The Plaintiff Construction Defect Bar Speaks Up on ELR: Hoisted from the Comments

Brian Collins from Birmingham makes the pitch why homeowner's should have a negligence cause of action for construction defects, and that the ELR should not be used to deny damages for code violations and other defects that may not yet have caused property damage (e.g. Aas CA Sup Ct. 2000):

[P]resently we see the systematic opening and closing of [developer/builder] entities that were under-insured, under-capitalized and virtually judgment proof. [In] residential construction where performance bonds are rarely available or requested ... an enforcement of the ELR, and barring negligence to those who lack privity would leave the purchaser/homeowner with no means of recovery. Although construction defects are foreseeable and homeowners have opportunities to forego the contract, what are their options for protection? If all builders require the one year limited warranty significantly limiting claims, how may a homeowner protect for latent defects. If the builder closes shop immediately upon completion of the subdivision, where does a claimant turn?

The ability to collect a portion of their actual damages [in a negligence cause of action], after paying fees, expenses and costs through a lengthy litigation of three to four years at a minimum, is not a windfall to the homeowner and only provides a partial remedy with the tort claims. Take those away and you will effectively eliminate any meaningful options for an owner when a latent defect is discovered as a result of some subcontractor's lack of care....

A commercial setting could provide a completely different rationale but the educated parties in that context do not require the protection that should be afforded to inexperienced home purchasers. I believe a distinction must be made between actions against those in a commercial setting versus those in a residential setting. Until that is done, you will find compelling arguments on both sides of the issues that cannot be reconciled. 

The appropriate answer for this may be a statutory remedy.  Many states have enacted minimum standards for residential construction.  Provisions like California Civil Code Section 895 et. seq. (enacted in the wake of Aas) grant a cause of action to homeowners to enforce these standards directly against the developer, general contractor, subcontractors, suppliers, or architect without regard to privity of contract.  The presence of such a remedy obviates the need for a tort remedy.   

In states where no statutory remedy is available to homeowners, the burden of evaluating whether to grant a remedy in negligence continues to weigh heavily on the courts.

PuP Leadership

There is the video of Occupy Denver electing Shelby the Cocker Spaniel as leader, but this here is more dignified ....

A Pup by Any Other Name

In preparing for my role in the ABA's Fundamentals of Construction Law program in Tampa, I was reviewing the 50 slides I was expected to cover in an hour, and generally wondering how I would ever make sense of this information for an audience that is not supposed to know much about construction law. I eventually arrived at the last slide, which began with a description of P3s. In full-on wearied speaker mode, I began to silently bemoan my fate: here, on the 50th slide of a one-hour presentation, I'm supposed to say something meaningful about P3s, a topic about which many intelligent people can expound for hours. As I was trying to make sense of this, my eyes drifted to the bottom half of the slide, which contained this interesting nugget: "PuP: Contract between two or more government bodies to share risk of projects." Thus, while a PPP is a Public-Private Partnership, a PuP is (apparently) a Public-Public Partnership. The cynical voice in the back of my head, shaped by many years of representing contractors, said "Great: if one public owner isn't enough to screw up this project, we'll just keep adding more." I then wondered how it was that I had never run into a PuP before---indeed, never heard it discussed before. The idea certainly seemed to make a lot of sense. As I was thinking about it, I realized: I had run into PuPs many times before, just never by that name. I have seen many projects where the financing of construction, and the ultimate management of the constructed facility, was shared between two or more different government agencies. And the odds are, you have, too. So, with the novelty of the PuP dispelled, I started wondering: what could be said about the PuP? What wisdom or sage counsel could a community of construction lawyers bring to bear? These were my thoughts. 1. Intra-Owner Liaisons Are Critical. Whenever a project has a diverse ownership group (and this could be multiple owners or multiple stake holders within a single owner), coordination inside the ownership group becomes critical. During the course of construction, the owner needs to speak with one voice and provide clear, timely, and definitive answers to the designer and the prime contractor. In a PuP project, some member of the owners’ team (including a consultant or the designer, as appropriate) should have a formal role as the liaison for all the owners. That person needs to be tasked with running the regularly-scheduled owners’ meeting, developing an agenda for that meeting, and leaving that meeting with specific action items, whether those are answers, questions, or proposals. 2. Let the Stake Holders Run Their Stakes. In multiple owner projects, one owner is often designated as the lead owner for the purposes of project administration. This advances the cause of having the owners speak with one voice, for the lead representative provides that voice. But it frequently causes problems as the project progresses. In the construction of a facility that will be used by multiple owners, it makes little sense to have one owner provide guidance for the construction of a portion of the facility that will be used by another owner. Everyone would be better served by allowing the individual owners to take charge of their portion of the project. This increases the need for intra-owner coordination, but it should streamline overall project management, because there will be fewer mid-course corrections. The “lead owner” approach tends to increase changes during the project, as stake holders who have either not been consulted or not been heard review the plans and realize that their portion of the project will not actually fit their needs. 3. Remember the Golden Rule As most lawyers know by heart, few partnerships are true partnerships. Instead, most partnership operate under the Orwellian truism that while all animals are equal, some are more equal than others. It will be the rare PuP where all owners are financially contributing in equal shares. Similarly, it will be rare that the project is equally important to all owners. More likely, there will be one, or a few, major stake holders, and the remaining stake holders will have much smaller interests. It makes sense to identify this elephant in the room at the earliest stages of the project, and recognize and acknowledge the key owners. One of the roles of the intra-owner liaison will be to manage this unequal partnership in a way that both ensures that the key owners are satisfied and that the other owners get what they need to get out of the project. With those thoughts, I turn the conversation over to my fellow construction lawyers, to share their own experiences and recommended best practices for the well-known, but not always named, PuP project.

Paul Helligers Feasting on The Economic Loss Rule: Duty Analysis vs. Limitation on Damages, and What Will it do to Insurance?

Setting the Table 

When a member of the building team (owner, architect, engineer, construction manager, general contractor, subcontractor, consultant, manufacturer or supplier) fails to use due care in performing contractually assumed work, it is foreseeable that other project participants will suffer economic harm.  If the one who suffers the economic harm does not have a contract with the offender, is there a remedy in the law of negligence?

In the first installment of a longer article excerpted in the Fall 2013 issue of the Construction Lawyer, “Making Sense of the Economic Loss Rule in Construction Cases,” Paul Helligers traces some of the historical twists and turns that form the Gordian knot of negligence law in construction cases, with a particular focus on the economic loss rule (“ELR”).   He notes a trend “in favor of a robust ‘private ordering’ approach in construction cases.”  He cites approvingly to an article by Sidney R. Barrett Jr., Recovery of Economic Loss in Tort for Construction Defects: A Critical Analysis, 40 S.C. L. Rev. 891 (1989) that seems to want to do away with negligence in this context: 

[P]arties involved in a construction project rely on intricate, highly sophisticated contracts to … allocate among them the risk of problems, delays, extra costs, unforeseen site conditions, and defects.  Imposition of tort duties that cut across those contractual lines disrupts and frustrates the parties’ contractual allocation of risk. 

Picking up on this, Helligers notes, the Washington Supreme Court in Berschauer/Phillips Construction Co. v. Seattle School District No. 1, 881 P.2d 986 (Wash. 1994) said: 

We hold parties to their contracts.  If tort and contract remedies were allowed to overlap, certainty and predictability in allocating risk would decrease and impede future business activity.  The construction industry in particular would suffer, for it is in this industry that we see most clearly the importance of the precise allocation of risk as secured by contract. 

Helligers concludes his first installment by extrapolating this line of thinking: 

The Wyoming Supreme Court (in Rissler & McMurry Co. v. Sheridan Area Water Supply Jt. Powers Bd, 929 P.3d 1228 (Wyo. 1996)) acknowledged that the contractor did not contract with the engineer but argued that the contractor ‘had the opportunity to allocate the risks associated with the cost of the work’ when it contracted with the project owner.  The Colorado Supreme Court (in BRW Inc. v. Dufficiy & Sons 99 P.3d 66 (Colo. 2004)) explained that the multiple parties to large construction projects typically rely on networks of two-party contracts to allocate their risks, duties and remedies.  A subcontractor ‘has the opportunity to allocate the risks of following specified design plans when it enters into a contract with a party involved in the network of contracts.  The Indiana Supreme Court (in Indianapolis-Marion Cnty. Pub. Library v. Chalierr Clark & Linard, P.C., 929 N.E.2d 722 (Ind. 2010)) adopted this concept in 2010 in denying recovery to project owners suing design professionals with whom they were not in privity. 

In other words, the handwriting is on the wall, if you want to recover economic damages from fellow project participants, you had better mind the P’s and Q’s in your contracts and not rely on a privity bypassing cause of action in negligence to bail you out of a bad bargain. 

The Appetizer

I am in favor of a duty analysis in negligence that tightens the circumstances under which tort remedies will be allowed in construction cases.  See my unsolicited advice to the California Supreme Court here.    However, I am not in favor of using the economic loss rule as a categorical limitation on damages to do the job because I think a rule based application of the ELR leads to inconsistent results and arbitrary outcomes. 

Salad Course

The bar review version of a negligence cause of action as applied in a construction project is a follows:  (1) we have a duty to use reasonable care in all our endeavors so as to avoid injury to others.  (2) The care we must exercise is in accordance with our station in life:  on a construction project we must act like careful and prudent architects, contractors, construction managers, owners, trade contractors and suppliers.  (3) If we fail to follow this standard of care in a way that foreseeably and proximately will harm others, then (4) we must pay.   That is the walls of privity are broken down version of negligence we find in McPherson v. Buick Motor Company (personal injury),  Glanzer v. Shepard (overpayment for goods because of defective weight certificate) and J’Aire v. Gregory (contractor’s delay causing damage to restaurant operator).  The courts routinely apply these elements without difficulty to compensate for personal injury and property damage caused by negligent conduct. 

But it soon became clear that more than “foreseeable harm” was required in cases asserting primarily economic harm.  With the benefit of hindsight, plaintiffs, and on a clear judicial day, courts can foresee forever.  But limitless liability is not socially useful.  So courts look for ways to cut off liability.  Two primary tools for cutting off liability for foreseeable harm has been, on the one hand, failing to recognize a duty in a particular case, and, on the other hand, by disallowing certain types of damage, e.g. by application of the ELR.  

The Main Course

Helligers points to a three fold rationale for the ELR: (1) the Ultrameres problem:  indeterminate liability that is grossly disproportionate to fault (because economic losses ripple out to customers of customers of customers ad infinitum); (2) the Palsgraf problem:  the potential of over deterrence that can make economic processes inefficient if actors are exposed to liability socially harmful in its potential scope and uncertainty;” and (3) the Berschaouer/Phillips Construction problem:  whether parties in the plaintiff’s position can reasonably be expected to protect themselves through their contracts, or otherwise.  

Helligers points out that the six Biakanja v. Irving factors (CA Supreme Court 1958) have dominated the landscape for determining whether a duty exists.  The Biakanja factors are:  (1) the degree to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to the plaintiff, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendant’s conduct and the injury suffered, (5) the moral blame attached to the defendant’s conduct, and (6) the policy of preventing future harm. 

Helligers contends that this test is too foreseeability centric, and it certainly is in the way some courts have applied the test.  It’s worth noting that in the construction context, the first four factors are of course always present, almost by definition.  It’s only the moral blameworthiness, and the wider social need for a negligence cause of action in order to prevent future harm (as opposed to leaving the parties to the contract remedies they have all agreed on), that can swing the decision one way or the other.  That’s where the action should be.  Some courts, however, including the California Supreme Court in J’Aire v. Gregory, have completely glossed over these last two factors and basically concluded that foreseeability is sufficient.  But that is not necessarily a problem of the formula; I would say it’s a problem of application.

Dessert

Why Not Rely on the ELR instead of Duty?  In almost all construction cases, when some project members are harmed, there should not be the need to interject a tort remedy.  It’s perfectly foreseeable that some project participants might fall short in their performance, and parties are able to guard against this in their contracts.  Resolving problems entirely through a chain of contractual privity works just fine. 

The problem with relying on the ELR to do the job is that there is no good reason to distinguish between harm to property and economic harm.   When a retaining wall falls down during construction and has to be rebuilt—it’s just money.  Why should there be a distinction drawn between this cost of reconstructing a retaining wall and pure economic damages that don’t involve damage to property.  If a tort remedy, is appropriate under whatever test is adopted, there is no reason to arbitrarily exclude one type of damage.

Cognac

In California, outside the products liability context, courts have mostly granted relief, or denied relief based on the duty analysis.  Contrary to Helligers, Calfornia has not “switched” on this.  The cases continue to come out on both sides:  some following the foreseeability heavy analysis of J’Aire, and others trimming back on where they find a special relationship. As noted by Helligers, this inconsistency is typical of the country as a whole.

I’m rooting for the trend towards the private ordering of relationships among project participants.  I'm in favor of limiting the ELR to a limitation of damages in strict products liability, where it started--although this does not seem to be happening.  The trend to let project participants orchestrate their remedies through their contracts, and not recognizing tort duties for economic losses would result in the law being clearer and more rational, and predictable. 

Then there is the insurance issue.  Doing away with negligence for economic damages on construction projects, if it's done along the "is there a duty" test should properly extend to construction defect cases, even cases involving property damage, as well as purely economic cases.  If carried through, this would upset the apple cart on insurance.  Resolution of a typical large construction claims dispute relies heavily on insurance for defense and resolution of disputes.   If we take negligence out of the equation, does insurance coverage go away?

There is a quiet revolution in insurance for construction under foot already, of course, with the movement to OCIP’s, CCIP’s, legislative abolishment of many traditional forms of indemnity, and the trend to design-build and integrated project delivery.  Restricting negligence causes of action among project participants would surely accelerate these changes.  

Draft Restatement (Third) of Torts: The Argle Bargle of the The Economic Loss Rule Continues

I'm reading Paul Hellegers' article in the Fall 2013 issue of the Construction Lawyer, Making Sense of the Economic Loss Rule in Construction Cases:  Does the Draft Restatement (Third) of Torts Help? Part One.   Before I comment on the rest of the article in the next post, what's this Draft Restatement (Third) have to say about the Economic Loss Rule?

I should note that ALI has this (Draft) Restatement Third behind a pay wall, so I will repeat just so much of it as Paul Hellegers has in footnote 1 of his article.

Draft Restatement (Third) of Torts

Chapter 1 (Unintentional Infliction of Economic Loss), sections 1-6.  

1.  General Principles. (a) "[a]n actor has no general duty to avoid the unintentional infliction of economic loss on another." 

2.  Definition of Economic Loss. 

3.  Preclusion of Tort Liability Arising from Contract (Economic Loss Rule).  "...[e]xcept as provided elsewhere in this Restatement, there is no liability in tort for economic loss caused by negligence in the performance or negotiation of a contract between the parties."  

4.  "[a] professional is subject to liability in tort for economic loss caused by negligent performance of an undertaking to serve a client."

5.  Slightly modified version of Restatement (Second) of Torts Section 522, which provides:  "One who, in the course of his business, profession or employment, or in any transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information."

6.  Imposes liability for "negligent performance of services resulting in loss to persons for whose benefit the actor performs a the service ... through reliance upon it in a transaction that the actor intends to influence."

...a few comments

So before we get to Paul's article, a couple of observations on these six sections.  

Section 1, is pretty broad, misleading, and unhelpful.  As Paul points out in his article, there are many categories of tort to which the ELR simply does not apply, e.g. fraud or  interference with economic advantage, etc.  Moreover, economic loss in garden variety torts is usually ruled out on proximate cause basis, not on a categorical prohibition of economic damage.  To pretend that this is a category based prohibition, except in strict products liability, is unhelpful. 

Section 3.  That's like saying "there is no liability for economic loss caused by negligence...., unless there is!"   Do we need this?  Should this remain hidden behind a pay wall?  Buried for good? 

Section 4.  This begs the question of privity of contract. Does "to serve client" limit recovery to the client. The whole privity thing, of course, makes no sense when we are talking negligence.  Isn't the whole point of negligence that this is damage recoverable independent of contract?   Is an architect liable to everybody on the project, or just the owner?  Is a construction manager liable for all economic damage suffered by everyone on the project when they fail to use due care?  Is that what ALI wants to say?  Courts, of course have been all over the map on this. 

Section 5.  This is the vehicle with which architects have often been held liable for economic damages resulting from their defective plans .... which "supply false information."  I don't think making an architect liable on this basis, and exempting a construction manager by applying the ELR is a distinction that makes sense or is justifiable.  

Section 6.  I understand this was not "approved" at the 2012 ALI meeting.  What is the status now?  Is this pretty much argle bargle, as Scalia might say?  Does "for whose benefit the actor performs the service" mean privity of contract?  Construction, of course, is a cooperative venture... pretty much everyone's actions are relied on by everyone else.  And WTF does "that the actor intends to influence" mean?  

No, I don't think the ALI is advancing the ball here.  Not at all.  

Next .... let's see what Paul Hellegers thinks of it.  Go read the article, come back for the discussion.  

Channeling Dr. Seuss to speak about the Origin of Highrises

Katerina Cisek--in the NYT:

About the Project
“A Short History of the Highrise” is an interactive documentary that explores the 2,500-year global history of vertical living and issues of social equality in an increasingly urbanized world. The centerpiece of the project is four short films. The first three (“Mud,” “Concrete” and “Glass”) draw on the New York Times’s extraordinary visual archives, a repository of millions of photographs that have largely been unseen in decades. Each film is intended to evoke a chapter in a storybook, with rhyming narration and photographs brought to life with intricate animation. The fourth chapter (“Home”) comprises images submitted by the public. The interactive experience incorporates the films and, like a visual accordion, allows viewers to dig deeper into the project’s themes with additional archival materials, text and miniature games. On tablets, viewers can navigate the story extras and special features within the films using touch commands like swipe, pinch, pull and tap. On desktop and laptop computers, users can mouse over features and click to navigate. Smartphone users can view the four films.