Inside this Issue
- A1 - Condo Owners Cannot Sue Original Builder for Implied Warranty: Economic Loss Rule Applied
- A2 - Protests Up & Sustains Down – A Brief Review of GAO’s FY 2014 Bid Protests
- A3 - No Damages for Delay Clause Held Unenforceable as Against Public Policy
- A4 - “Pollution Exclusion” in CGL Policy Enforced to Bar Recovery for Injuries from Contractor’s use of a Concrete Sealant
Article 1
Condo Owners Cannot Sue Original Builder for Implied Warranty: Economic Loss Rule Applied
See similar articles: Breach of Implied Warranty | Condo Defects | Condominium Defects | Condominium Suit | Construction Defects | Economic Loss Doctrine | Economic Loss Rule | Fit for Intended Purpose | Implied Warranty of Habitability | Latent Defects | Privity of Contract
By: Gail S. Kelley, P.E., Esq., ConstructionRisk Counsel, PLLC
Where a condominium homeowners’ association brought claims for breach of implied warranty and negligence against the general contractor that built the condominiums, but not the developer who engaged the contractor and who actually sold the units to purchasers, the court dismissed the suit due to lack of privity of contract giving rise to warranties, and due to the economic loss doctrine that prohibits negligence actions like this one. The complaint had sought general damages for the cost of repairing the building, special damages for alleged lost use of the building and impairment of the condominium operation, and punitive damages. Carolina Winds Owner’s Assoc., Inc. v. Joe Harden Bldrs., Inc., 374 SE 2d 897 ( SC Court of Appeals 1988).
In this case, the developer contracted with a contractor to build a twelve-story condominium building. Once construction was complete, the developer sold residential units in the building to various individual owners. The homeowner’s association (the “Owners”) was incorporated for the purpose of managing the building’s common elements on behalf of the unit owners. Subsequently, the exterior brick walls of the building began to crack and buckle.
When an investigation revealed that the cracking and buckling was caused by latent defects due to negligent construction, the Owners sued both the contractor and the masonry subcontractor, alleging that they were liable for repair costs because they breached an implied warranty that the building was fit for its intended use, in this case an implied warranty of habitability.
Implied Warranty of Habitability
In discussing previous case law, the Appeals court stated that an implied warranty of habitability from the initial vendor of a house does no more than fulfill the reasonable expectations of the parties under the contract. If a buyer has paid a fair price for a house and the house is defective, the buyer's expectancy interest is injured and he has a right to recover his damages from the seller.
The cost of repair is a common measure of the buyer’s damages. However, when a contractor is building a house for a developer, the contractor cannot be held liable under an implied warranty of habitability to a subsequent purchaser of a condo unit because it was actually the developer, not the contractor, that was the initial vendor of the property.
In this case, neither the contractor nor its masonry subcontractor were parties to the contract for the initial sale of the condominium units, thus the court held that they were not liable to the Owners on an implied warranty arising from the sale. The Owners' remedy, if any, was against the initial seller of the condominium units (the developer).
Economic Loss Rule
The Appeals court also agreed with the trial court that the Owners’ claim for negligence for the defective construction was barred by the "economic loss rule."
The holding that an action in negligence cannot be brought when the only damages are to the economic interests of the injured party has come to be known as the “economic loss rule” (also called the “economic loss doctrine”).
In discussing the economic loss rule, the court stated:
“In effect, the ‘economic loss rule’ simply observes the traditional distinction between recovery in contract and recovery in negligence in those cases where the damage consists of a diminution in the expected value of a product. Unless the plaintiff has contracted with a party who warrants, expressly or impliedly, that the product meets a standard of quality, value, or fitness for an intended use, he has no claim for inferior or negligent manufacture of goods in the steam of commerce.
These general principles apply with equal force to the sale of a dwelling. When the harm is to the purchaser's expectation that the dwelling is fit for an intended use, contract, not negligence, principles are involved. … This loss is occasioned not by a failure of the actor to conform his conduct to a standard of care imposed by law, but by his failure to fulfill a standard of quality imposed by the contract. Unlike the risk of physical injury to one's person or property, the risk to the expectancy interest can be fairly allocated by agreement of the parties to the sale. To protect himself, the purchaser may either take warranties, bargain for a lower price, or insure the risk.”
The court went on to say that:
“… holding a builder liable to remote purchasers of a defective dwelling would have entirely different consequences. By definition, liability would attach because of a contract to which the builder was not a party. He would be deprived of the normal opportunity to limit his liability for commercial or pecuniary losses, direct and consequential. Unrestricted liability to remote parties in the stream of commerce would destroy the fundamental principle of the common law that a contract between two parties cannot give rise to an obligation in a third who is a stranger to the bargain. It would also violate the common law principle which give parties in the marketplace freedom to allocate the risk of purely economic loss by agreement.”
The court was not persuaded by the Owners’ claim that the economic loss rule left them without a remedy for the defective construction. The court stated that the Owners, as original purchasers without knowledge of the defect, had a complete remedy against the developer on the implied warranty of fitness for intended use.
The court was also not persuaded by the Owners’ claim that the economic loss rule allows a negligent builder to escape responsibility for his carelessness. When a builder contracts to construct a dwelling, he gives an implied warranty that the work undertaken will be performed in a workmanlike manner. Subcontractors assume the same obligation under their contracts with the general contractor. The person contracting with the builder acquires a corresponding right to receive a well-constructed building.
If the construction is defective because of the builder's unworkmanlike performance, the person who contracted to have the work done will have a claim for damages for loss of his expectancy. This is a liability arising from the construction contract to which the builder is a party; it allocates responsibility for negligently-caused defects between the parties to the contract and gives them the opportunity to adjust the allocation of risk by agreement. A cause of action would thus be based on breach of contract and rather than negligence.
Likewise, the court disagreed with the Owners’ suggestion that the economic loss rule is out of step with modern case law. The court found that the great majority of courts deciding the issue in the past ten years have upheld the economic loss rule and provided the following comprehensive listing of such cases.
East River S.S. Corp. v. Transamerica Delaval. Inc., 476 U.S. 858, 106 S.Ct. 2295, 90 L.Ed. (2d) 865 (1986); State ex rel. Smith v. Tyonek Timber, Inc., 680 P. (2d) 1148 (Alaska 1984); Sacramento Regional Transit Dist. v. Grumman Flexible, 158 Cal. App. (3d) 289, 204 Cal. Rptr. 736 (1984); Affiliates For Evaluation and Therapy, Inc. v. Viasyn Corp., 500 So. (2d) 688 (Fla. Dist. Ct. App. 1987); McClain v. Harveston, 152 Ga. App. 422, 263 S.E. (2d) 228 (1979); Clark v. Int'l Harvester Co., 99 Idaho 326, 581 P. (2d) 784 (1978); Moorman Mfg. Co. v. Nat'l Tank Co., Ill.2d 69, 61 Ill. Dec. 746, 435 N.E. (2d) 443 (1982); Dutton v. Int'l Harvester Co., 504 N.E. (2d) 313 (Ind. App. 1987); Nebraska Innkeepers, Inc. v. Pittsburgh — Des Moines, Corp., 345 N.W. (2d) 124 (Iowa 1984); Marcil v. John Deere Indus. Equip. Co., 9 Mass. App. 625, 403 N.E. (2d) 430 (1980); Superwood Corp. v. Siempelkamp Corp., 311 N.W. (2d) 159 (Minn. 1981); Sharp Bros. Contracting Co. v. Am. Hoist & Derrick Co., 703 S.W. (2d) 901 (Mo. 1986); Nat'l Crane Corp. v. Ohio Steel Tube Co., 213 Neb. 782, 332 N.W. (2d) 39 (1983); Local Joint Executive Bd. of Las Vegas, Culinary Workers Union, Local No. 226 v. Stern, 98 Nev. 409, 651 P. (2d) 637 (1982); Ellis v. Robert C. Morris, Inc., 128 N.H. 358, 513 A. (2d) 951 (1986); Spring Motors Distrib., Inc. v. Ford Motor Co., 98 N.J. 555, 489 A. (2d) 660 (1985); Schiavone Constr. Co. v. Elgood Mayo Corp., 56 N.Y. (2d) 667, 451 N.Y.S. (2d) 720, 436 N. E. (2d) 1322 (1982); Hagert v. Hatton Commodities, Inc., 350 N.W. (2d) 592 (N.D. 1984); Ore-Ida Foods, Inc. v. Indian Head Cattle Co., 290 Or. 909, 627 P. (2d) 469 (1981); Lupinski v. Heritage Homes, LTD., 369 Pa. Super. 488, 535 A. (2d) 656 (1988); Mid Continent Aircraft Corp. v. Curry County Spraying Serv., Inc., 572 S.W. (2d) 308 (Tex. 1978); Blake Constr. Co., Inc. v. Alley, 233 Va. 31,353 S.E. (2d) 724 (1987); Wells v. Clowers Constr. Co., 476 So. (2d) 105 (Ala. 1985).
This article is published in ConstructionRisk.com Report, Vol. 17, No. 2 (February 2015).
Copyright 2015, ConstructionRisk, LLC
Article 2
Protests Up & Sustains Down – A Brief Review of GAO’s FY 2014 Bid Protests
See similar articles: Bid Protests | GAO Protests
By Derek R. Mullins, Esq., Sheppard Mullin law firm. (http://www.sheppardmullin.com/)
This article is reprinted with permission from the Sheppard Mullin Quarterly Review.
On November 18, 2014, the U.S. Government Accountability Office (“GAO”) published its Annual Report to Congress (B-158766, November 18, 2014), which contains the statistics for bid protests filed at GAO in FY 2014. Frankly, it’s a mixed bag – protests are up, sustained protests are down, but the overall “effectiveness rate” (where the agency grants some type of remedy or corrective action for a protestor) remains flat. Because there are many who think that the bid protest process is broken, it might be worth a closer look at some of the statistics to see if bid protests are being abused (as some in Government might claim) or if the process is working.
Here are the statistics taken from the report (along with those for FYs 2010-2013):
| FY 2014 | FY 2013 | FY 2012 | FY 2011 | FY 2010 | |
| Cases Filed | 2,561(up 5%) | 2,429(down 2%) | 2,475(up 5%) | 2,353(up 2%) | 2,299(up 16%) |
| Cases Closed | 2,458 | 2,538 | 2,495 | 2,292 | 2,226 |
| Merit (Sustain + Deny) Decisions | 556 | 509 | 570 | 417 | 441 |
| Number of Sustains | 72 | 87 | 106 | 67 | 82 |
| Sustain Rate | 13% | 17% | 18.6% | 16% | 19% |
| Effectiveness Rate | 43% | 43% | 42% | 42% | 42% |
| ADR(Cases Used) | 96 | 145 | 106 | 140 | 159 |
| ADR Success Rate | 83% | 86% | 80% | 82% | 80% |
| Hearings | 4,70%(42 cases) | 3.36%(31 cases) | 6.17%(56 cases) | 8%(46 cases) | 10%(61 cases) |
- Protests Filed – UP! The number of protests filed at GAO rose 5% from FY 2013, to 2,561. While FY 2013 saw a 2% drop, 2014’s increase is consistent with a noticeable upward trend in the number of protest filings. In this regard, overall, new protests are up 10% from FY 2010. It will be interesting to monitor this trend in light of several developments that could impact spending on Government contracts, including the partial easing of sequestration and a shift in power on Capitol Hill. Stay tuned.
- Protests Sustained – DOWN! … BUT… Effectiveness Rate – FLAT. Notably, and likely of particular interest to readers, the Sustain Rate plummeted to 13% – a 4% decrease from FY 2013. While the Sustain Rate saw a substantial decrease, the Effectiveness Rate, which captures not only sustains but also voluntary agency corrective action, remained constant at 43%. In fact, that number has remained at either 42 or 43% since FY 2010. So, while protesters faced a decreased likelihood of success on the merits in a final decision from the GAO, agencies appeared to be slightly more inclined to take corrective action than in years past. In the end, nearly half of all protesters were afforded some type of relief. If you are a protestor, those are pretty good odds, so keep that in mind. Also notable is the sharp decline in the use of GAO’s Alternative Dispute Resolution (“ADR”) procedures. But given the dramatic fluctuation of this number over the past five years, it may be difficult for contractors and practitioners to read anything into this.
- Reasons for Sustained Protests – Visibility! For the first time last year, GAO was required to include in its annual report a “summary of the most prevalent grounds for sustaining protests.” Once again, “failure to follow the evaluation criteria” represented the most common rationale for sustaining a protest, followed by “flawed selection decision,” “unreasonable technical evaluation,” and “unequal treatment.” What this data does not include is the majority of protests (those that do not reach a decision on the merits due to voluntary corrective action), which are captured in the “effectiveness rate” discussed above. In our experience, corrective action is commonly taken because of flaws in evaluating a proposal, so potential protestors should be especially aware of this ground when seeking information through post-award debriefings. Government evaluators should also be especially careful here, ensuring that things are done correctly in the first place.
One other interesting point worth noting, not reflected in the statistics above: the Annual Report documented the impact of the 16-day Government shutdown that took place in October 2013. At the time of the shutdown on October 1, 2013, there were 280 active protests on GAO’s docket. Because of the shutdown, GAO extended the 100-day protest deadline in each of these protests for 16 days. Notwithstanding the extension, GAO made an effort to decide all 280 pending protests within 100 calendar days of filing. GAO was able to resolve all but 39 of those cases within that time frame and only 5 of those remaining 39 took the full additional 16 days to resolve. So kudos to the GAO’s Office of General Counsel who kept on working hard, even when Congress pulled the rug out from under them.
About the Author:
Derek Mullins is an attorney in the Government Contracts, Investigations and International Trade Practice Group in Sheppard Mullin law firm’s Washington, D.C. office.
2099 Pennsylvania Avenue, N.W.
Suite 100
Washington, DC 20006-6801
T: 202.747.1900
Email: dmullins@sheppardmullin.com
This article is published in ConstructionRisk.com Report, Vol. 17, No. 2 (February 2015).
Copyright 2015, ConstructionRisk, LLC
Article 3
No Damages for Delay Clause Held Unenforceable as Against Public Policy
See similar articles: Delay Damages | No-Damages-For-Delay | Sovereign Immunity
By: Stanley P. Santire, Esq.
Santire Law Firm, Houston, Texas (http://www.santirelaw.com)
A “No Damages for Delay” contract provision was found unenforceable, based on the application of public policy principles that had previously only been applied in cases of tort liability. The Texas Supreme Court held that advance waivers of breach of contract causes of action are subject to the same public prohibitions against pre-injury waiver of tort liability—in situations where there is evidence of deliberate, intentional, or wrongful conduct. Zachry Construction Corporation v. Port of Houston Authority of Harris County, Texas No. 12-0772, 2014 Tex. LEXIS 768, at *43 (Tex. Aug. 29, 2014).
Aside from significant legal issues, the facts involved interesting engineering. Zachry Construction entered into a contract with the Port to build a wharf on the Bayport Ship Channel. Zachry intended to use an innovative process based on an “ice wall.” The “ice wall” would actually be a barrier of frozen earth. It would insulate the work area from the adjacent Bay, allowing construction in a dry environment instead of working “in the wet.” This was to be achieved by using pipes to circulate chilled brine into an earthen wall. A similar technique is being used in Japan to form a barrier around the damaged Fukushima nuclear power plant. There the purpose is to form an underground barrier and prevent fresh water flowing down adjacent mountains from getting contaminated by water from the leaking plant.
Understanding the Court’s reasoning begins with two contractual provisions. The contract made Zachry an independent contractor in “sole charge of choosing the manner in which the work would be conducted.” Id. The Court pointed out that this benefitted the Port by reducing liability exposure that could arise if the Port controlled Zachary’s work. The Court had to reconcile this provision with another that barred Zachry from recovering damages caused by the Port’s “negligence, breach of contract, or other fault.” Id. With these provisions in place the work proceeded.
Nine months into the project, the Port decided to add a large section to the wharf. Because of being already in the process of working on the wharf based on the initial contract, as a practical matter only Zachry could do this. Counter to the conclusion of Zachry’s engineers, the Port determined that the use of the frozen wall for the extension could weaken the wharf.
Against protest by Zachry based on the contractual right to determine the method of work, the Port would not budge. So Zachry removed the frozen wall already built and at considerably greater cost completed the project by working “in the wet”.
When Zachry sued for damages, the Port asserted two defenses. One was sovereign immunity. The Port of Houston Authority is a local government agency and asserted the Local Government Contract Claims Act, Texas Local Government Code §§271.151 – 160. On this defense, the Court determined that delay damages were permissible under the Act and that sovereign immunity had been waived.
Zachry prevailed on the immunity issue with a majority decision of five to four justices. This immunity decision alone would have made the opinion important for a contractor dealing with a local government entity in Texas. However, because of the broader application the most important aspect of the case is that the Justices unanimously went on to turn back the second defense.
The Port asserted not only that the contract explicitly insulated the Port. The contract even did so with capital letter language as follows:
“Zachry shall receive no financial compensation for delay or hindrance to the Work. In no way shall the Port Authority be liable . . . . for any damages arising out of or associated with any or hindrance . . . AND EVEN IF SUCH DELAY OR HINDRANCE RESULTS FROM, ARISES OUT OF OR IS DUE, IN WHOLE OR IN PART, TO THE NEGLIGENCE, BREACH OF CONTRACT OR OTHER FAULT OF THE PORT AUTHORITY.” Id.
The Court had in front of it a jury finding that Zachry's delay damages resulted from the Port's "arbitrary and capricious conduct, active interference, bad faith and/or fraud" Id. This finding was based on the Port forcing Zachry to proceed in a much more expensive approach despite Zachry entering into the contract as an independent contractor in “sole charge of choosing the manner in which the work would be conducted.” Id.
To the Port’s argument that Zachry was a sophisticated party knowingly entering a contract with the waiver of liability provision, the Court laid out the heart of the case with the following contract and tort reasoning:
“We have indicated that pre-injury waivers of future liability for gross negligence are void as against public policy. Generally, a contractual provision exempting a party from tort liability for harm caused intentionally or recklessly is unenforceable on grounds of public policy. We think the same may be said of contract liability. To conclude otherwise would incentivize wrongful conduct and damage contractual relations. This conclusion is supported by lower court decisions in Texas and court decisions in at least 28 American jurisdictions. We join this overwhelming consensus.” Id.
About the Author: Stanley Santire, Esq. is an attorney at:
Santire Law Firm (http://www.santirelaw.com); 7500 San Felipe Street, Suite 900; Houston, Texas 77063;| Phone: 713-787-0405; email: stanley@santire.com.
This article is published in ConstructionRisk.com Report, Vol. 17, No. 2 (February 2015).
Copyright 2015, ConstructionRisk, LLC
Article 4
“Pollution Exclusion” in CGL Policy Enforced to Bar Recovery for Injuries from Contractor’s use of a Concrete Sealant
See similar articles: CGL | Concrete Sealant Pollutant | Pollution Exclusion
By: J. Kent Holland, Jr., Esq., ConstructionRisk Counsel, PLLC
A federal appeals court vacated a district court ruling and found that the pollution exclusion in a commercial general liability (CGL) policy precluded a contractor from seeking defense and indemnification from its insurer for bodily injuries resulting from its use of a type of concrete sealant. The appeals court—applying Missouri law—ruled that TIAH, an acrylic concrete sealant used by the contractor, unambiguously met the policy’s definition of “pollutant” under the pollution exclusion. The court rejected the contractor’s argument that TIAH was not a “pollutant” in this context because it was a product it regularly used in its services. United Fire & Casualty Co. v. Titan Contractors Service, Inc., 751 F.3d 880 (8th Cir. 2014).
Titan Contractors Services, Inc. is a provider of construction-cleanup services, which includes cleaning and sealing concrete floors. Three women filed a negligence suit against the contractor in 2009 in Illinois state court. They alleged significant physical injuries stemming from the contractor’s use of TIAH at an improperly ventilated worksite. The contractor sought defense and indemnification from United Fire and Casualty Company, an insurer that had provided contractor with a CGL policy.
The insurer filed an action in federal district court in Missouri seeking a declaration that it did not owe the contractor a duty to defend or indemnify because TIAH was a pollutant under the policy’s exclusion. The trial court sided with the contractor, and determined that this exclusion was not applicable.
The insurer successfully appealed to the U.S. Court of Appeals for the Eighth Circuit, which vacated the lower court’s holding in a divided decision. The appeals court looked to the language of the CGL’s pollution exclusion, where “pollutant” was defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” The court also considered basic descriptions on the properties of TIAH—including the manufacturer’s safety manual and federal environmental laws—and found that it unambiguously fell within the definition of pollutant.
The court then addressed the contractor’s argument that even if TIAH appeared to fall within the exclusion’s definition of pollutant, coverage was nonetheless required under relevant Missouri legal precedent. Specifically, the contractor cited to a Missouri appeals case, Hocker Oil Co. v. Barker-Phillips-Jackson, Inc., where a pollution exclusion in a CGL did not apply to the insured gas station because in that context gasoline was a “product it sells” rather than a pollutant. The appellate court found that the cited case had little support in Missouri or elsewhere because it conflicts with the “deeply entrenched rule” of insurance contract interpretation, i.e., that a court may not “create an ambiguity in order to distort the language of an unambiguous policy.”
Moreover, the appellate court distinguished the current situation from that in Hocker Oil where if gasoline had been found to be a “pollutant,” that would have effectively eliminated coverage for the primary risks associated with operating a gas station. A reasonable insurance purchaser in unique context of a gasoline station owner, said the court, may not believe that gas was an excluded pollutant, especially since the CGL policy in that case was purchased through the insurer’s “Gasoline Department.”
In contrast, the contractor’s concrete sealing operations amounted to only about a quarter of its business, and TIAH was only one of several methods that the contractor used.
Interestingly, the dissenting opinion agreed with the logic of the Hocker Oil decision, and found more factual similarity with the concrete sealant. The dissent stated that the TIAH was not a pollutant in the context of the contractor’s routine business operations. The dissent further concluded that a reasonable policy holder in this line of business would expect the CGL policy to provide coverage for injuries associated with sealing concrete. Further, the dissent noted the legal maxim that any ambiguity would be resolved in favor of the insured over the insurer.
Comment: This case highlights the importance of understanding how the scope of a CGL pollution exclusion may be interpreted under a particular state’s law. The court acknowledged the concern that the scope of the pollution exclusion can be quite broad when the text is strictly applied. Companies that routinely handle substances that could fit the expansive definition of “pollutant” must be especially mindful of the extent to which the pollution exclusion in a CGL policy could eliminate coverage for its ordinary risks.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 17, No. 2 (February 2015).
Copyright 2015, ConstructionRisk, LLC
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