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With the current economic downturn, the construction industry is facing a slowdown that is unprecedented in recent memory. Home construction is on the decline 1 and cities are bracing for a downturn in residential and commercial construction 2. Many landowners, project developers, and contractors are struggling to complete projects, with claims for incomplete or defective work a likely result. Although the slowdown has not yet resulted in the volume of litigation that some firms had expected 3, practitioners who represent construction companies will need to be prepared to defend construction defects claims brought forth by the owners or developers.
This article addresses several issues that a practitioner should consider when defending a construction defect case brought against a contractor. Although an in-depth analysis of every issue that can arise is beyond the scope of this article, the issues discussed merit consideration in each construction defect case.
Who defends the lawsuit? When a property owner sues a general contractor for an alleged construction defect, one of the first questions that must be addressed is whether the contractor's insurer has an obligation to defend the claim. This analysis will involve the interpretation of the commercial general liability ("CGL") insurance policy, which provides coverage for personal injury and property damage resulting from the contractor's work on the project. The situation where coverage disputes arise is one in which the claimant is only seeking to recover for damage in the contractor's own work, i.e., there is no personal injury or damage to other property.
Courts' opinions have varied widely on whether such damage constitutes an "accident", "occurrence", or "property damage" under the CGL policy; this determination is critical, because if the damage is covered, the insurer has a duty to defend. In 2007, the Supreme Court of Texas determined that an insurer did have a duty to defend under the CGL policy 4. However, in issuing the opinion, the Supreme Court of Texas also acknowledged the split in authority concerning this issue, citing eleven jurisdictions 5 that have determined the CGL policy would provide coverage in this circumstance and five jurisdictions that have determined there would be no coverage 6. Thus, who bears the legal costs of the defense will depend on a careful analysis of the CGL policy and the applicable case law.
Time-barred claims. When a construction company retains an attorney for the defense of a construction defect claim, the attorney's initial review should focus on the timeline of events in the case and the relevant statutes of limitation. The practitioner should consider multiple theories of recovery in your review of the statutes, since construction defect cases often involve claims for breach of contract, negligence, and unfair or deceptive trade practices. Since the limitations periods will vary by both the nature of the claim and the jurisdiction, an effective defense may hinge upon the review of the proper statute for that project. On a related note, some contracts may include a forum selection clause that purports to control which statute of limitation applies. In cases where the contract contains a forum selection clause, the practitioner is advised to review the statutes for any restrictions on the enforcement of such a clause; for example, in North Carolina, such forum selection clauses are unenforceable under N.C.G.S. § 22B-3.
In addition to the limitations period provide by statute, the practitioner will need to thoroughly review relevant statutory and case law to determine if there is any chance the limitations period is tolled due to a discovery rule. The discovery rule tolls the statute of limitations until such time that the plaintiff discovers or should have discovered the defects that are the basis of plaintiff's claim. Although courts will not permit a plaintiff to use the discovery rule where the plaintiff has been willfully ignorant of the defect, the rule can be used where the defects complained of are latent defects. A review of any applicable statutes of repose, which cut off liability after a period of time, is also recommended.
Finally, the practitioner should thoroughly review both the construction contract, to determine if the contract provided a different claims period, if permitted by law, and any surety bonds, which typically require claimants to notify to surety within a certain number of days or be barred from making a claim.
Causation. Frequently, multiple construction companies provide services on one construction project. When an owner makes a claim against a general contractor for an alleged construction defect, it is imperative that the practitioner ensure that all potentially responsible subcontractors are put on notice of the claim and included in any legal action. The attorney will need to analyze the construction contract and each subcontract to determine who was actually responsible for the work that led to the allegation of a construction defect. Finally, the attorney should consult with experts to help in analyzing who is responsible for the defect and whether the architect or project engineer bears responsibility for deficiencies in the project planning.
Prior breach by the owner or developer. One additional consideration concerns a contractor's venerable right to pull off of a job when the owner or developer wrongfully withholds payment for work performed or otherwise breaches its obligations under the construction contract 7. When faced with a claim for a construction defect, an attorney representing the contractor should determine whether the contractor was given the opportunity to complete its work and whether the owner engaged in any conduct that amounts to a breach of the construction contract. It is commonly understood in the construction industry that certificates for payment are merely estimates for the work completed and that a punch list investigation will permit a contractor to correct any deficiencies in its work 8. A contractor who has been wrongfully denied the opportunity to complete its work and finish a punch list inspection may have a defense against an owner suing for alleged defects for that work.
Conclusion. Although this article does not provide an exhaustive list of the topics an attorney must consider when handling a construction defect case, analysis of these issues is essential in order to adequately serve your client. Be sure to check the statutes and cases in your jurisdiction to determine the applicable law for your case.
1 Aaron Smith, Housing starts, permits at record lows, CNNMoney.com, at http://money.cnn.com/2008/11/19/news/economy/housing_starts/index.htm?postversion=2008111910 (November 19, 2008; Web address verified May 26, 2009).
2 Charles V. Bagli, End Seen to New York Building Boom, The New York Times, Online Ed., at http://www.nytimes.com/2008/10/15/nyregion/15build.html?_r=1&scp=14&sq=construction+downturn&st=nyt&oref=slogin (October 14, 2008; Web address verified May 26, 2009).
3 Lynne Marek, Construction Firm Lays Off Nearly a Third of Its Associates, The National Law Journal, at http://www.law.com/jsp/law/sfb/lawArticleSFB.jsp?id=1202425980979&rss=SFB (November 13, 2008; Web address verified May 26, 2009).
4 Lamar Homes v. Mid-Continent Casualty Company, 242 S.W. 3d 1, 20 (Tex. 2007).
5 Id. at 6 (citing cases involving the analysis of the law in Alaska, Arkansas, Kansas, Minnesota, Nevada, New Jersey, New Hampshire, South Dakota, Tennessee, Virginia, and Wisconsin).
6 Id. at 6 (citing cases involving the analysis of the law in Hawaii, Iowa, Pennsylvania, South Carolina, and West Virginia).
7 Northern Helix Company v. United States, 455 F.2d 546, 550 (Ct. Cl. 1972).
8 Robert F. Cushman & James J. Meyers, Construction Law Handbook, § 35.04[G] (1999).
About the Author
R. Matthew Van Sickle is an associate with Ross Law Firm, Winston-Salem, North Carolina. His practice focuses on construction and lien law, insurance defense, trucking, and commercial collections.