is asserted is or may be liable to the cross-claimant for all or part of a claim asserted in the action against the cross-claimant.

A frequently cited case interpreting the permissive cross-claim rule is Executive Mgmt. v. Ticor Title Ins. Co., 114 Nev. 823, 963 P.2d 465 (1998). Noting that NRCP 13 (g) language is “clearly permissive” regarding the option to pursue, the Nevada Supreme Court held that where a party to an action has a permissive cross-claim, that party has the option to pursue that claim in an independent action, and if such a claim is neither asserted nor litigated, the parties cannot be barred from asserting it in a later action by principles of res judicata, waiver or estoppel. 963 P.2d at 474. Moreover, the Supreme Court stated it would “not allow the doctrine of claim preclusion to convert the permissive character of NRCP 13(g) into a compulsory mandate.” Id. at 475.

However, the Nevada Supreme Court’s relatively recent decision in Weddell v. Sharp 131 Nev. Adv. Op. No. 28, 350 P.3d 80 (May 28, 2015), has limited that procedural option for co-defendants. Even as to parties without contractual privity, the Nevada Supreme Court held that non-mutual claim preclusion applies in Nevada. The purpose of claim preclusion and non-mutual claim preclusion is to obtain finality of litigation by preventing a party from filing another suit based upon the same set of facts present in the initial suit. This includes promoting judicial economy in situations where the rules of civil procedure governing noncompulsory joinder, permissive counterclaims, and permissive crossclaims “fall short.” 350 P.3d at 84.

In the Weddell case, the Supreme Court decision modified the privity requirement established in Five Star Capital Corp. V. Ruby, 124 Nev.1048 (2008), with application of “the doctrine of nonmutual claim preclusion.” In short, the Nevada Supreme Court Weddell decision makes it clear that the main inquiry focuses on whether appellant has shown a good reason to justify this second lawsuitWeddell 350 P.3d at 85.

Now, notwithstanding the optional direction for permissive cross-claims or counter claims under NRCP (13), the Nevada Supreme Court found that defendants in a second lawsuit may validly use a claim preclusion defense based upon where (1) there has been a valid final judgment in a previous action; (2) the subsequent action is based on the same claims or any part of them that were or could have been brought in the first action: and (3) privity exists between the new defendant and the previous defendant or the defendant can demonstrate that he or she should have been included as a defendant in the earlier suit and the plaintiff cannot provide a “good reason” for failing to include the new defendant in the previous action. Id.at 85-86.

The Construction Attorney’s Toolbox—Building Solutions Through Mediation

Kent B. Scott | Babcock Scott & Babcock | August 18, 2017

Introduction

Today’s current economic climate challenges owners and contractors to complete projects in less time for less money. These pressures have created more demanding time schedules and monetary budgets that, in turn, have created an increased number of disputes. Another developing trend is the increased costs in time, money, efficiencies and lost opportunities taken up by these disputes.  The legal fees and costs incurred in resolving disputes become a major component of the dispute. The dollars that should go into project profits are now going into the resolution of project disputes.

This article will discuss the basic concepts of mediation as one of the tools that is used by clients and their attorneys to resolve construction project claims.

Mediation Defined

Mediation is a procedure where two or more parties attempt to resolve their dispute with a neutral party—the mediator. The mediator remains neutral throughout the meeting. The process is confidential.  No resolution can be reached without the consent of the parties. If an agreement is reached, the agreement will be binding and can be enforced by the courts.

Anatomy of a Successful Mediation

The success of a mediation is controlled mainly by the parties. Some of the critical components of a successful mediation include:

  • The background and capabilities of the mediator.
  • The attendance, commitment of informed people with authority to settle.
  • The needs and interests of the parties.
  • Whether a trial or arbitration has been scheduled.
  • Commitment of the parties and their attorneys to participate.

The following is a brief outline of the events involved in a mediation:

  • The parties sign a confidentiality statement.
  • The attorneys prepare a short and confidential written statement for the mediator.
  • The parties summarize their positions in a joint session.
  • The parties go into separate confidential meetings .
  • The mediator shuttles between the parties in an effort to find common ground.
  • If a settlement is reached, a written agreement is created .
  • If a settlement is not achieved another session may be scheduled or the mediator may offer some suggestions to consider that may assist the parties in future negotiations.

When and Where to Mediate

There is no set formula to ensure that a mediation will succeed. Mediation can be effective at any stage of the dispute: pre-litigation, during litigation, on appeal, etc. Most mediations occur after a claim has been filed and some exchange of information has taken place. The decision as to whether or when to mediate will vary with each case.

Who Should Come to the Mediation

The following is a brief summary of those who would be expected to attend the mediation:

  • Legal counsel. Yes, if the party is represented.
  • The person with authority to settle and others with knowledge of the facts.

How Long Will the Mediation Last?

It is common to schedule mediations for either a half or one full day. More time should be scheduled for mediations that require extensive travel, multiple parties or involve complex factual or legal issues. It is best to build in a margin of “float” time for the mediation session.

Multiple day mediations have built-in challenges. The parties recess after the first day and go home to re-think their case in a light that supports their original position. Consequently, the parties begin the next day needing to “warm up” and get back into the solution/settlement mode.

Conclusion

Mediation provides an opportunity for people to input how the process is designed and conducted. The parties are given an opportunity to confidentially express their interests and values without compromising their positions in front of the other parties. It provides the parties a sense of involvement and control over the dispute resolution process and the terms of a settlement.  In fact, the mediation may be the last time where clients and their attorneys will remain in control of the resolution process.

Happy Mediating to All!

* Kent B. Scott is a shareholder in the construction law firm of Babcock Scott & Babcock. www.babcockscott.com. He may be reached at kent@babcockscott.com.

 

 

Changing Landscape in Residential Construction Defect Cases

Jennifer M. Horn | The Legal Intelligencer | August 22, 2017

It is no secret that building envelope construction defects are prominent throughout our region. This issue affects thousands of properties and multiple builders. These defects are truly latent, with no visual cues or outward manifestation of water infiltration. Homeowners often discover the defect when they see scaffolding at their neighbor’s home and wonder if their home is similarly impacted. When invasive tests are finally performed, they often reveal a costly problem that in most cases requires removal and replacement of the entire building envelope, microbial growth remediation, window and door replacement as well as interior work. Real estate transactional practitioners and construction attorneys are left to navigate scopes of repair and sort through the shifting causes of action on behalf of the builders, subcontractors and the homeowners who are impacted.

Practitioners should be mindful of recent changes in the law affecting subsequent purchasers and spoliation. For those who purchased property from someone other than the builder (a subsequent purchaser), the landscape has improved, forcing contractors and builders to reassess the number and types of potential claims leveled against them. From the spoliation perspective, all parties must be especially mindful of new pitfalls relating to mere photographic evidence. Lastly, when considering whether to have an invasive moisture test performed, the Seller’s Disclosure Law must be considered, along with timing concerns.

For builders and subcontractors, Conway v. Cutler, a case that eliminated the cause of action for breach of implied warranty of habitability for subsequent purchaser homeowners, served to curtail the number of available potential claims. Under Conway, subsequent purchaser families who had otherwise timely and viable claims, faced serious challenges and were discouraged from pursuing recovery because they lacked privity with the builder.

A Seat at the Table for Subsequent Purchasers

However, this landscape changed in August 2016 when the Superior Court in Adams v. Hellings Builders, held that fraud and claims under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (UTPCPL) may be successfully asserted by third parties (including subsequent purchaser homeowners) against contractors who made misrepresentations to the original purchasers. According to Hellings, the absence of technical privity is not a bar to recovery when reliance is specifically foreseeable and damage proximately results. In this regard, courts have specifically determined that the existence of a third-party purchaser of property is foreseeable. The Hellings court held that when fraud creates or conceals a latent building envelope defect, transfer of the defective chattel or realty to a third party does not absolve the builder from liability for damages caused by the fraud. Instead, the focus turns to whether reliance on alleged misrepresentations such as, general advertisements, branded marketing materials, statements on a website, or statements in the original agreement of sale, were specifically foreseeable.

With the decision in Hellings, technical privity is specifically not required to assert a cause of action for fraud or a violation of the UTPCPL. Subsequent purchaser homeowners have a renewed pathway for claims and many regional contractors are reassessing the number of potential claims. Previously denied claims may now be viable in light of this change in the law. Practitioners should revisit timing concerns for all subsequent purchaser clients. For contractors and builders, Hellings is sure to increase the number and type of claims at issue.

Spoliation: Use caution when remediating

The doctrine of spoliation features prominently in many of these matters because the parties frequently mitigate their damages through repair and remediation. The recent case of Kinder v. Heritage Lower Salford, although nonprecedential, provides a cautionary and important roadmap for all construction practitioners and parties. In Kinder, the homeowners remediated their defective stucco during the litigation, taking photographs of the work, but not notifying the defendants of the repairs. No experts observed the remediation work and the plaintiffs’ own expert was unable to prepare a report based on the photographic evidence gathered in this case. In granting a motion in limine, the court barred evidence at trial and determined that the Plaintiffs were at fault for destroying the evidence at issue. As a result, the defendants were unable to conduct a physical inspection or otherwise identify the cause/source of the subject water infiltration and present a defense. Consequently, the Kinders’ claim was barred.

Practitioners should be cognizant of the fast pace of remediation and give reasonable notice to all parties and experts. Physical evidence of the underlying construction defect and damaged property should always be preserved to insulate against spoliation claims, which, as Kinder advises, can be fatal.

Building Envelope Defects and the Changing Real Estate Landscape

Building envelope defects have had a tremendous impact on the real estate market and the pace and manner of sales. It has become widely known that building envelope defects are not limited to stucco homes. Homes with brick, cultured stone and fiber cement siding can also have building envelope defects. This is where construction law intersects with the real estate practice and, importantly, Sellers’ Disclosure Law. Homeowners weigh the benefits and risks of having an invasive moisture penetration test performed on their home. The results of these tests must be disclosed with any sale. Such a test is necessary evidence to reveal the defect. However, if a potential claim is untimely, homeowners may not want to know whether they have a building envelope defect. Pitfalls await as more and more real estate agents are recommending that their buyers perform invasive moisture tests along with routine home inspections prior to purchasing a home. Real estate agents, homebuyers and sellers should be aware that claims against sellers for failure to disclose building envelope defects are on the rise.

The issues surrounding building envelope defects are multilayered and very complex. We find that homebuyers and builders receive a lot of bad information from multiple sources. In our office, we often hear from homeowners who believe they are “out of time” because their home is over 12 years old. However, often because of the facts of their specific case, this is not true. Builders believing they are immune to claims from subsequent purchaser homeowners must also reevaluate in light of Hellings, which directly refutes this position. Practitioners advising homebuilders and homeowners should be cautious as the legal landscape continues to shift.