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 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.
Oregon House Bill 2434 Threatens to Cut Off Large Commercial and High Rise Residential Defect Claims
All large commercial property owners and developers should be aware of a substantial risk that Oregon’s statute of repose for construction and design defect claims may be shortened from 10 years to 6 years if HB 2434 (available here) passes. Though similar bills were unsuccessful in years past, this year the sponsors have carved out publicly-owned buildings and low rise residential to avoid clashing with these well-represented interests.
"Large commercial structures" are generally defined as any residential structure (including apartments or for-sale units) over 4 stories and any commercial structure over 10,000 - 12,000 square feet and/or that cost over $250,000 to build.
Research shows that as many as 20% of defect claims are not discovered until after the 6th year from substantial completion, because damage resides in walls and other areas not readily observable. Defects discovered at these later stages are often significant and in some cases catastrophic because of the time period over which damage has occurred. The building owner’s property and liability insurance policies typically do not cover the losses, but contractor and design insurance policies often do extend coverage.
The most common repose period among the 50 states is 10 years. Several states’ repose periods are longer than 10 years, but only 9 states have periods of 6 years or less.
HB 2434 has passed the Oregon House of Representatives and is sitting before the Senate Judiciary Committee Chaired by Senator Floyd Prozanski. Testimony was received yesterday and another work session is planned for today. If you are opposed to this bill, you may contact Senator Prozanski by telephone at 503.986.1704 or by email at sen.floydprozanski@state.or.us.
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.”
