Inside this Issue

A1 - Contractor’s Defamation Suit against Inspector Dismissed due to Conditional Privilege to Advise Owner Concerning Contractor’s Work
A2 - Cosmetic Defects Found To Be Basis For Termination Of Contractor For Default
A3 - Choice of Law and Forum Selection Clause in Design Subcontract Unenforceable in California
A4 - A Condominium HOA Suit against Designer and Contractor Dismissed for Lack of Adequate Expert Testimony on Damages

Article 1

Contractor’s Defamation Suit against Inspector Dismissed due to Conditional Privilege to Advise Owner Concerning Contractor’s Work

See similar articles: Conditional Privilege | defamation | Inspection | Professional Opinion | Slander

J. Kent Holland
ConstructionRisk, LLC

A homeowner hired a firm to investigate the cause of their leaky roof, and based on the investigator's report that the roof had been installed over soaking wet fiber-board roof insulation, the homeowner sued the roof installer, who in turn brought a third-party defamation claim against the investigator, asserting that his statement concerning the installation of the roof was false and defamatory. Motion for summary judgment was granted for the investigator and affirmed on appeal, on the basis that the statement was conditionally privileged and the investigator did not act with reckless disregard for the truth so as to waive the privilege. Downey v. Chutehall Construction, 19 N.E. 3d 470 (Mass. 2014).

Were thees statements of "fact" or "opinion"? The contractor argued that the report about the roof did not constitute an “opinion” that was entitled to protection, but instead contained “statements of fact.” The trial court judge ruled that the alleged defamatory statements were not statements of facts but were professional opinions, were not negligently made, and were protected by conditional privilege.

The appellate court reviewed the language of the report to determine whether it contained factual statements or opinion conclusions. The court explained, “To determine whether the statement in question is defamatory, the court must decide whether it is an assertion of fact or opinion. The distinction is often subtle and difficult, particularly at the summary judgment stage…. [ ] In a defamation action, ‘the defendant is entitled to summary judgment if the challenged statement cannot reasonably be constructed as a statement of fact.’ ‘If a statement is susceptible of being read by a reasonable person as either a factual statement or an opinion, it is for the jury to determine.’” In other words, summary judgment would have to be denied so that a jury could consider the details of the report and decide if it contains statements of “fact” or “opinion.”

Based on the statement in the report here, however, the appellate court held the trial court erred in finding it was opinion instead of fact. The statement in question in the report was, “This roof was installed over a EPDM roof system that had fiberboard roof insulation that was soaking wet.” As stated by the court, “Here, [investigator] stated that the [ ] roof had been installed over wet insulation. This appears to be an assertion of fact that, at least in theory, could be verified as either true or false.”

For this reason, the appellate court concluded, “We do not consider this assertion an unambiguous statement of opinion appropriate for summary judgment. The defamatory statement on its face appears directly and definitively factual.” The published statement by the investigator was not, according to the court, “in any way introduced as an expression of opinion.” “Nor was the statement expressly qualified or limited as being based on the results of particular observations.”

Thus, the court concluded, “although it is a close question, we conclude that the unqualified factual assertion here, which might have been proven true or false, could reasonably be construed as a defamatory statement of fact.” Therefore, summary judgment should not have been granted on the basis that the statement was “opinion” and not a statement of fact. The court went on, however, to uphold the summary judgment for other reasons.

Conditional Privilege Applied. The investigator had been hired to investigate the cause of the leak and report its findings to the homeowner, which is exactly what he did, and the statements in his report were deemed to be “conditionally privileged.” The court found the statement involved a “common business interest” between the homeowner and investigator, “i.e., the evaluation of the likely source of the roof’s leak so that repairs could be made.” [The] statement furthered this common business interest as it affected [homeowner’s] decision on how they should proceed in addressing the roof’s leakage.

Where such conditional privilege applies to the communication, the privilege survives even if there was negligence on the part of the investigator. It would only be lost if the statement was “recklessly” made. The court found that the contractor failed to introduce sufficient evidence to establish that the investigator published the statements “recklessly.”

Comment: A lesson learned from this decision is the importance in stating professional opinions in a manner that they appear on their face to be “opinions” and not statements of fact.

The investigator in this case is fortunate that the court applied conditional privilege in spite of finding the statement to be a statement of fact rather than opinion. If the statement had been presented as “opinion,” the contractor would have had a higher burden of proof to prevail in a defamation suit.

It is important when issuing reports such as the type involved here to include a description of what was done to evaluate the problem, any assumptions and limitations on what was observed, and language to make it clear that the conclusions are “professional opinions” based on what was observed. Plainly and succinctly state opinions as “opinions” rather than as facts.

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. 18, No. 2 (February 2016).

Article 2

Cosmetic Defects Found To Be Basis For Termination Of Contractor For Default

See similar articles: Cosmetic Defects

By MATTHEW DEVRIES, posted in BEST PRACTICES, CASE LAW, CLAIMS AND DISPUTES on December 9, 2015.

In the construction world, many of us lawyers talk about what is known as a material breach in order to support a termination of the contract. In other words, the event that supports the claim for default or termination or breach of contract must be a material one or one that goes to the heart of the contract matter. Sometimes, the question comes down to whether an aesthetic or cosmetic defect constitutes a proper ground for termination.

Cosmetic damages. In the recent case of Brenner v. Zaleski, 174 So. 3d 76 (Louisiana 2015), the court upheld the owners’ decision to terminate the contractor for default for, among other reasons, the existence of numerous cosmetic defects. The case involved the construction of a new wooden loft in a condominium. During performance, the owners informed the contractor that they were concerned about certain cosmetic flaws in the work. The contractor became very aggressive during one of the conversations with the owner, who ultimately decided to terminate the contractor for default.

Trial court. After the termination, the owners hired an engineer who found a structural flaw in the contractor’s work. The owners sued the contractor for breach of contract. The trial court held that the contractor was terminated prematurely, finding that the primary reason the owners terminated the contract was because of the aggressive tone of the contractor during their conversations. The court also held that the contractor was not given an opportunity to cure or repair the defects.

Appellate court. The owners ultimately prevailed on appeal, where the appellate court ruled that “[t]here is no obligation on the part of the owner to allow a contractor, who has breached his undertaking by the performance of an unskilled and unsuitable job, additional time or opportunity to rectify his work.” The appellate court also found that although the owners did not appreciate the contractor’s aggressive behavior, this did not preclude the quality of the contractor’s work from being an additional reason for his termination.

So what? There are so many construction law issues in this case that can provide guidance to contractors—whether working on a new residential home, a large commercial development, or a significant transportation project. Here are a few:

The contract always matters.In any dispute, the court or arbitrator will look to the parties’ contract to determine the obligations, rights and damages available to the parties. In the case of a termination, the contract expressly addresses the circumstances when the contract can be terminated for the convenience of the owner or for the default of the contractor.
Material breach always matters. The “materiality” of the breach is important for so many reasons. First, generally you must prove a material breach in order to recover damages. Next, the court or arbitrator will often look to which party committed thefirst material breachin deciding whether to enforce various provisions of the contract. Finally, as a contractor, you will have only a limited number of circumstances to terminate a contract with an owner (e., non-payment, interference or owner-related delays, non-delivery of owner-provided materials), all of which mush be material to your performance.
Cosmetic defects sometimes matter.While probably not the traditional rule, the decision in Brenner demonstrates that cosmetic defects can support a claim for termination for default. While I do not believe the court would have reached the same result without some proof of a structural defect, the decision focused on the “quality of the work” of the contractor which was challenged by the owners.

About the Author:

Matthew J. DeVries • Partner
Burr Forman, LLP
Suite 2300 • 511 Union Street • Nashville, Tennessee 37219
Phone: 615-724-3235
mdevries@burr.com • www.burr.com
Blog: www.bestpracticesconstructionlaw.com

This article is published in ConstructionRisk.com Report, Vol. 18, No. 2 (February 2016).

Article 3

Choice of Law and Forum Selection Clause in Design Subcontract Unenforceable in California

See similar articles: Choice of Law | Design Contract | Forum Selection | Pay-If-Paid | pay-when-paid

J. Kent Holland, J.D.
ConstructionRisk, LLC

On a California project, where an architect’s agreement with its landscape design subconsultant called for all disputes to be resolved by the courts in Texas, applying Texas law, a California appellate court held the forum selection clause was unenforceable as contrary to a California code and public policy. Texas law could have enforced a “pay-if-paid” clause to avoid paying the subconsultant since the owner had not paid the Prime. California law, however, makes such clauses unenforceable. Choice of law and forum make a big difference in the outcome in this dispute. Vita Planning and Landscape Architecture, Inc. v. HKS Architects, Inc., 240 Cal.App.4th 763 (2015).

The Forum Selections Clause. The project owner hired HKS to provide architectural services for the Project pursuant to an “Agreement Between Owner and Architect” (Prime Agreement). Among other things, the Prime Agreement contained a Texas forum selection clause providing: “[a]s a condition precedent to the institution of any action [or] lawsuit[,]” that “all disputes shall be submitted to mediation” and that “[a]ll claims, disputes, and other matters in question between the parties arising out of or relating to [the Prime] Agreement ... be resolved by the ... courts in ... Texas.” The Prime Agreement also contained a Texas choice of law provision.

The owner “ceased paying for any work,” leaving HKS “with extensive unpaid bills” for its own services, and those provided by its “consultants.” HKS obtained a judgment against Owner in 2010 in Texas for $1,617,073.70 but was “unable to recover anything on that judgment, despite diligent efforts to do so.”

Subconsultant Sues For Its Fees. Vita Planning and Landscape Architecture, Inc. (Vita) filed a complaint against HKS seeking payment. HKS filed a motion to dismiss, asking the court to enforce the forum selection clause. The trial court granted the motion. This was reversed on appeal.

Vita raised several arguments in opposition. First, it characterized HKS as a “general contractor” and itself as a “subcontractor” and claimed the forum selection clause in the Contract was unenforceable under section 410.42. Vita also argued the case implicated “fundamental public policy concerning pay provisions in subcontractor-contractor contracts,” and suggested enforcing the forum selection clause would violate California public policy, under which “pay-if-paid” provisions are unenforceable.

In reply, HKS argued section 410.42 did not apply because HKS is a design professional and not a contractor and Vita is a professional subconsultant not a subcontractor. HKS asserted that the code applied only to actual contractors performing construction work, and that this was not a “contract for construction.”

Despite lack of signatures, court found there to be a contract. The first issue to be decided by the appellate court was whether there was even a contract between HKS and Vita. The problem was that the parties never signed a contract. The court, held that there was nevertheless a contract, and that the “absence of signatures does not render the Contract unenforceable.” This is because the parties “conducted themselves as though they had an agreement[.]” There is no dispute Vita performed pursuant to the Contract, and HKS accepted Vita’s performance. A “voluntary acceptance of the benefit of a transaction is equivalent to a consent to all the obligations arising from it, so far as the facts are known, or ought to be known, to the person accepting.” (Civ.Code, § 1589, italics added; see also Civ.Code, § 1584.

Forum Selection Clause is void. Turning next to the bar on enforcing a forum selection clause, the court analyzed section 410.42 of the code.

The court explained that, “Section 410.42 precludes out-of-state contractors from requiring California subcontractors to litigate certain contract disputes in the contractor’s home state”. It renders “void and unenforceable” a “provision [ ] of a contract between the contractor and a subcontractor with principal offices in this state, for the construction of a public or private work of improvement in this state” that “purports to require any dispute between the parties to be litigated, arbitrated, or otherwise determined outside this state” or that “purports to preclude a party from commencing such a proceeding or obtaining a judgment or other resolution in this state or the courts of this state.”

Moreover, said the court, the code was intended to “provide California subcontractors with the protection of California courts and law (including prompt pay laws) to which they are entitled”.

Designer is a contractor for purposes of the law. The court went on to address the question of whether design professionals were “contractor’s on construction projects” within the meaning of the statute, and held that they are.

Here, the court said, Vita is unquestionably a subcontractor because it was “awarded a portion” of HKS’s contract with Owner and because it did “not have a direct contractual relationship” with Owner.

The court stated: “We are not persuaded by HKS’s contention that section 410.42 does not apply because it is not a “general contractor,” which “construct[s] improvements,” but rather a “design professional.” In industry parlance, a “ ‘contractor’ ” may be “synonymous with ‘builder’[.]” The court concluded that the term “contractor” in section 410.42 is not limited to builders, and does not exclude an architect or design professional

Comment:

This case demonstrates the importance in knowing the state law before inserting choice of law provisions into contracts and assuming that a term or conditions such as pay-if-paid clause will be enforced using some other state’s law rather than the state in which the project is located. Another interesting aspect of the case is the fact that the court held a design professional to be a “contractor” for purposes of the statute. I am finding that more and more design professional contracts refer to the design firm as a “contractor,” “supplier,” “vendor,” “provider”, and other such terms. Rather than attempt to change this to “design professional” or “consultant,” it may be simpler and better to just include a sentence somewhere in the contract specifying that the firm is providing professional services and is not doing construction or other “work.” The same issue arises with more and more contractors calling professional services “work.” Again, perhaps the answer is to carefully define that in the context of the contract the term “work” means professional services only.

Article 4

A Condominium HOA Suit against Designer and Contractor Dismissed for Lack of Adequate Expert Testimony on Damages

See similar articles: Expert Damages | Expert Testimony | Expert Witness | Proof of Damages

J. Kent Holland, J.D.
ConstructionRisk, LLC

A condominium homeowner association suit was dismissed on summary judgment, which was subsequently affirmed on appeal, because the experts failed to present detailed evidence and explanation of the various elements of the damages claimed, and one expert failed to demonstrate his qualifications to testify. Broad estimates of damages, even though loosely based on R.S. Means, were not sufficient to take the matter to jury, where the expert failed to do a detailed analysis of each of the 23 elements of a claim. In affirming the judgment, the court explained that the HOA failed to present admissible expert opinions because one report’s opinions lacked sufficient disclosure of the method and calculations that formed the basis of the report, and the other expert was, by his own admission, not qualified to provide cost estimates relating to this other opinions concerning structural defects. This decision demonstrates the importance of presenting qualified damage experts who will present detailed analysis of the actual costs for each element of a claim. Inn by the Sea Homeowners Association, Inc. v. Seainn, LLC, 170 So.3d 496 (Mississippi 2015).

Suit was brought by the HOA against the developer, structural engineer, architect, contractors, and others that were involved in the design and reconstruction of the condominiums when they were rebuilt following their destruction by Hurricane Katrina. The suit alleged that significant problems began to manifest within a year of reconstruction -- including structural defects.

Report only provided estimate of damages. The HOA’s structural engineering expert provided an expert report on the structural issues, and his report included an estimate of $1,830,000 to correct engineering defects. The HOA also retained an architect as an expert, and his report identified twenty-three design and construction defects, which he estimated would cost $1.3 million to repair. He subsequently revised and updated his report a few months later and changed the repair estimate to $2.7 million. His report contained a description of each defect and a rounded, ballpark cost estimate to repair each defect.

Unfortunately for the HOA, its structural engineering expert vanished shortly before the trial date and they had to replace him. They granted a time extension to obtain a new expert. The new engineering expert provided a new expert report in which he agreed with the substance of the previous engineering report but also added that he believed that foundation pilings were designed with an overload of as much as 2.82 times their safe capacity. He was unwilling to provide exact itemized cost estimates for the items of engineering defects that he identified. He estimated a total repair budget for all the items between $1.6 million and $4 million.

According to the court, this new expert “openly stated that the ‘costs provided here are my best estimates’ but that he was ‘not a qualified estimator or contractor and therefore cannot be liable for the accuracy of these numbers. If more accurate numbers are needed then a licensed contractor or cost estimator should be engaged to provide them.’”

Supplemented report only provided details for one of twenty three items. The trial court ordered the HOA to supplement its expert reports. The HOA did so by having the architect expert add a ten-paragraph affidavit with exhibits to his report, identifying RS Means as the basis for his cost estimates. He attached an exhibit demonstrating a “step by step analysis” of how he used RS Means to estimate the cost as applies to the roof replacement item. But that was only one of the twenty-three items identified as structural defects in his report. He did not do a similar detailed explanation for the other twenty-two items. Instead, he asserted that each “of the enumerated items in my report [is] contained with [M]eans and [was] researched for Inn By the Sea.”

The trial court concluded that the expert reports and affidavits failed to provide sufficient proof of actual damages and, therefore, granted summary judgment against the HOA. In determining whether the trial court acted correctly in granting the motion, the appellate court reviewed a number of previous appellate court case precedents. It cited a Court of Appeals decision that found the appropriate measure of damages was the actual repair costs that already had been incurred by the plaintiff in fixing the deficiencies of a contractor. It also cited a state Supreme Court decision that affirmed a defendant’s right now to be ambushed at trial with previously undisclosed calculations forming the basis for the plaintiff’s expert opinions, “even when the new disclosure did not alter the original expert conclusions.”

Conclusory estimates not sufficient for jury consideration. With regard to the use of RS Means, the court stated that the manual “is a reliable industry source of data that has been used with approval in cases involving expert testimony on damages.” “But merely disclosing that a five year old RS Means manual is the general basis for the conclusory estimates on twenty-two of twenty-three items of alleged structural damages amounting to several million dollars does not provide a sufficient disclosure of data for a trier of fact to determine that the estimates have been calculated with reasonable accuracy or for a defendant to meet the evidence. As it is, the testimony is unreliable because it fails to disclose the basis of the expert opinion.”

The court further stated that, “Production of the basis for only one itemized opinion out of twenty-three was not in compliance with the degree of specificity reasonably ordered by the trial court.”

Expert not qualified to testify. The appellate court also sustained the trial court’s conclusion that the replacement structural engineering expert was not qualified to provide expert testimony relating to damages. This is because the expert, “explicitly stated in his expert report that the range of between $1,660,000 and 4, 020,000 was merely his general estimate and that establishing sufficiently specific estimates would require bringing in someone more qualified.”

In summing up its conclusions, the appellate court stated that the engineer’s cost damages opinions lack sufficient disclosure of the method and calculations that formed the basis of his report. The court stated that the architect, by his own admission, was not qualified to provide cost estimates relating to his other opinions on structural defects.

Comment: This decision shows the great importance of obtaining experts qualified to provide a detailed expert opinion on damages and how those damages were calculated using the system that is recognized in the expert community. It demonstrates that parties should not go into litigation with the assumption that they can merely present cost estimates and rather loose explanations of damages because as the appellate court stated in this case, the defendant is entitled to know prior to trial the actual damages being claimed and the expert basis on which they are calculated.

Search

Get the Newsletter

Contract Guide for Design Professionals

Recent Newsletters

All Newsletters

Risk Management Workshops

Life Skills Workshop Slides

Contract Clauses – Papers and Articles

Construction Risk Management

ConstructionRisk.com Report (February 2016)