Utah Reverses Course on Apportioning Costs of Defense to Policyholders
A recent Utah Supreme Court decision could result in significant benefits to some policyholders in Utah’s construction industry. The case, Ohio Casualty Insurance Co. v. Unigard Insurance Co., 2012 UT 1, concerned a fight between two insurers about how to split the costs of defending a lawsuit brought against their policyholder, Cloud Nine. For policyholders, the most notable aspect of the decision centers on the fact that Cloud Nine was uninsured for about six months between the end of Ohio Casualty’s policy and the beginning of Unigard’s policy.
Ohio Casualty argued that Cloud Nine should have paid a portion of its defense costs based on the length of time it was uninsured. The court disagreed, noting that because both insurers reserved the right to control all aspects of the defense, “it would be inequitable to apportion any defense costs to an insured who has no power to select counsel or negotiate rates and no voice in deciding whether to settle the suit,” and therefore “it would be inequitable to hold the insured responsible for the share of defense costs attributable to the time period during which it was uninsured.”
The Ohio Casualty decision is significant because it effectively overrules part of the influential case of Sharon Steel Corp. v. Aetna Casualty & Surety Co., 931 P.2d 127 (Utah 1997), in which the court held that defense costs should be apportioned to an insured for those periods when it was without coverage.
For policyholders who have had a gap in liability coverage, the Ohio Casualty decision could provide a lifeline. Virtually all liability policies that obligate an insurer to defend its insured—including CGL, professional liability, employers’ liability, and pollution coverage policies—contain language that gives the insurer the right to control significant aspects of the defense. Thus, Ohio Casualty could apply in many coverage gap situations. Moreover, the complexity of many construction disputes makes an insurer’s duty to defend an extremely valuable aspect of coverage. Insurance industry statistics show that the cost of defending a complex commercial case can range as high as 77 cents for every 23 cents paid out to claimants. Scott C. Turner, Insurance Coverage of Construction Disputes § 7:1 (Nov. 2009). Depending on the complexity of the dispute and the length of the coverage gap at issue, the Ohio Casualty decision could spare construction industry policyholders from paying defense costs that could easily tally hundreds of thousands of dollars.
Washington Supreme Court Reverses Williams
In Williams v. Athletic Field, Inc., 155 Wn. App. 434 (2010), the Washington Court of Appeals ruled that a lien filing was invalid because it was not properly acknowledged. This decision created a stir among Washington construction lawyers, because the lien claimant had used a lien filing service which in turn had used a form patterned after the one provided in the lien statute, RCW 60.04.091(2).
On September 15, 2011, the Washington Supreme Court unanimously reversed the Court of Appeals, holding that a lien filing that follows the statutory form is valid even if not properly acknowledged. The court relied heavily on the statutory language to the effect that the form provided “shall be sufficient.”
The court also clarified the apparently competing principles that, on the one hand, lien law is to be “liberally construed” in favor of claimants and, on the other hand, that lien are in derogation of common law and are to be “strictly construed.” The answer is that strict construction applies to the determination whether the claimant’s services are of the type that creates a lien. If they are, then liberal construction is applied to extend the protections of the lien statute.
This decision should bring comfort to persons performing lienable work who depend on lien filing services from time to time. Such services would be well advised to adhere closely to the form of lien given in the statute.
LEED Avoids Class Action, Energy Savings Claim Left Untested
There’s big news in the battle between consultants in the green building industry and the U.S. Green Building Council (“USGBC”). Following almost a year of litigation, it appears that the USGBC may have defeated a $100 million class action lawsuit brought by engineers and designers, according to a court order issued last week. The plaintiffs’ complaint filed last October argued that USGBC made false claims about the energy efficiency of buildings certified under its LEED program. According to plaintiffs, who were not LEED accredited professionals, the USGBC’s allegedly false claims about energy saving and energy efficiency deceived consumers into pursuing LEED certification, and along with it, hiring LEED accredited consultants. But the veracity of USGBC’s energy efficiency claims remains undecided for now, as the federal district court for the Southern District of New York has ruled that the plaintiffs lacked “standing” to pursue their case under both federal and state false advertising laws.
More precisely, the court found that engineers and designers were not in a position to claim that the alleged false advertising could have harmed them. The court rejected the plaintiffs’ injury claims. For one thing, engineers and designers are not direct competitors of USGBC – the Council certifies buildings, while the plaintiffs provide construction and design consulting services. Also, according to the court, the engineers and designers could not show that any alleged false advertising by USGBC caused them to lose clients, because the LEED building certification program does not require builders to use LEED accredited engineers or designers. Even if the USGBC deceived builders about the LEED program, the court reasoned, LEED didn’t preclude them from hiring plaintiffs.
Naturally, energy use is a critical component of the LEED program. And while the class of dejected New York plaintiffs may never get to challenge the truth of LEED’s past advertising, stakeholders involved in green building can draw some valuable lessons from this skirmish when it comes to green building certification and energy efficiency.
The court’s order briefly touched on the most important of these lessons. Citing USGBC’s own filing in the case, the court noted that green building certification doesn’t necessarily address energy performance so much as the potential for energy efficiency. In other words, LEED certification may establish the potential for energy saving, but it doesn’t prove it. Then again, the LEED program does award points for the use of renewable energy, for on-site generation of renewable energy, and for monitoring and reporting energy use. Bottom line – because so many different factors go into a green building score, a clean/renewable energy claim about a green building can be potentially misleading.
So what does this mean? For one thing, one shouldn’t discount the value of a green building certification, whether from LEED, National Association of Home Builders, Green Globes, or any other comparable program. Certifications provide a nice, simple way to prove the green credentials of a building. On the other hand, additional disclosure may be prudent, particularly for those who market or advertise certain green attributes of a building. Architects, builders, owners – and anyone else who might profit from such claims – must be careful to not overstate or misstate the significance of a green building certification. With respect to energy efficiency, for example, a good LEED score may be the result of significant energy efficiency, or it may not.
Finally, what about the New York plaintiffs and their $100 million claim against USGBC? While the merits of their case remain unproved, don’t be surprised if the plaintiffs appeal the district court’s order. If they can convince a higher authority that they may have lost business to the LEED program, they may get a second chance to go after USGBC’s energy efficiency claims.
Keep an Eye on sb 474 in California: Sweeping Edits will Eliminate Traditional Indemnity Rights and Obligations, as well as AIE's in Commercial Construction Contracts
Indemnity and additional insurance provisions in commercial construction contracts may no longer be an “arm’s-length” negotiation in California. Dramatic changes are proposed in sb 474 (2011). We most recently saw this type of legislative intrusion directing contract language in the residential construction context with the significant modifications of Civil Code section 2728 a few years ago. The current proposed legislation likewise dramatically changes the traditional model of commercial construction contracts and risk-shifting amongst the parties for California projects, and it applies broadly to all commercial construction contracts, including public contracts.
The language of the present text of sb 474 would – effective for any contract executed on or after 1-1-2012 – bar the usual risk allocation in the indemnity provisions and requirements for additional insured endorsements in developer to general contractor/lower tiers, and from the general contractor to any lower-tier subcontractor/vendor. It is significant to note that the new language would eliminate the application of section 2782.5 (developer and general contractor negotiations on risk allocation) after 1-1-2012 through proposed section 2782(2). While the prohibition would not apply to “amendments” to contracts existing prior to 1-1-2012, it would apply to virtually all commercial construction contracts after that date with few exceptions, including all “design construction, alteration, renovation, repair or maintenance” arising out of a wide variety of construction activities. These activities encompass work in the green and alternative energy realms as well, where risk allocation is sensitive due to the inherent emerging nature of the technology involved in the project. Under the proposed statute, however, any provision between the parties written in conflict with the law would be void as against public policy and unenforceable.
In substance: no blanket indemnity provisions allocating the risk (historically called a Type I provision in California) would be valid. Only provisions that narrow the indemnity/contribution to the harm caused by the fault of the indemnifying party would be permitted. Importantly, the proposed statute would also prohibit the common requirement of AIE coverage in favor of the developer/general contractor to the extent such requirements seek coverage for the scope of the prohibited indemnity.
Furthermore, if the property on which the construction is performed is in California, this law would apply regardless of any choice-of-law provision or place of execution of the contract.
The proposed language impacts developers and general contractors in very practical ways. Naturally, all contracts and subcontracts, as well as all insurance provisions, will have to be modified if this legislation passes. Insurance policy requirements, scope of coverage and risk management considerations will have to be re-evaluated in light of the elimination of historic requirements. Once a claim is made, however, the real result will be that the developer/general contractor will bear the full burden of responding to and defending the claims when they arise. No longer will a simple tender under a Type I be effective to bring everyone closer to the table for an early resolution. And there will be no tenders to all AIE insurers requesting a full defense and indemnity under their policies with an expectation of a cooperative defense. Instead, we should expect that the developer/general contractors and their insurers will be primary and first have to front the defense expenses for any claims and suits until it is – if it is – proven that the actual fault or violation was caused by the indemnifying party. Typically, this means that there will be rare recovery through early resolution without much litigation firsthand. The apparent goal of this litigation is to finger-point and shift the blame to other parties to avoid indemnification and contribution to the requesting party, along with the fee reimbursement obligations. Even then the catch-22 may be what recovery will or can be had on the cross-claims that seek indemnity and contribution without a final factual finding of the indemnitor’s liability, which naturally leads to more litigation (the costs of which “chase” may not be recoverable without adequate contract language). While claims of “fairness” abound in the promotion of the proposed text, we know from experience that this type of language generates litigation and an existing problem is made worse. These problems will be exponential if there are burning limits policies on the projects as well as limited insurance resources.
The Increasing Importance of Performance Bonds
There are now 25 states in the U.S. that hold that construction defects are not an “occurrence” and are therefore not covered under commercial general liability policies insuring contractors. Couple this troubling statistic with the ever increasing number of policy exclusions and limitations, and we begin to realize that in many situations the contractor’s insurance policy is inadequate (or non-existent) protection against defects.
The importance of performance bonds as security to pay for construction defects is therefore growing. While some sureties who sell the bonds will tell you that bonds merely guarantee completion, and do not insure against latent defects, the language of the typical bond defies this position.
Bonds plainly state that they guarantee each and every obligation of the contractor under the contract. Those obligations usually include the duty to perform work according to the plans and specifications, the standard of care, and without defect or nonconformity. This author has not seen a bond that attempts to carve out construction defects from its coverage. And bonds do not have the host of exclusions or limited coverage grants that plague the value of insurance policies. By the same token, bonds are not perfect and owners should consider the following to get the most protection from a bond:
First, the bond duration should extend at least as long as the warranty period (typically one year from completion but sometimes longer) and for as many years thereafter as possible, up to the statute of repose period in the state in which the project is located. Because construction defects often appear years after completion, the bond duration is critical. You may pay more for a bond with a longer duration, but if the bond is needed, you should be paying less for the unreliable insurance carried by the contractor.
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Oregon Supreme Court Declines to Reconsider Abraham Decision
In March of this year, the Oregon Supreme Court issued its opinion in Abraham v. T. Henry Construction, Inc. Unhappy with one aspect of the opinion, the Abrahams promptly filed a petition for reconsideration. Last week, the Oregon Supreme Court denied the Abrahams’ petition. While it was making its way through the appellate courts, Abraham provoked considerable interest from lawyers and construction industry groups alike because of its potential to change Oregon law.
Abraham involved construction defect claims by the Abrahams, homeowners, against their contractors. The central issue in Abraham was whether the Abrahams could recover in negligence for damage to their home even though there was a contract between the Abrahams and their contractors. This was a significant issue for the Abrahams: If their negligence claims were barred, they could not recover because the statute of limitations had expired on their breach of contract claims. The Supreme Court concluded that, in the absence of contract language limiting the Abrahams’ right to assert negligence claims, their allegations of property damage stated a claim for negligence. This meant that the Abrahams’ case against their contractors could move forward.
Still, the Oregon Supreme Court did not stop there. The Court went on to state that that negligence claims arising out of the construction of a house must be brought within two years from the date on which the plaintiff discovers or should have discovered the injury. While a two-year statute of limitations is generally assumed to be the applicable period for negligence claims, at least one recent case (Waxman v. Waxman & Associates) has, for some lawyers, cast doubt on that assumption. Indeed, those same lawyers have contended that rather than two years from discovery, the applicable limitations period for negligence claims is six years from the date of the injury. This apparent conflict has, in some cases, allowed lawyers to argue one of two potentially applicable statutes of limitations, depending on which party they represent and when it appears the injury occurred or was discovered.
By filing their petition for reconsideration, the Abrahams sought to have the Oregon Supreme Court modify its opinion and omit the reference to a two-year statute of limitations for negligence claims. The Abrahams argued that, among other things, they did not ask the Oregon Supreme Court to decide any statute of limitations issues. While it is true that the Court’s reference to a two-year statute of limitation was not essential to the holding in Abraham, it certainly indicates how the Oregon Supreme Court might rule. As a result, Abraham provides some measure of guidance on the issue of which statute of limitations should apply in construction defect cases. However, because Abraham did not decide any statute of limitations issues, it is likely that the two-year versus six-year dispute will continue until Oregon’s appellate courts address it directly.
Dispute resolution clauses: getting the prenup right before you say "I do."
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Before using AIA forms or any other agreement to begin a project, owners should review and revise those forms to ensure that they contain appropriate provisions governing dispute resolution. Otherwise, you may be stuck suing different parties in different forums for the same set of construction and design defects, you may be unable to recover the costs of litigation if you prevail, or the cost may be too high because you did not select an economical arbitration service.
Arbitration
The choice between litigating in arbitration or litigating in court is complex, and you should consider that choice carefully in each contract. However, arbitration generally saves time and is procedurally simpler. Arbitration also allows you to avoid a jury trial, which may be tremendously beneficial to parties trying to focus attention on defects and away from irrelevant or unfairly prejudicial matters.
In court, any reference to a defendant’s insurance coverage is possible grounds for a mistrial, while in arbitration, most arbitrators are fully aware whether coverage likely exists. The awareness of insurance coverage is particularly important in construction and design defect cases. Owners require designers and contractors to obtain coverage precisely because they want to be compensated for defects, and want the referee resolving their claim to consider that coverage. Preserving your ability to consider insurance coverage is another factor favoring the choice of arbitration over court.
Consolidated arbitration
On most construction jobs, whether commercial or residential, there will be more than one party potentially responsible for a defect. Therefore, your dispute resolution clause must allow you to force different parties into one arbitration proceeding for claims arising from the same or similar defects on the same site.
If you do not require consolidation of related claims, you may end up in more than one arbitration over the same set of defects. This not only increases legal costs associated with litigation, but may produce two different results. An arbitrator in one arbitration proceeding may not feel compelled by the holdings of another arbitrator, even if they are hearing cases arising out of the same set of defects. The arbitrator hearing your claim against the designer may hold that, though the building is defective, it is not due to design defects. Another arbitrator hearing your claim against the contractor on the same building may agree that the building is defective but that the defects are not due to the contractor. In theory, you could fail to collect in both cases.
Attorney fees
Be sure to consider a clause which awards attorney fees to the prevailing party. An attorney fee clause is a double-edged sword. You want it when you have a strong case and are likely to prevail; you want to avoid it when you are not likely to prevail. Of course, at the time of contracting, you have no idea what litigation position you may be in some day, making it hard to decide if you want the clause or not. Many parties who feel they have an economic advantage over the other party to the contract opt for no attorney fee clause, assuming they can outlast their opponent in a litigation battle. Other parties feel that attorney fee clauses encourage litigation because they give the potential plaintiff a belief that its recovery will be that much larger. Finally, owners in particular should consider that most states’ lien statutes give designers and contractors a prevailing party attorney fee right in cases where the designer or contractor are suing for additional compensation (which is the most common claim by those parties). If the owner does not have an attorney fee clause in the contract allowing the owner to collect fees in cases where the owner is plaintiff (the most common being construction defects and delay claims), then the contractual relationship between the parties is unequal. If the owner wants to avoid attorney fees for both sides, it needs to include in its contract an affirmative waiver by the designers and contractors of the attorney fees rights bestowed by lien statutes or other statutes.
Subcontractors and sub-consultants
The agreement between you and your contractor or designer is not an agreement between you and your contractor’s subcontractors or designer’s sub-consultants. So, for example, requiring your contractor to agree to consolidated arbitration will not mean you can force the subcontractors to consolidate if their agreement with the contractor does not require them to. Review subcontracts and agreements with sub-consultants to ensure that those agreements require the parties to agree to consolidate.
Arbitration service providers
There are many different organizations that provide arbitration services. You can compare them by fee structure, the quality of the mediators and arbitrators on their panel, and the procedural rules governing the arbitration. While standard form AIA contracts designate the American Arbitration Service as the default provider, many parties opt for smaller local services with lower fees and good panels.
Keep An Eye On This Major Seattle Project
On January 6, 2011, the Washington State Department of Transportation (WSDOT) signed a contract with Seattle Tunnel Partners for the biggest piece of the SR 99 Viaduct replacement project, the 1.7 mile long tunnel carrying traffic from the south end of the Seattle waterfront to near the Seattle Center. This is a design-build contract with an estimated value of about $1.35 billion.
The SR 99 viaduct was built in the 1950s and concerns have been expressed about its ability to survive a major earthquake, in part because its foundations rest in part on fill materials that may liquefy in such an event. After studying various options, WSDOT has decided to replace the viaduct with a bored tunnel, which will require the use of one of the largest tunnel boring machines ever built. The SR 99 replacement project has many other parts, some of which are already in the preliminary phases of construction.
The WSDOT website has lots of interesting information about the project, including video simulations of how the existing viaduct and nearby seawall might collapse during a major earthquake and how it will look to drive through the completed tunnel.
Owners and developers: keep your eye on Section 106 compliance
A recent federal court decision underscores how a federal agency’s failure to comply with Section 106 of the National Historic Preservation Act can impact construction projects.
Section 106 is a procedural statute that requires each federal agency to take into account the effect of its “undertakings” on properties listed on or eligible for listing on the National Register of Historic Places. “Undertakings” include federally funded or federally permitted private projects.
In this case, the district court granted a preliminary injunction that suspended construction on a 700+ megawatt solar project in California. The court found that the BLM, by not adequately consulting with a tribe on the project, failed to comply with Section 106.
The case is a good reminder that owners and developers should monitor the permitting or funding agency’s approach to Section 106, because the agency’s lack of compliance can derail your project.
Have You Updated Your Mechanic's Lien Procedures in California?
Now that the holiday frenzy has wound down, many have overlooked the necessity of updating their mechanic’s lien procedures in California. Effective January 1, 2011, prevailing California law imposes new requirements and notice procedures for effective lien actions on mechanic’s lien claimants. These changes immediately affect the preparation, service, and recordation of mechanic’s lien claims. California Civil Code § 3084(a)(6)-(7) will mandate that a valid claim of lien, also known as a mechanic’s lien, must contain the following information in addition to what the law currently prescribes:
• Particular language in 10-point boldface type entitled “Notice of Mechanic’s Lien” as set forth precisely in the statute, and
• Affidavit of proof of service on the owner or reputed owner (and construction lender or original contractor in some cases, but best practices suggest that providing notice to all categories may provide an increased opportunity for payment).
If you have been using old forms, or even current commercially prepared forms, you should verify that they will not be outdated come January 1. The law makes clear that a failure to meet the requirements would cause the mechanic’s lien to be unenforceable as a matter of law. Your counsel should make certain that any preprinted form or custom form captures the new requirements of the Civil Code.
Further, the amendments affect the recordation of a lis pendens for a suit to foreclose a mechanic’s lien. The filing, which was previously performed as “good practice,” is legally mandatory beginning January 1, 2011 under Civil Code § 3146. The lis pendens must be recorded within 20 days after filing of the foreclosure action, and best practices dictate that counsel should record it immediately after the action is filed to preserve priority. You can find the legislation here.
Oregon Supreme Court Hears Abraham Appeal
Last month the Oregon Supreme Court heard oral argument in Abraham v. T. Henry Construction, Inc., a residential construction defect case. Shortly after the Oregon Court of Appeals published its opinion in September 2009, Ahead of Schedule authors Eric Grasberger (“Negligence Claims Take Another Twist in Oregon” and Kip Childs (“Oregon Court of Appeals Provides Clarification to Contractor Negligence Claims” commented on the decision. The case pits the homeowners, the Abrahams, against their general contractor, Keith Lucas, and framing contractor, Kevin Mayo.
Unhappy with the result in the Court of Appeals, Lucas and Mayo petitioned the Oregon Supreme Court seeking review on several questions that are described in the Court’s media release. Because the case involved several issues frequently litigated in construction defect cases (economic loss rule, statutes of limitation, building codes as the basis for a negligence claim, etc.), the Oregon Trial Lawyers Association (“OTLA”) and Oregon Home Builders Association (“OHBA”) weighed in and filed amicus curiae (literally, “friend of the court”) briefs. These briefs followed predictable lines of argument. Among other things, OTLA urged the Court to decide in favor of the plaintiffs and hold that, among other things, a discovery rule applies to breach of contract actions. For its part, OHBA suggested that the Court find that, absent a special relationship, one party to a contract (such the plaintiff project owner) should not be permitted to assert a negligence claim against the other party (such as the project’s general contractor).
Whether the Court will take up these important issues remains to be seen. However, until they are addressed by Oregon’s highest court (or legislature), these controversial issues will continue to be the source of much legal wrangling and uncertainty for both plaintiffs and defendants alike.
OSHA Creep
OSHA compliance recently became harder and costlier, and may continue to do so, thanks to several developments at the federal and state level. (Click here for a prior post on OSHA reform.)
You may go to prison if you discipline or terminate an employee who might be worried about an unsafe working condition—even though your employee had not bothered to tell you about his concern. That is what the current version of the Robert C. Byrd Miner Safety and Health Act of 2010 (H.R. 5663) provides.
The Byrd Act, not yet law, would prohibit firing or discriminating against an employee who refuses to perform the his duties if he “has a reasonable apprehension that performing such duties would result in serious injury to, or serious impairment of the health of, the employee or other employees.” Employers should wonder how they will know whether their employees have “reasonable apprehensions”—the Act does not require the employee to voice his apprehension for this provision to protect him from discrimination for failing to do his work. If the Act becomes law, an employer who fires an employee because that employee is not performing may find itself faced with a complaint.
The Byrd Act has not moved since July 29, 2010, when it was placed on the Union Calendar. Depending on the results of the recent elections, it may not move at all.
If your business has an effective noise protection program in place, that may not protect you from OSHA penalties.
The U.S. Occupational Safety and Health Administration recently proposed adopting a new interpretation of the word “feasible” as it is used in certain sections of the General Industry and Construction Occupational Noise Exposure standards (sections 1910.95(b)(1) and 1926.52(b)).
Feasible, which currently means that a measure is both capable of being done and that the costs of implementing the measure are less than the cost of an effective hearing conservation program, would only mean capable of being done. If you have avoided certain measures because they were not economically feasible, and if OSHA determines that they were capable of being done, your program will not be in compliance.
For example, if your employees are exposed to a loud workplace but you require them to wear effective ear protection—and they do—this will not be good enough. If OSHA decides that redesigning your workplace with expensive sound-absorbing baffles is capable of being done, you have to do it. Even if it would be no more effective than your current program.
Instead of allowing a cost-benefit analysis, the Administration would consider administrative or engineering controls economically feasible when the cost of implementing those controls will “not threaten the employer’s ability to remain in business.” So, if OSHA decides those sound-absorbing baffles won’t threaten your ability to remain in business, they are economically feasible. Oddly, though the Administration argues that its proposal restores the “plain meaning” of feasible to its enforcement policies by eliminating cost-benefit analyses, it did not state how it derived its proposed economic viability standard from that plain meaning.
Continue Reading...Washington Supreme Court Re-Examines Economic Loss Rule
The Economic Loss Rule plays an important part in construction disputes, but it has not been clearly defined or understood, or so the Washington Supreme Court has recently stated. The Economic Loss Rule has been generally described as applying to “economic damages” in cases where the plaintiff has a contract that addresses or could reasonably address the risk of those economic damages. The Economic Loss Rule has been applied in Washington to disputes relating to product liability and construction matters.
The Washington Supreme Court revisited the Economic Loss Rule in two cases issued on November 4, 2010, Eastwood v. Horse Harbor Fdn., Inc., and In re Affiliated FM Insurance Co, v. LTK Consulting Services, Inc. The court concluded that the Economic Loss Rule had been misunderstood. The nature of damages is not determinative (since many kinds of damages can be stated in monetary terms), and the presence of a contract is also not determinative. Instead, the key issue is really whether the plaintiff can identify a duty owed independently of any contract. The court said that the Economic Loss Rule should be renamed the Independent Duty Doctrine.
In Eastwood, the court ruled that a tenant’s duty to avoid waste was independent of a similar duty stated in the lease, and so the plaintiff in that case could pursue claims in tort and for breach of contract simultaneously. In Affiliated FM Insurance, the court held that an engineer hired by the City of Seattle to make recommendations about repairs to the Seattle Monorail owed a duty of care to the company that operated the Monorail, independent of its contractual duty to the City. As a result, the operating company could pursue a claim against the engineer for negligence after a Monorail train caught fire.
Both Eastwood and Affiliated FM Insurance include multiple opinions, concurring and dissenting, that discuss various aspects of the old Economic Loss Rule, now renamed the Independent Duty Doctrine. All of the opinions should be examined to understand the status of the law in this area.
Two results of interest to construction litigators should survive the restatement of the rule. In Washington, a contractor given faulty plans by its client/owner may not sue the owner’s architect for negligence in preparing those plans. And Washington does not recognize a cause of action for negligent construction. Any case needs to be analyzed on its particular facts, however.
Washington Court Holds Statute of Limitations Doesn't Apply to Arbitration
Contributor: Stephen P. Kelly
In Broom v. Morgan Stanley DW, Inc., the Washington State Supreme Court held that state statute of limitations did not apply to a contractual arbitration. The arbitrators of an investment-related dispute had dismissed certain claims because plaintiffs failed to bring them before the applicable statutes of limitations lapsed. Analyzing the Washington statute of limitations and arbitration statutes, the court found that the legislature didn’t intend the term “action” in the statute of limitations – to include arbitration. Because of this, the court reasoned, the arbitrators weren’t authorized to apply the state statute of limitations to plaintiffs’ claims. The court made clear, though, that people can agree, by contract, to apply a state statute of limitations to arbitration provisions.
Construction and design contracts as well as many other types of contracts commonly specify arbitration as the exclusive forum for disputes, and commonly select what laws apply to the contract. This decision could affect a variety of construction-related disputes including construction defect and payment claims and the full impact of the decision remains to be seen. In the meantime, for a construction contract in Washington where arbitration is the forum for disputes, parties that want the Washington statutes of limitations to apply to the arbitration should make this clear.
One to Watch: BIAW Sues to Stop New Washington Residential Energy Efficiency Standards
In November 2009 the Washington State Building Code Council (“WSBCC”) approved amendments to the Washington State Residential Energy Code imposing additional energy efficiency requirements for newly permitted homes. The controversial changes, found in Chapter 9 of the new Code, are scheduled to take effect on July 1, 2010.
The new regulation at issue requires that “Dwelling units permitted under this Code shall comply with all provisions of Chapter 5 of this Code [building component performance requirements] and develop 1 credit from Table 9-1.” The requirements thus apply to both new residential units and additions to existing units. Table 9-1 contains a list of 13 options for achieving energy efficiency in newly permitted homes each of which qualify for between .5 and 2 credits and some of which must be combined with other listed options to qualify. Most of the options involve increasing the efficiency of HVAC systems, while others address things such as building envelope efficiency, water efficiency and on-site generation of renewable (solar or wind-generated) energy.
Various members of the Washington building industry have strenuously objected to the new regulation on the grounds that it will add to the cost of new homes built in Washington, therefore making them more difficult to sell in a down real estate market and ultimately harming the state’s building industry.
On May 25, 2010, the Building Industry Association of Washington and various building industry participants consisting mainly of residential builders and HVAC consultants and equipment suppliers, sued the WSBCC in the U.S. District Court for the Western District of Washington (Case No. 3:10-cv-05373-RJB). The complaint requests a temporary injunction prohibiting the State from implementing the new regulation and a declaration that the regulation is unconstitutional.
The Plaintiffs contend that the new energy efficiency regulation violates both the Supremacy Clause (Article VI) and the Interstate Commerce Clause (Article I, Section 8, cl. 3) of the U.S. Constitution. The primary argument set forth in the complaint is that the new regulation has the effect of imposing more stringent energy efficiency standards than those imposed under federal law, and is therefore in contravention of the Supremacy Clause in that such regulations are preempted by the federal Energy Policy Conservation Act of 1975 (EPCA) and similar acts.
Table 9-1 does not directly impose standards higher than those imposed under federal law, but the plaintiffs argue that many of the options listed are impractical and effectively force home builders and buyers to select expensive HVAC, water heating and plumbing equipment that exceeds federal standards, thus contravening the EPCA and adding between $4,000 and $15,000 to the cost of a new home.
The EPCA prohibits states from imposing higher energy efficiency standards than those imposed under the Act but also includes exceptions, including one allowing states to enact performance-based building codes that provide multiple options for compliance.
In response to the complaint, WSBCC may argue that Chapter 9 meets the performance-based building code exceptions of the EPCA and other relevant federal laws, that Table 9-1 provides a number of different ways to achieve one credit of additional energy efficiency, that the options are not impractical or unduly burdensome and/or that the plaintiffs’ allegations regarding the impact on the industry and the cost of new homes in Washington are exaggerated.
The plaintiffs’ complaint spends little time on the Commerce Clause argument, which is that the new regulation will disadvantage the residential building industry in Washington as compared to competitors doing business in other states that have less stringent regulations.
The plaintiffs’ Supremacy Clause argument should garner the most attention from the court and it will be interesting to see how the case is decided. The decision may come down to a factual analysis of the various options set forth in Table 9-1. Although the complaint addresses several of the allowed options, it provides little detail as to why the options are impractical. For instance, the complaint states, without further discussion, that the renewable energy options “are simply not viable for many homes/home sites.” Such factual issues should provide a fertile battleground for the litigants.
As of the date of this Blog, the court has not yet ruled on the request for temporary injunction pending the outcome of the proceedings; however, this may become a moot issue, as it appears that Governor Gregoire has requested that implementation of the new standards be delayed by nine months.
Whatever the outcome, this case is certain to have widespread implications for the Washington residential building industry and could set an important precedent for other states wishing to impose new residential energy efficiency standards.
