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.
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.
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.
Welcome
Ahead of Schedule focuses on legal matters critical to the construction industry, offering insights, analysis, tips and updates regarding the law of project development, design and construction. The authors have well over 100 years combined experience in construction litigation and contract negotiation, along with prior office and field experience in engineering, construction and accounting. Stoel Rives' work includes all types of contracting scenarios and litigation, from $50,000 liens to mega-million dollar disputes. Reporting from 10 offices across the western United States, Ahead of Schedule shares our recent experiences and the latest industry developments with you, along with our passion for the industry and the ever-changing legal landscape.
Thank you for your interest. We hope you enjoy Ahead of Schedule and the unique depth of insight that it offers!
Eric Grasberger
Chair of Stoel Rives' Construction and Design Section
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.
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.
