Jeff Blumenthal of the Philadelphia Business Journal interviewed me about holding the City of Philadelphia accountable for its role in the Market Street Building collapse. The interviewed appeared in the September 27, 2013 issue and can be view here: Philadelphia Business Journal Interview
The solar energy industry has seen tremendous growth. In 2012, solar panels generated 3.3 billion gigawatts of power. That amount is expects to more than double to 7.2 billion gigawatts by the end of 2013. Solar energy is now a $77 billion industry and solar energy stocks are among the top performers on Wall Street. With this growth comes an increasing number of contractors installing solar panels and developers installing solar panels on their projects.
However, this growth has come at a cost. One of the reasons for this tepid growth is the dramatically falling costs of the photovoltaic panels (those ubiquitous blue solar panels) used to capture and generate the suns rays into electricity. Some manufactures have sacrificed cost for quality and this has the solar industry concerned.
Early this summer, the New York Times ran a story regarding the growing anxiety in the solar energy industry over the quality of solar panels being manufactured, particularly in China. The concern over defective panels is great enough that, according to the Times, “First Solar, one of the United States’ biggest manufacturers, has set aside $271.2 million to cover the costs of replacing defective modules it made in 2008 and 2009.”
Contractors installing solar panels and developers building projects that use them should be very concerned as well. Although the usual claims of breach of contract and warranty exists against contractors and developers over defective solar panels, so do claims of product liability, which are relatively uncommon in the construction industry. Under the legal theory of strict liability, a “seller” of a product is liable for damages caused by defects in the product. Because liability is strict, a plaintiff in a strict liability case need not show that the seller knew the product had a defect. The problem for contractor and developers is that in the world of strict liability the term seller does not just mean the manufacturer, but anyone in the chain of distribution. This chain of distribution includes retail dealers and distributors, contractors and developers. For contractors and developers concerned about this growing threat, now would be the time to review your insurance policies with your insurance agent to see if such claims would be covered by your current policy. (Chances are they are not.)
Bad news for contractors and developers is good news for plaintiffs stuck with defective solar panels. In a strict liability case, the class of potential defendants liable for the defective product is much larger than in a breach of contract or warranty case. With a larger defendants pool, the chances of an affirmative recovery or a favorable settlement are increased.
Wally Zimolong, Esquire, founder of Zimolong, LLC, announced today that he had obtained an $86,000 settlement from a real estate developer and its real estate broker over claims that they built and sold a home that leaked because of defective stucco.
Two homeowners, a husband and wife, brought the case in the Philadelphia Court of Common Pleas. The case involved the purchase of a new luxury townhome in Philadelphia. The townhome experienced leaks because of defective stucco. The defective stucco was so severe that they caused mushroom growth in the homeowners’ window sills. The homeowners also alleged that the home had a green roof that they never approved and was installed in an incorrect manner, which contributed to the leaking. The developer eventually refused to attempt to repair the leaks.
Zimolong, LLC engaged a forensic account, Dan Pike, CPA, of the accounting firm Cantor Novak Beaver & Pike, P.C. to review the developer’s bank accounts and tax returns. The analysis revealed that there was a basis to hold the developer entity’s sole owner personally liable for the defective construction. Ralph Clapp, AIA of Arcon Consulting acted as the plaintiff’s construction defect expert. Jeff Lappin served as Zimolong’s green roof expert.
“We are very pleased with the settlement,” Zimolong said. “Sadly, it is all too common for unscrupulous developers to cut corners during construction, deliver a defect product, and then try to leave the homeowner holding the bag.”
Wally Zimolong, Esquire is a trial lawyer who represents individuals and companies in construction matters. Wally has been named one of Super Lawyer Magazine’s “rising stars” for 5 consecutive years. He has successfully litigated hundreds of construction related cases and has counseled clients nationwide on developing and constructing highways, multifamily apartment buildings, professional and collegiate sports stadiums, schools, and uniform planned communities.
The local CBS affiliate in Philadelphia has a story that many lawyers already know: defectively installed stucco is causing homeowners to spend thousands of dollars to repair their homes. The story underscores another problem homeowners face: they will not likely recover a dime of their repair costs.
The story recounts an all too familiar tale of homeowners who discovered defects related to improperly applied stucco, brought suit against the builder, obtained a judgment, but have been unable to collect on the judgment. The two primary reasons that homeowners face difficulty in collecting on judgments for defective stucco installation – or any defective construction for that matter – are the unavailability of insurance proceeds and the court’s respect for the corporate structure.
Insurance Coverage for Defects.
Homeowners in construction defect cases are always unpleasantly surprised to learn that in Pennsylvania a builder’s or contractor’s insurance policy does not cover claims of defective construction. Pennsylvania Courts share the opinion of a minority of states that faulty workmanship is not an “occurrence” under an insurance policy and, therefore, not subject to insurance coverage. Homeowners can thank the Pennsylvania Supreme Court and something known as the “Kvaerner doctrine” for this.
Generally, an insurance company’s duty to defend a lawsuit against its insured and to indemnify the insured (i.e. pay a judgment against the insured) depends on the language of the insurance policy. Most standard policies cover “occurrences” causing damage to persons or property. Moreover, most policies define an “occurrence” as something accidental. In Kvaerner v. Commercial Union Ins. Company, the Pennsylvania Supreme Court held that faulty workmanship was not an occurrence because “[s]uch claims simply do not present the degree of fortuity contemplated by the ordinary definition of “accident” or its common judicial construction in this context.” This holding has become known as the Kvaener doctrine.
Critics of the Kvaener doctrine point out that by holding faulty workmanship as not accidental Courts are essentially saying that contractors intended to construct the home in a faulty manner. While that is certainly true in some cases involving unscrupulous builders, more often builders have every intention of providing consumers with a sound product that they can be proud of. Despite this criticism, Pennsylvania Courts and their federal brethren have upheld Kvaener time and time again. Thus, unless Pennsylvania Courts suddenly have a change of heart, homeowners are stuck looking solely to the contractor and builder to recover money for repairs.
The Liability of the Builder and Contractor
In stucco defect cases the liability of the builder and contract is usually clear. The problem is that the entities that built the home typically have little to no assets by the time homeowners obtain a judgment or verdict in their favor. Builders usually set up “single purpose” entities who are the legal owners of the homes at the time of construction. The only assets of these entities are the homes being built and once the homes are sold the entity has no more assets to “attach” and liquidate in order to have a judgment paid. Contractors, on the other hand, are often under-capitalized and rarely own many assets (much of their equipment is leased), especially in the case of smaller residential construction firms.
What about the deep pockets of the individuals who owned the single purpose entity? By statute, individual shareholders (in the case of a corporation) limited partners (in the case of a limited partnership) and members (in the case of a limited liability company), are not individually liable for the debts of the corporate entity. However, the “corporate veil” can be pierced in certain circumstances. There is no hard and fast rule as to when the corporate veil can be pierced. Court look to a variety of factors, including, failing to treat the entity truly as a separate entity and commingling personal and entity funds. Proving such a case is no easy task.
Certain states realizing the inequities that can result in a case involving defective workmanship to a residential property have passed statutes specifically requiring insurance policies in those states to cover claims for defective workmanship. However, until Pennsylvania’s legislature either passes a law like this or Pennsylvania courts have a change of heart, homeowners will continue to be frustrated when pursuing claims for defective workmanship.
Many have asked me whether the victims of the Market Street building collapse can sue the City of Philadelphia for damages for failing to conduct proper inspections of the building. The short answer is no. Sovereign immunity gives the City immunity from civil suit alleging it failed to properly inspect the Market Street building during demolition.
Generally, under the doctrine of sovereign immunity state and local governments are immune from civil lawsuits and criminal prosecution. (Like many of our laws, the doctrine owes its roots to England who long ago believed the crown could do no wrong.) The only exception is where the legislature has waived sovereign immunity by statute or where there is a constitutional violation. In Pennsylvania, a municipality, like the City of Philadelphia, can be sued for damages only if the City’s actions fall within one of the eight exceptions where the legislature has waived sovereign immunity. The eight exceptions to sovereign immunity are when the damages arise from:
(1) the operation of a car operated by a City employee or official;
(2) the care, custody, and control of personal property in the City’s possession;
(3) the care, custody, and control of real property in the City’s possession;
(4) the care, custody, and control of trees, traffic lights, traffic signs, or street lights or signs;
(5) a utility service;
(6) a dangerous condition on City owned streets;
(7) a dangerous condition on City owned sidewalks; and
(8) the care, custody, and control of animals.
Therefore, unless the victims of the Market Street building collapse can show that the City’s improper inspection of the building fell within one of these eight categories, they are out of luck and cannot sue the City. But wait, what about exception (3), the care, custody, and control of real property, wouldn’t the City’s improper inspection of the building fall within that exception? No, because possession under exception (3) means total control over the property, not limited control or mere occupation of the property.
The law is well settled in Pennsylvania on the issue. Municipal agencies enjoy sovereign immunity from claims that they failed to conduct proper inspections and abate code violations. On numerous occasions, plaintiffs have argued that exception (3) applies to allow suits against municipal agencies that have failed to properly conduct inspections or abate code violations only to see their argument rejected by the Court.
While City’s improper inspections — or lack thereof — of the Market Street may mean it is morally liable or liable as a matter of public policy, under the doctrine of sovereign immunity it is not legally liable for its failure to act.
According to Chris Palmer at the Philadelphia Inquirer, after receiving a complaint by a neighbor, Philly L&I officials visited 2136 Market Street and deemed the structure safe to continue work.
Many would be surprised to know that L&I inspectors are not engineers, have no engineering backgrounds, and receive no formal training on the structural integrity of structures and buildings. How do I know this? In 2009, I sued L&I (and won) on behalf of a developer whose property was wrongful demolished by L&I. At issue in the case was the arbitrary nature in which L&I declares buildings “unsafe” or “imminently dangerous.” (The case is Bullard v. City of Philadelphia in case anyone is interested in googling it and reading about it .)
The L&I inspector, who made the demolition decision, testified at his deposition that L&I inspectors are not required to be engineers, to have engineering backgrounds, receive no training on the structural integrity of buildings and structures and L&I maintains no manuals as to when a building is deemed in danger of collapse. Instead, L&I inspectors rely on common sense he said.
More than common sense is needed to prevent the next tragedy.
The technical engineering cause of the collapse of 2136 Market Street should not be too difficult to decipher. 2136 Market was a much taller building constructed with reinforced masonry (literally bricks and sticks). Moreover, the building adjacent to 2136 Market to the East had already been demolished. It is certainly not the first time an older building constructed in the style of 2136 Market collapsed during demolition.
What needs to be answered is what could the City of Philadelphia done to prevent this tragedy?
The initial focus has been on the responsibility of the contractor performing the demolition. ENR reports that the owner of the firm performing the work, Griffin T. Campbell, has a checkered criminal past. I am not sure how the owner’s criminal history makes it an more likely that his employees failed to follow sound construction and engineering techniques in bringing down 2136 Market.
But, shouldn’t the City of Philadelphia’s Department of License & Inspections (“L&I”) bear some of the blame? According to the ENR story, L&I officials have disclaimed any responsibility for monitoring the demolition of 2136 Market Street and, instead, have pointed the finger at OSHA. While it is true that OSHA has responsibility to monitor construction practices that place workers in danger, its oversight responsibility for construction practices that may cause a building to collapse on an adjacent building and its ability to that stop work is questionable. OSHA’s primary goal is to ensure building practices do not pose an unnecessary risk to construction workers, not whether construction is being performed according to industry standards. OSHA regulations are not building codes and unsafe building practices do not necessarily equate to improper building techniques. For example, roofers working without fail protection are engaging in an unsafe building practice and committing an OSHA violation. However, that does not mean that the roof that they are installing is being installed improperly or that the roof is likely to fail in the future. Certainly, there will be overlap between unsafe and improper practices especially in an area like demolition.
While OSHA’s ability to stop work for improper building practices is questionable, L&I’s ability to stop work that may cause a building to collapse is not. L&I’s power to stop work on a building that is in “imminent danger of collapse” is squarely within its power under the Philadelphia Building Code and L&I regularly slaps its blaze orange imminent danger notices on structures throughout the City, ordering workers to immediately cease work on a site when its does (often under the threat of arrest), and forcing adjacent buildings to evacuate.
Sovereign immunity prevents L&I from being help culpable for any failure on its part. However, that should not stop us from investigating whether L&I’s could have prevented this tragedy and demanding changes be made to L&I’s practices so this does not happen again.
The headline of a recent article on Lexology grabbed my attention: “How to Guarantee the HOA Can’t Litigate the Condo Construction Defect Claims.” The authors’ means to preventing litigation of construction defect claims was even more intriguing: arbitration clauses.
How can arbitration clauses guarantee that no ligation over construction defect claims occurs? It can’t. Arbitration is litigation just decided in a different forum. Like many, the authors appear to misunderstand what arbitration is and what the parties can expect.
The misunderstanding of the arbitration process leads to a misguided bias for and against the process. In construction defect cases, plaintiff’s counsel, in particular, bristle at the prospect of arbitrating a construction defect claim clinging to the belief that juries render larger awards. On the other hand, defense counsel champion arbitration as a means to chill potential claims, snuff out allegedly frivolous claims, and to avoid the unhinged damages awards of juries. These misplaced beliefs are grounded in a lack of understanding of the arbitration process and certain myths regarding arbitration.
Myth #1: A Jury Will Give Me A Larger Damage Award.
In the early 1990’s, Professor Ted Eisenberg of Cornell Law School published a famous law review article that examined plaintiff success rates and damage awards in jury trials and bench (Judge) trials. To the surprise of many, the Professor Eisenberg’s revealed that plaintiffs won more frequently and received larger average awards in bench trials. Despite empirically data to the contrary, there remains a widespread perception that jury awards are larger.
This misconception extends to arbitration panels. Among many plaintiff’s attorneys, arbitrators are more disfavored than judges. However, as those regularly litigating construction disputes in arbitration already know, arbitration panels regularly award extremely large damage awards.
Myth #2: Arbitration Is Too Expensive Up Front.
It is true that the fees to initiate an arbitration proceeding are larger compared to the fees for filing a complaint in state or federal court. Alas, litigation expenses are not limited to the initial cost of filing suit. The overwhelming amount of attorneys fees in litigation are spent on discovery (interrogatories, document production and review, and depositions). In arbitration, discovery is either limited by statute or agreement of the parties. The result is usually a cost saving for the parties.
There is also a costs savings to be appreciated at the “trial” portion of the arbitration. Because the rules of evidence and procedure are relaxed (that does not mean not followed it means relaxed) the hearings are run more efficiently. Moreover, particularly in construction defect cases, the parties benefit from the experience of the arbitration panel when it come time to explain technical areas of the construction critical to the claims. Obviously, it is much more efficient, and thereby costs less, to have an expert explain a technical area related to the construction of an certain portion of the structure to a panel of arbitrators, who is likely already familiar with the terminology and methods described, than it is a jury, who likely has no experience with construction.
Finally, there are very few grounds for appeal of an arbitration award (much to the chagrin of those opposed to arbitration). These efficiencies result (usually) in a lower overall litigation cost to the parties involved.
Myth #3: Arbitration Panels Are Defense Biased.
As someone who has been on litigated cases in front of a panel of arbitrators on behalf of both claimants (in arbitration plaintiffs are called claimants) and defendants (in arbitration defendants are called respondents), I can attest that is certainly not the case. I am unclear where this mistaken belief comes from. However, I suspect that it comes from the unfamiliarity with the process and litigation folklore. The fact is a good case, a good expert, and a good presentation yield good results no matter what the forum.
All of this is not to suggest arbitration is perfect. However, it is certainly not the judicial purgatory as some believe it is.
Last week, I gave an overview of the claims typically raised in a construction defect case. This week we look at the defenses that a defendant in a construction defect case can raise. Typically, there are three categories of defenses a defendant in a construction defect case may be able to raise:
- Statutory; and
- Common Law.
1. Contractual Defenses.
In my last post, I discussed how plaintiffs in construction defect cases should look to the contract documents when evaluating what claims to bring in a construction defect case. The same contract documents that give rise to a construction defect case can provide defenses to construction defect claims. Three common contract clauses that can be used in defending a breach of contract claim in a construction defect case are:
- Express waiver of warranty;
- Integration; and
Waiver of Warranties.
Many states, including Pennsylvania, recognize an owner can waive the implied warranty of habitability and workmanship by contract. For the waiver to be valid, courts usually require that the waiver be clear and unambiguous. Pennsylvania courts go a step further and require that the waiver specifically reference latent defects.
Plaintiffs in construction defect cases will sometime allege that they were fraudulently induced by the contractor based upon oral representations concerning the quality of construction. These representations do not appear in the contract documents. Integration clauses are clauses in contracts that state that terms in the written document represent the entire agreement and that no representations not contained in writing in the document are not part of the parties agreement. When these clauses exist in the contract, courts have dismissed claims that owners were fraudulently induced by a contractor’s oral representations which do not appear in the written agreement.
A contract may also contain a release of claims against the contractor or developer. If properly worded, the release may be enforceable against claims brought by a plaintiff in a construction defect case.
2. Statutory Defenses.
The Statute of Limitations.
Every state has a statute of limitations that bars claims brought a certain period of time after the injury giving rise to the claim occurs (or a claimant first learns of the injury). The length of time varies depending on the claim alleged. If a plaintiff in a construction defect case brings its claim outside the statute of limitations, the court can dismiss plaintiff’s case. Because the statute of limitations begins to run from the date the plaintiff first knows or should have known about the damage, it is important to discover early on in the litigation when that occurred.
The Statute of Repose.
Most states also have something known as statutes of repose. Statutes of repose bar all claims construction defect claims brought a certain period of time after the building was completed regardless of when the plaintiff learns of the defect. In Pennsylvania, the statute of repose is twelve years Therefore, suppose a plaintiff first learns of a construction defect in December 2012, but the building was completed in 1995. If she filed her construction defect case in January 2013 she would be within the statute of limitation for whatever claim she brings, however, the statute of repose may bar her claim, notwithstanding the statute of limitations, because the building was completed more than 12 years before her claim.
3. Common Law Defenses.
The Spearin Doctrine.
The Spearin Doctrine is one of the best defenses to a construction defect case for a contractor but is also one that is usually not raised. We have written about the Spearin Doctrine on this blog before. The doctrine gets its name from a 1918 United States Supreme Court decision United States v. Spearin, 248 U.S. 132 (1918), which held that a contractor will not be liable to an owner for loss or damage that results solely from defects in the plan, design or specifications provided to the contractor. Effectively, Spearin created a doctrine where the owner impliedly warrants that the plans and specifications if followed will result in a function system. Essentially, Spearin holds that if a contractor is required to build according to plans and specifications prepared by the owner (or the owners representative) then the contractor will not be responsible for the consequences of defects in the plan. In other words, if the contractor builds it as he was told to by the architect and the design does not work, he is not liable for those defects.
Even without a defense barring plaintiff’s claim, defendants in a construction defect case can often mitigate the damages plaintiff is entitled to recover under the dual theories of economic waste and betterment. Generally, the measure of damages in a construction defect case is the cost of completing or correcting the defective work. However, when the cost of completing or correcting the work is disproportionate to the probable loss in value to the injured party then damages will be measured by the difference between the market price that the property would have had without the defects and the market price of the property with the defects. This is known as economic waste.
Betterment prevents an owner from receiving a windfall when repairing or replacing defective construction. Under the theory of betterment, an owner cannot recover the cost of any enhancement or improvement of the replacement work. In other words, the owner can only recover the cost of what he originally bargained for.
Next week, we will look at insurance coverage issues in construction defect cases.
An unfortunate side-effect from the mid-2000’s construction boom is claims regarding faulty workmanship and defective construction. Because defective construction work is often latent, it may take years before the damage the defect is causing becomes apparent. Therefore, defects for homes built several years ago are just becoming apparently and the cost to remedy these defects is often significant. When defects do become apparent, what causes are available for the property owner?
1. Breach of Contract
Any analysis of a construct defect case should always begin with a review of the relevant contract documents. In a commercial setting, the property owner should review its construction contract with the contractor, who constructed the property. In a residential setting, while there may be a construction contract between the parties, more often it is an agreement of sale for the property that governs the relationship between the parties. The contract may contain an express warranty regarding the work that was performed requiring repairs to defective work to be made. On more complex projects, the contract may include specifications and drawings that set out in detail what the contractor is required to build. On the other hand (as will be discussed in a future post) the contract may contain exculpatory language releasing the contractor from certain liability. Therefore, it is important to review the contract documents to determine the respective obligations of the owner and the contractor.
2. Breach of Statutory Warranty
Most States have a statute governing the creating, construction, and sale of condominiums and other shared ownership communities. These statutes usual contain some form of statutory warranty concerning the work performed by the developer of the condominium. For example, under the Pennsylvania Uniform Condominium Act, which is modeled on the Uniform Condominium Act, the condominium developer (declarant) expressly warranties against structural defects in each of the unit and all of the common elements for two years from the date each is conveyed.
3. Breach of Implied Warranty
In additional to any express warranties, many states recognize an implied warranty of habitability and good workmanship The implied warranty is given not only by the developer but also the general contractor that constructed the project. Under the implied warranty habitability and workmanship, builder-vendors impliedly warrant that a newly constructed home is constructed in a reasonably workmanlike manner and fit for habitation as a residential dwelling. Examples of a builder-vendors breach of the implied warranty include failing to construct a water tight home, failing to construct a home with potable water supply; failing to install adequately sized furnaces in a condominium; failing to construct a water-tight basement, failing to install a crawl space drainage system, and constructing a home with a cracked foundation.
4. Consumer Fraud
Most States also have some form of consumer protection law. Almost all of the states that have these laws make them applicable to real estate transactions. Most consumer protection statutes allow for the award of attorneys fees to the plaintiff and a doubling or tripling (trebling) of damages to the plaintiff. (Both Pennsylvania and New Jersey allow for treble damages.) While some states require a showing of common law fraud before liability under the consumer protection statute will be found, states like New Jersey and Pennsylvania apply a lower threshold and require only a showing of a technical violation of the statute or “deceptive conduction” before liability will attach.
5. Negligent Misrepresentation
The developer and contractor are not the only parties potentially liable for construction defects. Architects and engineers have exposure for liability for faulty designs. Furthermore, architects and engineers should be aware that if their plans and drawings are to be shared with third parties they could be liable under the tort of negligently supplied information. Under this theory, those, like architects and engineers, who in the regular course of their business supply information to third parties are liable if they failed to exercise reasonable care in supplying the information relied upon. Therefore, if architectural plans and drawings are included in a developer’s sales material, which a buyer relies upon in purchasing the property, the architect may be liable to the purchaser if the information contained in the drawings is incorrect. Under this same theory, an owner can also bring a claim against an architect hired by the general contractor for defective plans and specifications notwithstanding the lack of contractual privity.
Depending on the facts of the case, other claims that may be brought in a construction defect case include common law fraud, intentional misrepresentation, negligence, and an action to pierce the corporate veil.
In our next post, we will look at what defenses are available to these claims.