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.
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.
CPSC Recommends Removal and Replacement of Chinese Drywall
Today the Consumer Product Safety Commission recommended removal of all sulfur-containing drywall from homes built with the problem drywall. The CPSC’s recommendation is contained in its Interim Remediation Guidance for Homes with Corrosion from Problem Drywall. In addition to the problem drywall, the CPSC recommends removal and replacement of all fire safety alarm systems, electrical components and wiring, gas service piping and fire suppression sprinkler systems, all of which the CPSC states have a direct connection to safety. The CPSC recommendation also noted that, while its scientific investigations are ongoing, information revealed to date justified issuing the interim recommendation.
But I already paid for that! So you have a mechanic's lien; now what? (Part 2)
Four Practical Points for Avoiding and Responding to Construction Liens
Step 1: Who’s healthy in 2010?
Within the bounds of the Fair Credit and Reporting Act and any state obligations, it is imperative for both owners and general contractors to understand the financial fortitude of the parties doing the work. If you don’t obtain the bonds to protect the project, you need to be aware of what you can do to protect your rights. While you cannot request a complete financial audit, good due diligence will save you time, energy, money, and headaches in the future. Keep an eye out and an ear to the ground for any questionable items or rumblings related to the trades. Has anyone complained of “slow-pay” issues? Are there any “marks” against the contractor on any registration or licensing entity with the state? How timely is the contractor in meeting and agreeing to the terms you proposed (discussed below) that have active and proactive involvement for ensuring that the project remains clear of liens? Where is the contractor’s facility? Will it be condemned because it’s so rundown or has that “almost vacant” look, or is everything shiny and “new,” which in this economy could reflect an overleveraged or overextended trade contractor just waiting to fold if that next job doesn’t come through? While these items alone cannot “tell” you the contractor’s financial status, do not race past any yellow flags – the red ones are just behind it waving in the wind. These precautions are as true for the owner, who can get sideswiped by the general contractor or any of the lower-tier trades or suppliers.
Step 2: Is it time to update your contracts and specifically your right of inspection, payment, and mechanic’s lien provisions?
Do you know what your contract allows you to do at the beginning of the contract term or during the project to avoid liens? Do you have a list of the trades and suppliers (at least the major ones if not everyone) in the contract or within 30 days of its execution? Is your state a “preliminary notice” state such as California or Nevada, or a “surprise” state such as Idaho? Is your contract an “open-book” agreement? Can you communicate with lower-tier trades at any time? Do you have payment provisions relating to timing of payment for lower-tier trades or suppliers in your prime agreement? Do you require a sworn statement for the work performed for prior payment applications and a listing of the trades? Do you have joint pay or direct pay provisions if you have any concern whether those trades might be paid? Can you require waiver and lien releases with each payment (as permitted by law, of course)? Are you allowed to offset payments if you do discover there are some financial or payment concerns?
Step 3: Do you check in on the status of the work?
It is important to both monitor the work to keep up on the status and to communicate with the trades and suppliers on a regular basis to make sure they are being paid. While a few trades may promptly bring a slow pay or non-pay to the owner ’s or general contractor’s attention, many others in this economy will not until the very last minute out of pressure from the nonpaying party or fears of “not playing along” and not getting future work. The key is to allow the owner or general contractor to discover any issue early in the process – early enough so that any money can get to the right party and not the party that disappears with the dollars.
Step 4: Someone’s filing a claim; what do I do?!
There are times when something may slip past you despite the best-laid plans. Do you have a checklist action plan? Does everyone know what to do and what information and documents are required? Many times these claims arise at the most inopportune times and create a “fire drill” atmosphere. Avoid the confusion and rush, and know what you need to get done in your state to avoid a lien on the property or obtain the prompt removal of the lien if one has already been filed. The more information you have in advance, the better decisions you will make during the process and the less money it will cost you to address the issue.
But I already paid for that! So you have a mechanic's lien; now what? (Part 1)
Your project is coming along fine, despite the economy. You’ve weathered the squalls of bids, design changes, agency approval, and credit (mercifully), and now even construction completion is looking good. You can see the finish line through the haze on the horizon, and you’re fairly pleased with how you have pulled everything together with what has been a long haul through the system. You’re in the home stretch. You’re closing down the last items and payment obligations to ensure everything will get done. You didn’t even have to spend much money on legal fees in drafting the contract or during construction (that alone is reason to cheer for your department’s budget). You may just go on a “road show” to tout your expertise about how projects should be run. And then....
You receive a call from your project manager letting you know that a subcontractor says it wasn’t paid and will file a mechanic’s lien in five days if it doesn’t get a check. Well, how could that be? You have a record of payments to the general contractor, but you cannot find a release for those payments. You get two more calls from unpaid trades.... Yet, you feel somewhat confident; after all, the contract says the general contractor “is responsible” and you have that record showing you did pay him. It’s his responsibility to pay all the people he contracted with, right? Well, yes and no (of course!) is the legal answer your construction lawyer will likely give you.
Unfortunately, this scenario is becoming all too common in this lingering depressed construction environment. Tight bids, job or trade failures, and an ailing economy have trapped many owners and general contractors, causing them to potentially pay twice for work they thought was already “clear” and paid for.
Although each state’s laws on mechanic’s liens govern each party’s obligations and rights, in my next post I will provide you with some simple, general guidelines that owners and general contractors should keep in mind at the beginning of each project to help protect against the possibility of such a double payment.
Chinese Drywall Investigation One of Largest in CPSC History
The Consumer Product Safety Commission has spent more than $3.5 Million investigating sulfur-containing drywall in what has become one of the largest investigations in CPSC history, according to Scott Wolfson, spokesman for the CPSC. And the investigation is not done yet. During a press conference last week, the CPSC announced the release of more than 1,800 pages of investigation documents from three separate studies. Additional reports are expected to be released later this month.
Based on this initial information, the CPSC has confirmed that suspect Chinese drywall contains elevated levels of sulfur compounds in comparison to non-Chinese drywall. According to Mr. Wolfson, the measured levels do not pose a human health risk to homeowners. Still, the CPSC has received more than 1,900 complaints about drywall-related health symptoms and other problems. In addition, the CPSC is continuing to work on a 50-home study with the Lawrence Berkeley Livermore Laboratory, and this report may provide the scientific evidence necessary to connect Chinese drywall to the symptoms homeowners have been experiencing.
What is more, the reports due later this month may also answer the question about whether the CPSC will seek a recall of Chinese drywall. So far, the drywall manufacturers have not voluntarily agreed to recall their product, which means that the CPSC will need to clearly establish a link between Chinese drywall and the problems it is believed to have caused. Although the CPSC declined to comment about whether a recall action was imminent, Mr. Wolfson did say that the CPSC is “continuing to try to gather that proof” and that “rigorous scientific evidence is needed” to link the tainted drywall to health problems and excessive corrosion.
Finally, the CPSC recently launched a new website, www.drywallresponse.gov, and a hotline, 1-800-638-2772, to help consumers affected by this issue.
Negligence Claims Take Another Twist in Oregon
Just when you thought it was safe to go back into the water, the Oregon Court of Appeals strikes again with another iteration of the “economic loss doctrine” which defines when parties can sue each other in negligence for construction defects. In Abraham v. Henry (September 2, 2009) the Court held that parties to a contract can sue each other in negligence if a rule, code or standard “independent of the contract” has been violated. A prime source for independent rules, held the Court, is the Oregon Building Code. From now on, we can expect to see plaintiffs including in their complaints that one or more provisions of the Oregon Building Code have been violated. It will be easy to find such violations in most construction defect claims.
The prior standard, enunciated in the Jones v. Emerald case, held that there must be a “special relationship” between the contracting parties in order to support a negligence claim. No one really knew what a special relationship was, but most believed that alleging in the complaint that the owner relied on the contractor’s expertise was sufficient to create such a relationship and thus a right to sue in negligence. Abraham may have changed that belief by pointing out that, at least in that case, there was nothing “special” about the arms-length owner/contractor relationship, and, with or without reliance on the “expertise” of the contractor, each party was acting on its own behalf and for its own benefit.
Other decisions from Oregon courts support the argument that the economic loss doctrine does not bar negligence claims if there is physical property damage, but this argument was not made or at least not addressed by the Abraham court.
The principal reason – if not the only reason – why the economic loss rule is relevant is that Oregon’s statute of limitations for breach of contract is six years from the date of breach (which, at the latest, is usually the date of substantial completion or failure to honor extended warranties). For claims discovered and/or brought after six years, you must be able to assert a negligence theory for the claim to be viable, because the negligence period runs two years from the date of discovery of the claim (as opposed to the date of breach), capped by the 10 year statute of repose (which states that all claims must be brought regardless of discovery within 10 years from substantial completion). Thus, if you cannot assert a negligence claim, you may have no other claim to assert.
The vast amount of time and fees generated in litigating statute of limitations issues in Oregon construction cases is fueled by (1) disparate limitations periods for breach and negligence claims, (2) disparate limitations periods for claims against designers versus contractors, and (3) the every changing – and arguably inconsistent – decisions from Oregon courts on what the rules of the game really are. Oregon needs a “Construction Defect Reform Act” with one limitations period for all claims against all parties on a construction project, governed by a discovery rule and capped by a statute of respose, with a clear statutory answer to the economic loss rule. Until then, uncertainty and high legal fees will continue to be the norm.
Oregon Court of Appeals Provides Clarification to Contractor Negligence Claims
The Oregon Court of Appeals recently issued an opinion in Abraham v. T. Henry Construction, Inc., et al., a residential construction defect case, that helps clarify the circumstances under which a contractor may be sued for negligence. The issue of whether a contractor may be sued for negligence, as opposed to breach of contract is, in many cases, relevant to a determination of whether the owner’s claims are barred by the statute of limitations. Owners often need to rely upon a negligence claim to get past the six-year statute of limitations that applies to claims for breach of contract.
In Jones v. Emerald Pacific Homes, Inc., which was decided in 2003, the Oregon Court of Appeals held that an owner who had a contract with a contractor could sue the contractor in negligence if the contractor had breached a standard of care that was independent of any contractual duty or standard of care. Some courts generally referred to the non-contractual duty or standard of care as a “special relationship.” The Jones opinion then only begged the question of what constituted a special relationship.
In Abraham, the court held that, among other possibilities, a contractor’s duty to comply with the applicable building code constituted a duty independent of the contract and thereby created the type of special relationship necessary for asserting a negligence claim.
Abraham will be an important tool for owners seeking to pursue construction defect claims in situations in which the owner’s contract claim has expired due to the six-year statute of limitations, but only in certain types of cases. The Oregon Legislature recently passed legislation shortening the statute of ultimate repose (which is different from the statute of limitations) to six years, for medium to large commercial projects. As a result, the issue of whether a contractor may be sued for negligence, as opposed to breach of contract, will be relevant only to residential and small commercial projects and the Abraham case will be relevant only to those situations.
New Oregon statute shortens period for asserting building defect claims on "large" commercial projects.
On July 14, 2009, Oregon Governor Ted Kulongoski signed HB 2434 passed in June by the Oregon Legislative Assembly. Although a chapter number has not yet been assigned to the new act, the law will go into effect for building defect claims that arise on or after January 1, 2010.
As addressed in prior Legal Updates from Stoel Rives’ Development Law Group, HB 2434 reduces from ten years to six years after substantial completion the maximum time period during which an owner of a "large commercial building" can assert claims against those who performed design, planning, surveying, architecture, engineering, construction, repair, or construction supervision or inspection of or for the building.
As defined in the statute, the term "large commercial building" includes but is not limited to:
- rental residential structures of more than four stories
- mixed-use projects
- commercial structures that cost more than $250,000 to construct
- motels, hotels, nursing homes, hospitals and recreational facilities
- commercial structures with a ground area over 10,000 square feet or a height over 20 feet
- commercial rental units in a larger structure, if the unit has a ground area of over 12,000 square feet or a height over 20 feet
The term "large commercial buildings" does not include publicly-owned buildings or condominium buildings.
One concern for affected building owners and developers is simply the shortening of the period from ten years to six years after substantial completion during which the owner or developer can pursue a defect claim of its own against the designer or contractor of the building.
A second concern, however, is that building owners and developers may end up with legal obligations to a purchaser or tenant regarding building defects for a longer period than the six years after substantial completion during which the owner or developer can assert the claim against the building’s designer or contractor. In this way, a building owner or developer could have a multi-year exposure to getting "caught in a squeeze" by having a defect claim asserted against it by a buyer or tenant yet having no right to assert that claim against the parties that designed and constructed the building.
Owners and developers of "large commercial buildings" in Oregon should consider modifying the claims, warranty, correction of defects, and statute of limitations provisions in their purchase and sale agreements, leases, and construction and design contracts to respond to the changes in Oregon law made by HB 2434.
If you have any questions about the issues of this posting, please contact James A. Zehren, a member of the Construction & Design Section of the Development Law Group in the Portland office of Stoel Rives LLP, at jazehren@stoel.com or 503-294-9616.
Oregon Statute Regarding Defective Design and Construction Claims Pending Governor Action
Oregon HB 2434, passed by the House of Representatives on May 4, 2009 and by the Senate on June 22, 2009, is currently awaiting the Governor’s approval or veto. The bill would reduce from 10 years to six years the maximum time period during which an owner of a "large commercial building" could assert claims against those who performed design, planning, surveying, architecture, engineering, construction, repair, or construction supervision or inspection of or for the building.
Read our full client alert on this topic.
If you are opposed to, or favor, this significant change in Oregon’s statutes, we encourage you to contact Governor Kulongoski. Because the Governor could take action on HB 2434 at any time, please convey your comments as soon as possible in order to increase the likelihood that they will be considered.
Chinese Drywall Reported In Oregon: How You Can Protect Yourself.
The Portland Business Journal recently stated that Chinese drywall has been reported in Oregon. In addition, late last week the United States Consumer Product Safety Commission (“CPSC”) issued a status report on its investigation into the imported drywall. This report states that 5,503,694 sheets of Chinese drywall were imported into the United States during 2006, so it is no surprise that Chinese drywall was used by contractors in Oregon.
Because the CPSC investigation is ongoing, we do not know whether the imported drywall will be recalled. While waiting for the CPSC to complete this report, if you suspect that a building that you occupy was built with defective drywall, you should:
- Investigate whether your building contains drywall from China. Chinese drywall may have “MADE IN CHINA” printed on its back side (the side facing the studs). In addition, the inner core of Chinese drywall may appear gray in color in comparison to the white inner core of domestically manufactured drywall.
- Look for corroded metal components throughout the building. Examples include door hardware, fixtures, pipes, wires and other exposed metal throughout the building. Corroded copper piping and copper wires may appear blackened from exposure to sulfur in the drywall.
If you believe that your building contains defective drywall, generally you should:
- Determine whether the drywall may be affecting your health. The CPSC has reported that the most commonly reported symptoms include irritated and itchy eyes and skin, difficulty in breathing, persistent cough, bloody noses, runny noses, recurrent headaches, sinus infection, and asthma attacks. Symptoms that may be related to something in a building may present themselves when you are inside but go away after you leave. If you are suffering from any of these or other symptoms, consult a physician immediately.
- Inspect the metal components in your building. In Oregon, a certified home inspector may be able to help you conduct an investigation. Of critical importance are components related your building’s electrical and gas systems. Because these systems have the potential to be hazardous to your health or property, they should be routinely inspected and repaired to decrease any risk of failure. Alert your local gas supplier if you believe your gas system has been affected. Likewise, consult a licensed electrical contractor for any issues related to your electrical system. Any inspections or repairs should be thoroughly documented to increase your ability to recover repair costs from those responsible.
- Submit a Consumer Product Incident Report to the CPSC, either through the CPSC website or by calling the CPSC toll-free at 1-800-638-2772.
- Contact your state and local authorities to report your concerns and get direction on any help or resources in your area.
- Contact your insurance company and contractor to report your concerns.
- Consult with an attorney regarding your legal rights and remedies.
Although we do not yet know whether the CPSC will require a recall of imported drywall, if it does, the repair costs and inconvenience to building owners and occupants will be significant. By taking appropriate steps, building owners may avoid potential hazards and place themselves in a position to recover repair costs should they be necessary.
New WA Supreme Court Opinion has several Construction law implications
On June 18, 2009 the Washington Supreme Court issued its decision in Cambridge Townhomes, et al. v. Pacific Star Roofing, Inc., et al., 81003-6. The decision touches on several issues of interest to the construction industry in Washington. In particular, the Court clarified the law about when a corporation may be held liable as a successor in interest to a sole proprietorship (generally, where control in the company remains in the same hands, such that the old entity was effectively just wearing a “new hat”). The Court also enforced a broad indemnity provision in a subcontract, rejecting the subcontractor’s argument that its indemnity should be construed to apply only to third party tort claims. Finally, the court had occasion to revisit RCW 4.16.326(1)(g) which went into effect in July 2003 and requires that construction defect claims be filed within six years of substantial completion of construction or termination, whichever is later. The Court had held in 1000 Virginia Ltd. P’ship v. Vertecs Corp., 158 Wn.2d 205 (1994) that this provision did not apply retroactively. In Cambridge Townhomes, the Court clarified that application of the statute of repose turns on the date when the claim accrues, not when it is filed. You can read the entire decision here.
Chinese drywall claims now certified as a class action
Our Sean Gay recently blogged here and here about recent complaints out of Florida and elsewhere concerning defective Chinese-manufactured drywall that emits noxious sulfur gas and has been linked to problems with electrical and air conditioning systems. The latest news is that several such claims have recently been consolidated into a single federal class action lawsuit. After much wrangling by the respective parties over where the consolidated cases would be heard, a panel of federal judges decided that the matter would go to Judge Fallon of the U.S. District Court for the Eastern District of Louisiana. You can read more about the consolidation decision at consumeraffairs.com. To follow the latest developments in the case check out the Court’s web page for the matter.
Statute of limitations: State entity trumps in Safeco Field case
On March 5 2009 the Supreme Court of Washington issued a 6-3 decision in WA State Major League Baseball Stadium Public Facilities District v. Huber, Hunt & Nichols-Kiewit Construction, No. 81029-0, in which the court held that the 6-year the statute of limitations for breach of contract did not apply to a construction defect claim concerning the construction of Safeco Field due to the exemption in RCW 4.16.1 for actions brought “for the benefit of the State”.
The case arose after the Mariners discovered that the fire protection coating system to the stadium’s structural steel beams and columns failed, allegedly because the contractor applied a primer layer that was incompatible with the coating layer. The Public Facilities District and the Mariners (who are responsible for the maintenance of the stadium) filed suit more than seven years after the date of substantial completion of the stadium. The court of appeals granted summary judgment in favor of the contractor because the matter was not timely filed. In holding that the statute of limitations did not apply in this case, the Court stated that the State’s sovereign powers had been delegated to the Public Facilities District, the public municipality created to build the baseball stadium. The Court reasoned that the construction of Safeco Field was a manifestation of the State’s sovereign function of providing for public recreation, in much the same manner as the improvement of a city park or public library. The dissent disagreed that the action was for the benefit of the public, noting that the public had to pay a private for-profit entity for a ticket to gain admission to the stadium.
As a consequence of this decision, contractors should not assume that the statute of limitations will apply on projects involving a state-delegated entity, even where the improvement being constructed appears to be substantially or exclusively for private use. In such circumstances a reasonable limitation period for claims should be agreed and set out in the construction contract.
Chinese Drywall Defects a Growing Concern
Since we first blogged about Chinese drywall, homeowners in at least 19 states, including Washington and California, have reported problems associated with defective drywall.
Late last year, U.S. Consumer Product Safety Commission (CPSC) began receiving complaints about damage to homes constructed with drywall manufactured in China. The drywall reportedly contains elevated sulfur levels, which have been linked to corrosion and other damage. To address this growing problem, the CPSC established a Drywall Information Center to address consumer concerns about sulfur-tainted drywall. According to the CPSC, 419 reports have been filed. Homeowners commonly complained of a “rotten egg” smell, health concerns, and corroded and damaged metal components in their homes.
On May 21st, the U.S. Senate held hearings on the topic. Louisiana Senator Mary L. Landrieu stated that 550 million pounds of drywall have been imported to the United States from China. She also speculated that more than 100,000 homes could be affected nationwide. In response, Senator Landrieu sponsored the “Drywall Safety Act of 2009,” a bill aimed at banning Chinese drywall imports until the government promulgates appropriate standards.
As Senator Landrieu said during the hearing, “this defective product is not just a concern for homebuilders or homeowners, but is a concern for many other professions in both the public and private sectors.”
Recent Oregon Court of Appeals Case Resolves Statute of Limitations Issues in Construction Defect Cases
The Oregon Court of Appeals recently issued a ruling in the case of Waxman v. Waxman & Assoc., Inc. that resolves two significant issues regarding the statute of limitations in certain construction defect cases. First, the court ruled that where a plaintiff’s claim is based upon breach of contract, the applicable statute of limitations is six years, not ten. And second, the court ruled that the six-year limitation period begins to run at the time of the breach (which will generally be at the time the work is completed), not at the time the breach is discovered.
With respect to its ruling that ORS 12.080 does not incorporate a discovery rule, the court recognized an exception in cases of fraudulent concealment. Specifically, the court recognized that if the defendant fraudulently concealed the contract breach, the six-year period would not begin to run until the plaintiff discovered the breach or reasonably should have discovered it. While the extent to which this exception will be used remains to be seen, it is certainly possible that it will lead to allegations in future litigation that latent construction defects of which the contractor should have been aware were fraudulently concealed and therefore subject to a discovery rule.
The six-year limitation period will not apply to all construction defect claims, but only to those that are based upon breach of contract. In some cases, owners who purchased their property directly from the builder or developer may be limited to breach of contract claims and subject to the six-year limitation period, because the availability of tort claims is uncertain under Oregon law. Such owners, however, will likely be able to pursue tort claims against other parties with whom they did not have a contractual relationship, such as subcontractors, in which case their claims would be subject to a two-year statute of limitations, but also subject to a discovery rule. Likewise, owners who purchased their properties from prior owners and not directly from the builder or developer may also be able to pursue tort claims against the builder or developer.
The Waxman ruling is certainly good news for builders, because it confirms the position they have been taking on Oregon’s statute of limitations in construction defect cases. At the same time, though, it likely raises at least one significant new issue for litigation.
What do drywall, dog food and baby formula have in common?
With the widespread use Chinese products, it had to happen sooner or later—a construction defect made in China. According to the Wall Street Journal, gypsum wallboard—otherwise known as drywall—manufactured in China is releasing sulfur gases, which can smell foul and cause corrosion. Apparently the sulfur, a noxious chemical, has been linked to problems with air conditioning systems and wiring in homes built with the sulfur-containing drywall.
So far, South Florida is the only area where homeowners are complaining in significant numbers.
Gypsum, a key component of drywall, is a mineral compound commonly mined from underground deposits or produced as a chemical by-product. In response to the complaints, the manufacturer, Knauf , is purchasing its gypsum from another mine and has begun to test for sulfur. Although sulfur can be harmful to humans, the emission levels reportedly do not exceed the threshold set by the Florida Department of Health. They have, however, been blamed for heating and cooling system failures.
Like the widely-publicized Chinese dog food and baby formula scandals, the sulfur-containing drywall is likely to spawn litigation as homeowners undertake costly repairs to address the corrosion problem and its cause. Hopefully, the tainted drywall continues to distinguish itself from prior defective product scandals in one important respect—no deaths or injuries have been reported.
