You Can’t Always Get What You Want – “Economic Waste” in Construction Defect Claims

Michael L. Meyer | Taft

The Rolling Stones’ Mick Jagger famously sang, “You can’t always get what you want, but if you try sometime, you’ll find you get what you need.” Jagger wasn’t singing about damages in construction defect litigation. But his message rings true, especially when the cost to repair a defect is high and the final product meets the owner’s requirements.

The goal of any construction project is to build a structure that meets the owner’s needs. If the project does not meet that goal, the owner will want the shortfall corrected. When a defect is major, preventing any practical use of the building, a repair is almost always necessary. A non-functioning electrical system or a foundation sinking into the earth requires repair. But what about conditions that don’t substantially impair the use of the finished project? Must a contractor remove and replace components even if those components function properly?

Contractors understand that the owner should receive the finished product called for in the contract. If it does not, the owner has not received what it paid for. But even in that case, the owner is not always entitled to precisely what the contract specifies. Examples of this problem abound. Perhaps a new parking lot is discolored but otherwise has a smooth and functional surface. Or what if a residential construction contract calls for copper water supply lines but the builder uses PVC? Or a contractor uses the wrong color mortar and brick?

In a defect dispute, the owner is generally entitled to the building as specified in the contract. Often that means the owner receives the cost to repair and place the project in the condition called for in the contract. But if the cost to repair is grossly disproportionate to the actual benefit of that repair, should the owner receive that remedy? This question highlights the concept of “economic waste.”

“Economic waste” is a legal protection that prevents the unnecessary use of financial resources to repair a defect. With the discolored brick and mortar, must the contractor fully remove and replace the brick? What if the mortar is not only discolored but also structurally weak? If the building lacks structural integrity, most courts would require removal and replacement. But if the only defect is the use of the wrong color, should the result be the same? Although each case is unique, a cosmetic defect often does not justify complete removal and replacement. In that instance, the excessive cost to remove and replace components outweighs the benefit to the owner.

What about the case of a garage built using trusses different than those shown in the plans? The storage area ceiling is six inches lower than expected. Must the contractor remove the roof and trusses and replace them? Unless the structure is unsound, probably not. The cost to do so would be extreme. And in most cases, that cost would be disproportionate to the value of the extra storage space – an “economic waste.” Instead, the owner should receive the difference in fair market value between the structure as contracted for and the structure as built. This ensures the owner pays for what it received. It also prevents unnecessary economic harm to a contractor when it substantially complied with the contract.

Of course, not all instances of cosmetic defect implicate economic waste. If cosmetic elements are the primary purpose of a component, replacement may be necessary to achieve substantial compliance. But when a contractor substantially complies, an owner has no right to perfection, especially if achieving perfection is disproportionately expensive.

When facing a defect, an owner must consider whether a repair short of removal and replacement would allow the building or system to function. If so, that alternative may be appropriate and legally required. But contractors must understand the importance of full compliance whenever possible. And they must be ready to craft a remedy that gives the owner a finished product it can use.

Deadlines. . . They’re Important. Project Owner Risks Losing Claim By Failing to Timely Identify “Doe” Defendant

Garret Murai | California Construction Law Blog

Earlier this year I filed a complaint in a court which I won’t identify other than to say that it wasn’t the San Francisco Superior Court. Immediately upon filing the complaint the Court gave notice of a trial date. As counsel for the party bringing the action, I appreciate this, as it eliminates the back and forth jostling that can sometimes occur when trying to get a trial date.

Here’s the kicker though. While I appreciate getting a trial date straight out of the gate. The date I got was . . . wait for it . . . not until 2022!

Those who litigate in California state courts know that the courts are understaffed and overworked. But you’ve got to give this un-named court credit for being upfront. Forget the “well, let’s see where this goes” niceties. Trial within a year? Fugetaboutit. Trial within a year and a half. Don’t even think about it. Trial within two years. It’s about as good as you’re going to get.

But it’s not just the courts who have had pre-pandemic issues only get worse since COVID. Everyone these days seem to be running slower in a COVID-induced brain fog. Seriously, it’s a thing. And not just among the Australians. The Irish are apparently feeling it too. And I have a sneaking suspicion so too are we Americans.

With Thanksgiving reduced to your eating a microwaved turkey dinner in front of your television set and Christmas and New Year looking less like reality and more like sugar plums dancing in your head, focused and diligent, should you remain, particularly if you’re litigating this holiday season or any season for that matter.

In the next case, Steciw v. Petra Geosciences, Inc., Case No. G057375 (July 29, 2020), 4th District Court of Appeal, homeowners in a construction defect case nearly lost their right to sue a geotechnical engineer in a claim brought under the Right to Repair Act by failing to serve the engineer within three years after naming the engineer as a defendant.

The Steciw Case 

On July 2, 2014, homeowners Eugene Steciw and others sued Shappell Industries and Toll Brothers, Inc. for construction defects arising out of the construction of their homes in a single-family housing development known as San Joaquin Hills in Laguna Niguel, California. In addition to naming Shappell and Toll Brothers as defendants the complaint also named unidentified defendants, including unnamed engineers, as “Doe Defendants.”

In October 2014, Toll Brothers filed a cross-complaint against various subcontractors but not against Petra Geosciences the geotechnical engineer on the project. Two months later, in December 2014, Toll Brothers filed a motion to dismiss the complaint or, in the alternative, stay the action to comply with the pre-litigation procedures of the Right to Repair Act.

On May 25, 2015, the Court granted Toll Brothers’ motion and stayed the action pending compliance with the pre-litigation procedures under the Right to Repair Act. Nine months later, on February 19, 2016, the Court ended the stay concluding that Toll Brothers “had its opportunity to inspect and repair the defects noticed by Plaintiffs, but has chosen not to.”

On August 2, 2017, the homeowners amended their complaint to name Petra Geosciences as “Doe 101.” According to the homeowners, they did not become aware that Petra Geosciences was a potentially responsible party until April 13, 2017 when Toll Brothers produced discovery identifying Petra Geosciences as the geotechnical engineer. The homeowners served Petra Geosciences on August 9, 2017, three years and 38 days after the original complaint was filed.

Petra Geosciences answered the homeowner’s amended complaint on September 7, 2017. Nine months later, on June 19, 2018, Petra Geosciences filed a motion to dismiss claiming that by serving Petra Geosciences three years and 38 days after the original complaint was filed, the homeowners failed to comply with Code of Civil Procedure section 583.210 which provides that a “summons and complaint shall be served upon a defendant within three years after the action is commenced against the defendant.”

What happened next was interesting and even a bit eyebrow raising:

  • On July 10, 2018, two weeks before the scheduled hearing on Petra Geosciences motion to dismiss, the parties were in court on unrelated matters when the trial court decided sua sponte (Latin for “on its own motion”) to advance the hearing on the motion to dismiss, and announced its intention to grant the motion.
  • In response to comments made by the homeowners’ counsel that the hearing was not scheduled until two weeks later, the trial court responded, “I was told they are advanced to today, and whether you like it or not, I’m going to deal with them, and you can figure out what you’re going to with it.” According to the trial court, the case had “spun wildly out of control.” When asked by the homeowners’ counsel whether they could file their opposition that day, the trial court responded, “[t]he way it works is, file when you can. I’m not going to turn it down. I start reading. And when I get bored, stop reading. Put the good stuff up front.”
  • At the conclusion of the hearing, the trial court stated, “[a]t this point, it will all be under submission. I have to go back and review this. And don’t be surprised if you there’s not much changed between what the minute order will say and what I already said, but if get open — that’s why you’re here. You’re here to get me to think about it.”
  • Later that day, the homeowners’ counsel filed a 101-page opposition including exhibits.  However, the trial court’s minute order, which was entered the following day on July 11, 2018, rather than stating that the court had taken the matter under submission as the court said that it would, stated that it was the trial court’s decision to grant Petra Geoscience’s motion to dismiss.
  • After the trial court’s minute order was entered, the homeowners’ counsel filed a motion for reconsider on the ground that the trial court had not considered its 101-page opposition. The Court denied the motion for reconsideration without explanation and later entered a judgment of dismissal in favor of Petra.

Counsel for the homeowners appealed.

The Appeal

On appeal, the 4th District Court of Appeal noted that under Code of Civil Procedure section 583.210 even defendants identified as “Doe” defendants must be served within three years after an action is originally filed.

However, explained the Court of Appeal, the three year deadline is tolled under certain circumstances under Code of Civil Procedure section 583.240:

In computing the time within which service must be made pursuant to this article, there shall be excluded the time during which any of the following conditions existed:

(a) The defendant was not amenable to the process of the court.

(b) The prosecution of the action or proceedings in the action was stayed and the stay affected service.

(c) The validity of service was the subject of litigation by the parties.

(d) Service, for any other reason, was impossible, impracticable, or futile due to causes beyond the plaintiff’s control. Failure to discover relevant facts or evidence is not a cause beyond the plaintiff’s control for the purpose of this subdivision.

Under Code of Civil Procedure section 583.240, explained the Court of Appeal, “[i]t is self-evident that a party must be identified before it can be served”,  that “[i]n many cases, formal discovery is the only reasonable means of identifying a party,” and that “[i]n such cases, if a stay prevents discovery, it also, as a practical matter, impedes (affects) service.”

However, the Court of Appeal was careful to make two points with respect to subdivision (b) of Code of Civil Procedure section 583.240.

First, explained the Court of Appeal, tolling is appropriate where discovery is “reasonably necessary” in order to determine the identity of a “Doe” defendant. This does not mean that discovery is “essential” in determining the identify of a “Doe” defendant. The Court of Appeal gave the following example:

For example, suppose plaintiffs could have identified Petra by reviewing documents in the building inspector’s office, but Petra was only identified in an obscure footnote. We would not necessarily expect plaintiffs to find that information as a matter of course, and thus formal discovery would be reasonably necessary to identify Petra, even though it may have been technically possible to do so without discovery. A plaintiff need not go to extraordinary lengths.

Second, explained the Court of Appeal, if a stay did not prohibit service, and if the homeowners had a practical means of identifying Petra Geosciences as a “Doe” defendant without formal discovery, then no tolling would apply.

Thus, explained the Court:

[T]he proper focus here is on whether the stay affected service as a practical matter by depriving plaintiffs of the only reasonable means of identifying Petra. If plaintiffs did have other reasonable means of identifying Petra, then, because the stay itself did not directly prohibit service, the stay did not affect service. It is, after all, still a plaintiff’s burden to serve all parties within three years of filing the complaint. And if there were practical and reasonably discoverable means of doing so without formal discovery, then the stay did not impede service and the tolling provision does not apply.

However, the Court of Appeal remanded the case back to the trial court, holding that whether the trial court’s stay of the action practically impeded the homeowners from identifying Petra Geosciences as a “Doe” defendants was a decision for the trial court to make.

Conclusion

So, there you have it. In multi-party construction litigation cases, as most typically are, you need to name your “Doe” defendants within three years of filing your complaint, or be able to show that that you had practical ability to determine the identity of a “Doe” defendant within those three years.

Colorado’s Abbreviated Legislative Session Offers Builders a Reprieve

David McLain | Higgins, Hopkins, McLain & Roswell

Would you believe me if I told you that this year could have been worse for builders? Had COVID-19 not hit, the Colorado Legislature may have passed bills that would have had a severely negative impact on the home building industry. In response to the COVID-19 pandemic, the Legislature temporarily adjourned in mid-March, 67 days into the 120-day legislative session. After a two-month recess, the Legislature returned for approximately one month to pass critical bills including the state budget, the school finance act and what to do with the money from the federal CARES Act. Of the bills on the calendar when the Legislature temporarily adjourned, legislators focused on those that were “fast, free, and friendly,” and let the others fall by the wayside. 

Bills that died included SB 20-138, which would have extended Colorado’s statute of repose for construction defect claims from six plus two years to 10 plus two years. The bill also contained a number of accrual and tolling provisions, which would have made it harder for builders to convince tribunals that claims were untimely. This bill died on the Senate floor, for lack of support. We will see whether plaintiffs’ attorneys will revive this effort next year. 

SB 20-093, while not an outright ban on arbitration or a legislative overturning of the Vallagio decision, would have made it harder to administer and more difficult to get cases into arbitration. The bill died under the “fast, free, and friendly” test, i.e., it faced too much opposition. I expect to see this bill again next year, in some form.

HB 20-1046 would have limited retainage to 5% on certain construction contracts. The bill also included requirements on timing of payments, interest on late payments, and attorneys’ fees and costs to be awarded to those who sued for late or non-payment. The bill died in committee prior to the COVID-19 recess in the face of opposition from owners’ groups. It remains to be seen whether this bill will be rerun next year.

The Legislature did pass a number of bills that will impact the home building community. Among them, HB 20-1155 will require, once it goes into effect, home builders to offer: a solar panel system, a solar thermal system or both; prewiring or pre-plumbing for the solar systems; and a chase or conduit for future installation of such systems. The bill will further require builders to offer: an electric vehicle charging system; prewiring for the future installation for such a system; or a plug-in receptacle in a place accessible to a vehicle parking area. Finally, the bill will require builders to offer electrical heating systems.

Buckle up for next year when some or all of the unsuccessful bills from this year return, and the plaintiffs’ bar takes another crack at the home building industry.

Fifth Circuit Holds Insurer Owes Duty to Defend Latent Condition Claim That Caused Fire Damage to Property Years After Construction Work

Jeremy S. Macklin | Traub Lieberman

Most general liability policies only provide coverage for “property damage” that occurs during the policy period. Thus, when analyzing coverage for a construction defect claim, it is important to ascertain the date on which damage occurred. Of course, the plaintiffs’ bar crafts pleadings to be purposefully vague as to the date (or period) of damage to property. A recent Fifth Circuit decision applying Texas law addresses this coverage issue in the context of allegations of a condition created by an insured during the policy period that caused damage after the policy expired.

In Gonzalez v. Mid-Continent Cas. Co., 969 F.3d 554 (5th Cir. 2020), Gilbert Gonzales (the insured) was a siding contractor. In 2013, the underlying plaintiff hired Gonzales to install new siding on his house. In 2016, the underlying plaintiff’s house was damaged in a fire. The underlying plaintiff sued Gilbert in Texas state court alleging that when Gonzalez installed the siding in 2013, he hammered nails through electrical wiring and created a dangerous condition that caused a fire three years later in 2016.

At the time Gilbert performed construction work, he was insured by Mid-Continent Casualty Company. Mid-Continent disclaimed coverage to Gonzales on the basis that the complaint unequivocally alleged that property was damaged in 2016 and there were no allegations that property damage occurred prior to 2016 or was continuing in nature.

The Fifth Circuit started its analysis by acknowledging Texas’ strict eight-corners rule for determining an insurer’s duty to defend. Relying on prior Texas and Fifth Circuit decisions (Don’s Building Supply, Inc. v. OneBeacon Insurance Co.Wilshire Insurance Co. v. RJT Construction, LLC, and VRV Development L.P. v. Mid-Continent Casualty Co.), the court narrowed its focus to “actual, physical damage alleged in the underlying litigation.” The court reasoned, “[i]f the only alleged damage occurred outside of the policy period, then there is no duty to defend. But if any of the alleged damage occurred during the policy period, then the duty to defend attaches.”

The court held that the underlying lawsuit “plainly alleges physical injury to property that occurred within the policy period.” The court identified three reasons for its holding: (1) the underlying complaint stated that the 2016 fire “relates back to [the] construction and/or installation of siding” in 2013, (2) the policy defined “property damage” to include “all resulting loss of use of that property,” so damage to the wire includes damage to the entire house, and (3) the underlying plaintiff’s claim of damages alleged that “the electrical wires were damaged in 2013.”

Judge Catharina Haynes dissented, explaining that she would hold that property damaged occurred after the policy period ended, when the fire broke out in 2016. Judge Haynes agreed that the court is bound by Don’s BuildingWilshire, and VRV Development, but she emphasized that those cases also hold that when an underlying plaintiff alleges actual, physical damage due to the insured’s negligent conduct, the alleged property damage does not relate back to the time of the negligent act when determining when the property damage occurred. Judge Haynes criticized the majority for focusing on the time of the negligent conduct.

The Gonzales decision highlights the importance of analyzing each allegation in an underlying pleading to determine when any physical injury may have occurred. The dissent also leaves the door open for a different panel of Fifth Circuit judges to distinguish or reverse Gonzales.

Contractor’s Claim for Interest on Subcontractor’s Defective Work Claim Gains Mixed Results

John J. Gazzola | ConsensusDocs

Skanska USA Bldg., Inc. v. J.D. Long Masonry, Inc., No. SAG-16-933, 2019 BL 336852, 2019 US Dist Lexis 152787 (D. Md. Sept. 9, 2019)

This case concerns calculation of a damages award to a general contractor, Skanska USA Building, Inc., on its claim for breach of contract against its masonry subcontractor, J.D. Long Masonry, Inc., arising from Long’s faulty construction of a masonry façade at a medical research facility in Baltimore. When the façade collapsed and Long failed to repair it, Skanska hired a replacement subcontractor, C.A. Lindman, to remediate Long’s defective work and filed suit against Long to recover the resulting damages. After the court granted Skanska’s motion for summary judgment as to liability, Skanska moved for summary judgment on the issue of damages, relying on the indemnification provision of the subcontract to seek compensatory damages, pre- and post-judgment interest, and litigation fees. In the subcontract, Long agreed to indemnify and hold Skanska harmless from all claims, losses, costs and expenses, including attorneys’ fees, arising before or after completion of Long’s work, caused by, arising out of, resulting from, or occurring in connection with Long’s performance of the work or breach of the subcontract.

The court first applied the terms of this provision to award Skanska compensatory damages, holding that Skanska was, as a matter of law, entitled to recover the amount of the Lindman subcontract and general conditions incurred to supervise remediation of Long’s work. The court, however, denied Skanska’s claim for pre-judgment interest on the entirety of these damages. Skanska asserted that it was entitled to pre-judgment interest on the full award, calculated from the date on which it first paid Lindman. The court disagreed, explaining that, under Maryland law, a claimant is entitled to an award of pre-judgment interest as of right only when the amount due is certain, definite and liquidated by a specific date prior to judgment. The court reasoned that, because much of the Lindman subcontract value was composed of later-executed change orders, an award of pre-judgment interest could not be uniformly calculated back to the date of Skanska’s first payment to Lindman. And moreover, because Skanska continued to withhold sums due to Lindman pending resolution of certain issues, awarding Skanska pre-judgment interest on amounts it had not yet paid would result in a “windfall” to Skanska because there was no “use of income” loss to be compensated.

The court also refused to award pre-judgment interest on Skanska’s overhead and supervisory costs, on grounds that there was no fixed, certain date on which Skanska’s claim to them became liquidated and that these damages were actually composed of costs that Skanska would have incurred regardless of Long’s beach. As such, the court awarded Skanska pre-judgment interest only on amounts actually paid to Lindman and on a “check by check” basis, or from the particular date on which each such payment was made.

Next, the court awarded Skanska its attorneys’ fees, concluding that the subcontract’s indemnification provision expressly provided for such an award because it tied payment of such fees to an action for breach and indicated that Long would indemnify Skanska for fees incurred in a suit between them. The court denied Long’s request for a reduction in the award, noting that Long’s complained-of delays arose from Skanska’s need to investigate and repair Long’s defective work in order to quantify its damages, efforts that did not “unreasonably balloon Skanska’s legal fees.”

Finally, applying federal law, the court awarded post-judgment interest on the total judgment entered against Long, calculated from the date the judgment was entered.