Construction Defect Litigation: The Defenses

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:

• Contractual;
• 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
• Release.

            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.

           Integration Clauses.

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.

             Release.

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.

          Economic Waste/Betterment.

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.

Construction Defect Litigation: The Claims

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.