In my latest Daily Journal of Commerce Construction column, I discuss Oregon’s new 5% retention rule. Parties negotiating construction contracts should stay mindful of how the new retention provisions may force changes to other contract and how such changes may affect all parties throughout construction of the project.
Read the full article at the Daily Journal of Commerce website. Subscribers only.
"Retention Rule Change May Have Unintended Consequences" was originally published March 19, 2014 by the Daily Journal of Commerce.
The Latest DIRT in California: Additional Mandatory Reporting for Excavators, Operators and Contractors?
Those that “dig in the dirt” are very familiar with the Damage Information Reporting Tool (DIRT), which was launched in 2003 by the Common Ground Alliance (CGA). Over the years California has enacted several statutes requiring anyone moving dirt to notify a regional notification center of the area of planned disturbance that may impact a subsurface installation. A subsurface installation operator then takes prompt steps to accurately mark the earthen area to avoid harm to the affected property. Also, the statutes mandate that any damage discovered ator caused to any subsurface installation must be reported. Damage is defined broadly and includes “all breaks, leaks, nicks, dents, gouges, grooves, or other damage to subsurface installation lines, conduits, coatings, or cathodic protection” pursuant to California Government Code section 4216.4(c). See Government Code sections 4216-4216.9 for more information. But, effective January 1, 2014, Government Code section 4216.6 (c) and (d) now calls for the gathering and reporting of statewide information about “facility events” that have been reported using DIRT.
The new amendments to Government Code section 4216.6 (d)(1) seeking the gathering of statewide information now define facility events as “the occurrence of excavator downtime, damages, near misses, and violations.” But, while any person damaging property of another already has mandatory reporting requirements, reporting downtime and near misses remains categories of voluntary reporting. Expanded definitions of damages and violations in the CGA “Best Practices” request the provision of information voluntarily to assist facilities and operators in ensuring fewer dangerous practices and less resulting harm to person or property through proactive training and education. The CGA yearly publishes “Common Ground: Study of One-Call Systems & Damage Prevention Best Practices” (CGA Best Practices). The March 2013 edition provides useful definitions for these categories of voluntary reporting:
- Downtime = Lost time reported by a stakeholder on the DIRT field form for an excavation project due to failure of one or more stakeholders to comply with applicable damage prevention regulations.
- Damages = Any impact or exposure that results in the need to repair an underground facility due to a weakening or the partial or complete destruction of the facility, including, but not limited to, the protective coating, lateral support, cathodic protection, or housing for the line, device, or facility.
- Near misses = An event where damage (as defined above) did not occur, but a clear potential for damage was identified.
While the new statutory sections do not mandate individual reporting under the expanded definitions, those working in this field may voluntarily report additional information if they desire to assist the CGA and the state in proactively educating those in the field and the public as to best practices. And, although the reporting is labeled as confidential, those considering voluntary reporting should first discuss any ramifications of such expanded voluntary reporting with their counsel.
In my recent article, "Contractor Not Entitled to Setoff Costs of Repairing Subcontractor's Defective Work," I discuss the Oregon Court of Appeals’ decision that a contractor cannot terminate its subcontractor for convenience and setoff costs incurred in repairing the subcontractor’s defective work (affirming the trial court’s decision).
Read the full article, here.
"Contractor Not Entitled to Setoff Costs of Repairing Subcontractor's Defective Work,” published by the ABA in Construction Litigation: American Bar Association Section of Litigation, January 17, 2014. Republished with permission.
Multi-Family Sellers Beware: Don't "Alienate" Your Project from Insurance Coverage for Construction Defects
The apartment business is booming right now. Unfortunately, construction defects persist as well, particularly in garden-style and wood-framed construction. Most developers are savvy enough to maintain a good insurance program, but many do not understand (until too late) that the policies they bought may not cover the risk of construction defects.
As an owner-developer, neither your property insurance policy (including your builder’s risk policy) nor your general liability policy is likely to protect you from the cost of repairing defects to property you own. Most likely, your property policy has an exclusion for any damages caused by defects in construction or design. And your liability policy has exclusions for property damage to any property you currently “own, rent, or occupy.” (See exclusion J(1) below.)
Even more surprising to some is another exclusion that prevents coverage for property damage to property that you “sell, give away or abandon” (known as the “alienated property exclusion”). (See exclusion J(2) below) This means that for projects you develop, occupy (i.e., rent) and sell, you likely have no coverage during your occupancy of that project or after you sell (whether to unit owners through a condo conversion or to another apartment owner).
j. Damage to Property
“Property damage” to:
(1) Property you own, rent, or occupy, including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property for any reason, including prevention of injury to a person or damage to another’s property;
(2) Premises you sell, give away or abandon, if the “property damage” arises out of any part of those premises;
Upon learning of this unfortunate situation, many developers ask: What good is the policy if it doesn’t cover me when I own the project and it doesn’t cover me after I sell it? Good question. The insurer’s response is that the policy only covers damage to other people’s property (like the project next door), not damage to your own property or the property you once occupied and sold. Strangely, if you sell the project before you occupy it, coverage is more likely.
Solutions? There are steps you can take to minimize your risk:
(1) always sell your project under a strongly worded and very broad “as-is” clause;
(2) recognize that even an “as-is” clause won’t protect you from suits for fraud or concealment (and that your insurance usually won’t cover intentional bad acts either);
(3) consider purchasing a special endorsement to your policy that gets around the “alienated property exclusion,” if available;
(4) consider a separate “tail policy” to cover the risks arising out of property you developed, occupied and sold, if available;
(5) ensure that your design and construction team have policies that contain broad coverage and adequate dollar limits;
(6) ensure that your contracts require the design and construction team policies to remain in place for the full statute of repose, even if the claim comes after any sale or disposition of the property;
(7) ensure that your design and construction contracts avoid any limitations on liability or waivers of damages; and
(8) include in your contracts a strong indemnity clause that might (in some jurisdictions) allow you to seek protection under the design and construction policies even after the original statute of repose has run.
Finally, recognize that the statute of limitations or repose applicable to claims against you may be longer than the limitations periods applicable to your claims against the design and construction team. The act of any repair or remodel work by you, or the act of sale or disposition, may start a new limitations period for claims against you arising out of the repair, remodel or sale. This new limitations period would likely not, however, extend the liability of your contractors and designers (or their insurance policies) unless they were directly involved in the repair or remodel work.
In ParkWest Homes, LLC v. Barnson (Feb. 4, 2013) (ParkWest II), the Idaho Supreme Court affirmed the district court’s ruling that where a property encumbered by a mechanics lien is not brought to foreclosure against an interested party within six months of the filing of the lien, the court cannot enforce the lien against that unnamed party, and the lien claim will fail as to that party. In ParkWest I (2010), the Idaho Supreme Court had previously held that ParkWest’s lien on the property was valid as against the buyer and the deed of trust holder.
After the Court’s decision in ParkWest I, the encumbered property was transferred to a third party (“Residential”) via a trustee’s sale from the original trustee. However, the trustee had not been named in the original foreclosure action, and was therefore not a party to raise the legal issue to the district court or Supreme Court in those prior proceedings. Residential intervened in the action after gaining title, and filed a motion for summary judgment, seeking dismissal on the grounds that the mechanics lien was void because ParkWest failed to comply with Idaho Code § 45-510 (failing to file foreclosure within six months).
The district court dismissed the original deed holder from the action, as it no longer held an interest in the property, and granted Residential summary judgment. The Court explained that since Idaho is a title theory state, and a deed of trust is a title-passing procedure, legal title to the property passes to the trustee, and it is a necessary party to the foreclosure action for any party against which the mechanics lien is to be enforced. Since ParkWest had not filed an action within six months of the filing of the mechanics lien against the trustee who held an interest in the property – the predecessors-in-interest of Residential – the Court ruled that Residential took the property free and clear of ParkWest’s lien on the property.
A California appellate court has clarified for public owners and contractors (a) what the results may be if the owner does not timely sign a change order and (b) under what circumstances a change order is required. In G. Voskanian Construction, Inc. v. Alhambra Unified School District, No. B221005 (Cal. Ct. App. Mar. 29, 2012), following competitive bidding, the contractor and the District entered into a written contract for moving portable buildings and making improvements. The contractor secured the required performance bond. The underlying contract included the standard “written change orders required” language, along with a provision relating to how change orders were to be approved. The District's "designee" identification, however, was left without express direction or guidance. During the course of the contract, the District's Assistant Superintendent directed the contractor to work with the District's construction manager regarding change orders, and stated that the District would then approve whatever they agreed to. Given that the work related to portable classrooms to be used during the school year, the project was on a very tight summer schedule. Any extra work had to be performed immediately, and the change orders would be bundled and later processed by the District.
At the time of the pre-bid walk, classes were in session and so only two of the 16 buildings could be visually reviewed by bidders - and from the doorways only - without the plans. Further, in the course of this tight construction timeline, and post-award, errors by the District's architect were discovered, including the failure to specify any fire alarms for the moved portables. The District directed the contractor to make changes to correct the errors and issued another bid, for which the same contractor was the lowest bidder, to add the fire alarms. The contract terms were the same regarding the written change orders and bonds as the initial contract. In the course of the work, several portables were also discovered by the contractor to include more rooms in the portables than shown on the plans obtained post-award, in some cases five more rooms per portable than represented. The contractor requested change orders for the errors in the plans. The District refused. The contractor submitted a claim as required under the contract, and the District rejected the claim. Litigation followed, and included a claim by the District against the bonds by cross-complaint.
After analyzing prior California law, which historically narrowly allowed an oral modification of a public contract and had recently rigidly rejected any oral modifications of public contracts, the appellate court ruled that as to the first contract, what was at issue was not that there were no change orders, but the timing of the written change orders. In that instance, the court found that the District ultimately did approve of the written change orders by the contractor after the contractor followed the proper process, but it was the amount that was at issue. As the contractor had complied with the contract in performing the work even though the cost was disputed, and had submitted the appropriate claim work required by the contract, the court ruled that the change order sums were recoverable in full. As to the second contract, relating to the errors by the District’s architect for the fire alarms, the court held that the errors in the plans necessitated the extra work and therefore no change order was required to entitle the contractor to the extra payment for the additional work. As to the errors in the plans and specifications, which misled the contractor to his detriment on his bid, the court ruled that the District had committed a breach of the warranty of correctness. Since these errors did not rely on the issuance of written change orders, the court held that the written change orders were not required for the extra compensation.
Of additional note is the appellate court’s upholding of the attorney fee award, not on the construction contract, but on the bonds. The court noted recent California caselaw in 2010 wherein the public entity's action of filing a cross-complaint and putting the bonds in issue - by seeking affirmative recovery and fees that were not otherwise at issue - allowed a reciprocal finding by the court when the public entity did not prevail on its claims. Because the contractor and the sureties were represented by the same counsel and the facts and theories were so intertwined, the court upheld the fee award against the District, essentially doubling the contractor's award against the District.
The takeaways for a public agency: a narrow and short-sighted denial of undisputed work necessary to complete the project can cost the natural expense requested by the contract plus interest and attorney fees, and for a contractor: know your contracts and be diligent about compliance to document your entitlement to the additional costs of the work.
Have you noticed unusual language in a client’s contract pertaining to broad waivers of subrogation and acceptance of risks that you never thought your client would have? A brief trend in contract negotiations for many industrial projects has been the appearance of the so-called “knock-for-knock” indemnity provision. The term “knock-for-knock” is typically used for a provision in which each side agrees to bear the loss and liability for all harm to its own property, employees and vendors/subcontractors, regardless of the cause of the fault. In the most rigid of provisions, in addition to each party agreeing to bear the losses and damages to its “side” of the agreement, each party also agrees to defend and indemnify the other party from and against any claims by those on its “side.” For instance, in an owner/general contractor agreement, the owner would bear losses for any harm to its employees or other contractors, irrespective of whether the general contractor caused the harm. And if that other contractor or employee sued the general contractor, the owner would step in and pay for the defense and indemnity of the general contractor. This arrangement, while well known and traditional among insurers and common in the drilling/oil/gas/ocean construction industries, is less familiar and expected in U.S. commercial or industrial construction contracts. The premise behind such arrangements is a reduction in the administrative expenses of litigation where the parties are pointing fingers at each other and the certainty of handling claims to resolution with fewer costs.
While substantial legal, business and practical issues should be considered and discussed when negotiating such a provision, three key categories should be at the forefront of any advice:
1. Does the applicable law allow such provisions? Many states, by common law or statute, prohibit the indemnification of another party’s sole negligence or willful misconduct, and even more states are limiting the transfer of that part of the “active negligence” of another to a non-responsible entity. See, for instance, California, Oregon, Idaho and Texas anti-indemnity statutes that either void such provisions or effectively re-write the provisions to comply with the law. Of course, many states are looking to or have modified their statutes to severely restrict indemnity provisions in even the commercial construction setting, although many out-of-state entities, even if licensed in such a state, will still use their favored boilerplate contracts which may contain these provisions outright or even their vestiges.
2. Even if allowed, are the risks to your client warranted for the benefits claimed, or is the greater risk that to your client and the other side is simply using its negotiating weight to its advantage? There may be valid business reasons why the other side is effectively, “the only game in town” for your client. However, a clear-headed and objective evaluation will allow your client to balance the risks and rewards of such a provision and possibly take other action to protect against this risk that it would not otherwise own.
3. If your client must take this risk, or affirmatively decides to take this risk, is the client’s insurance adequate in type and amount for the increased risk? And is the waiver of claims and subrogation requirement, found parallel with such knock-for-knock indemnity provisions, at odds with your client’s insurance such that it may not have the coverage that it initially believed? A thorough consideration of the business and legal risks that your client may assume under a knock-for-knock indemnity provision is critical to the proactive protection of its interests in what could otherwise rapidly become a “bet the company” situation.
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.
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.
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 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.
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.
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.
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!
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 firstname.lastname@example.org.
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.