Residential construction-defect
litigation continues to be a focus of both the construction industry
and the legal profession.
By Nicholas
M. Wieczorek and Stephen J. Kane
Over the past five years,
the volume and complexity of residential construction-defect cases
has grown in the Southwestern United States in a manner that keeps
pace with the region's explosive growth and its accompanying
housing and infrastructure needs. Until several years ago, many
practicing design professionals in parts of the Southwest never
had a single professional errors or omissions claim made against
their company or their individual licenses. Now, simply as a result
of the increased amount of litigation, any design professional engaged
in residential design services has a high likelihood of being brought
into construction-defect litigation. The same holds true for contractors
who build residential homes.
Historic Development
of the Current Situation
Construction-defect litigation
has been "hot" in the Southwest since it exploded in southern
California in the mid-1980s. Since then, it has expanded to other
areas as new housing starts in those areas pick up. For example,
as of mid-1997, the US Census Bureau released statistics showing
that between 1990 and 1996, Nevada led all states in housing-unit
growth. During that period, the state recorded a 31.9% increase
in the number of houses and apartments. Nevada continued to lead
the nation in growth up through the 2000 census.
On December 4, 1996,
the New York Times published an article titled "The
Great Nevada Litigation Rush," which shows how construction-defect
litigation followed this housing boom to Nevada. The article reports,
"Fueled by Americans' gambling fever, Las Vegas and other
Nevada resort cities have seen dizzying economic and population
growth the last decade. In California, lawyers who specialize in
cases involving home construction defects, hit by a slump in their
state's housing market, are practically drooling over the prospects
next door. They are taking the Nevada bar exam at double the rate
of three years ago and are aggressively wooing Nevada property managers
and homeowners associations."
As of late 1996, according
to the article, there were approximately a dozen construction-defect
cases pending in Clark County District Court (where Las Vegas is
located). The number of homeowners association (HOA) and similar
cases filed against developers and contractors continues, along
with the growth in Nevada's population. As of the writing of
this article, there are in excess of 120 cases brought by residential
HOAs and homeowners against builders, developers, and contractors
in Clark County District Court. Similar growth and subsequent litigation
has occurred in Arizona, Colorado, and Utah and promises to occur
anywhere housing markets boom.
Types of Suits Typically
Filed
The typical construction-defect
case consists of a direct action filed by the HOA board, or the
individual-unit owners within a particular subdivision or development,
against the developer or builder of the home. The complaint typically
asserts causes of action for negligence, breach of contract, breach
of warranty, and statutory damages against the builder or contractor.
Depending on the jurisdiction, the complaint might contain allegations
of strict liability as well.
Typically the developer
or builder files a third-party action against the various designers,
subcontractors, and material suppliers that provided construction
services and supplies to the involved development. In the past,
design professionals usually did not participate in these types
of cases for two reasons. First, there is usually a separate contractual
relationship between the builder and the design professional, versus
the builder and its various subcontractors. Second, a different
standard of proof is required for a builder to establish a professional
negligence claim against a design professional than it does to establish
a negligence claim against one of its subtrades. Over the past few
years, however, developers and builders in construction-defect litigation
almost always join the design professionals to defend against professional-negligence
allegations. As a result of this trend, claims against designers
and subtrades are all litigated in the same case.
Litigation Against
Design Professionals
Usually an architect,
engineer, or other professional's involvement in construction-defect
litigation is tied to an allegation of error or omission in the
professional services rendered by the designer. Moreover, the allegation
states that this error or omission was a contributing factor to
a construction defect or deficiency within the development.
The focus of inquiry,
invariably, is related to the scope of professional services provided
by the designer. Most typically these services are outlined in the
construction design documents or improvement plans and in any written
specifications prepared by the design professional. The adequacy
of the services rendered by the design professional is judged based
upon the scope of professional services provided, as well as upon
the contractual provisions between the designer and the developer
or builder.
A contractor (subtrade
or material supplier) is usually brought into the construction-defect
action when there are allegations that damage might be the result
of a particular subtrade's failure to properly perform its
work, to meet the industry standard, or to build in accordance with
the applicable building codes. As with the design professional,
the contractor's scope of services is imperative in determining
its potential liability in a construction-defect case.
Construction-defect litigation
involving either design professionals or contractors usually follows
a fairly typical pattern that has developed over the past several
years of practice. Most often, a Case Management Order (CMO) governs
construction-defect cases. This order sets forth specific requirements
regarding producing available job files and records, investigating
and testing at the project or development site, as well as designating
expert consultant witnesses, depositing relevant reports, and determining
when depositions might begin. In the unlucky instances when no CMO
is put into place, the applicable rules of civil procedure preside.
These cases tend to progress at a slower pace as a result of high
levels of inefficiency and redundancy.
Defending Yourself
Against a Construction-Defect Claim
The best defense against
liability arising from construction-defect cases is to take a proactive
position in the case. Both design professionals and contractors,
as a matter of defensive litigation practice, should proactively
practice the following steps in case they are brought into construction-defect
litigation.
Maintain Job Files
Pertaining to Contract Negotiations
The standard of care
pertaining to professional services rendered by a design professional
is tied specifically to the contractual obligations the professional
undertakes. Likewise, a contractor's scope of work, in most
cases, is limited to his or her contractual obligations. Files containing
written contracts, proposals, or contract negotiations, should be
maintained indefinitely in office records. Make sure to maintain
copies of the fully executed agreement and any drafts exchanged
among the parties before entering into the final agreement. Maintaining
comprehensive contract files is the key to asserting many available
defenses, including invocation of limitation of liability provisions,
arbitration/alternative dispute resolution agreements, or favorable
interpretation and application of indemnification agreements.
Maintain Job File
Records for at Least Six to 10 Years
Many cases currently
pending involve projects that were designed and/or constructed in
the early 1990s. Although it places a burden on record-retention
staff and storage resources to maintain job files indefinitely,
complete job-file documents should be maintained for a minimum of
six to 10 years following substantial completion of the project,
which roughly coincides with the outside statutes of repose for
filing construction-defect actions.
For example, in every
construction-defect case, both statutes of repose and statutes of
limitation apply. The Nevada Supreme Court has explained the difference
between statutes of repose and statutes of limitation as follows:
Statutes of repose bar causes of action after a certain period
of time, regardless of whether damage or an injury has been discovered.
In contrast, statutes of limitation foreclose suits after
a fixed period of time following occurrence or discovery of an injury
(Allstate Ins. Co. v. Furgerson, 104 Nev. 772, 775
n.2, 766 P.2d 904 [1988]).
Nevada Revised Statute
(NRS) 11.203 provides a 10-year statute of repose to bar claims
against the owner, occupier, or any person furnishing the design
or construction of an improvement to real property more than 10
years after substantial completion of the improvement for any damages
regarding "any deficiency in the design, planning, supervision
or observation of construction or the construction of such an improvement
which is known or through the use of reasonable diligence should
have been known" to the claimant.
NRS 11.204 provides an
eight-year limitation period for latent deficiencies in the design
or construction of real property improvements, and NRS 11.205 provides
a six-year limitation period for filing claims arising from patent
deficiencies in the design or construction of the improvement. Although
other jurisdictions have different time periods for both their statutes
of limitation and statutes of repose, a 10-year statute of repose
for cases such as these is quite common. In any event, given the
varying statutes of repose/limitation that can be triggered in any
given claim, a minimum 10-year records-retention policy is an appropriate
means of ensuring that, if a claim does arise, job files and records
will be available to assist in formulating an appropriate defense.
If maintaining job-file
records is not an available option for such a lengthy period of
time, then documents should be maintained consistent with a written
records-retention policy. No matter how long the records are retained,
that policy should be followed scrupulously to avoid any question
of impropriety should a particular project end up in litigation
and hard copies of the job file for that project are no longer available.
Properly Prepare
Job Files and Documents During the Course of Design and/or Site
Visitation and Construction
- A project history
creates a historical record that enables project representatives
to determine or confirm previous decisions and important events.
This helps provide a record to determine or allocate responsibility
in the event of disputes.
- A communications record
keeps the entire project staff informed of ongoing decisions and
events and creates a common understanding on the part of all project
participants–owner, contractor, consultants–of project
status and each participant's responsibilities along the
way.
- Continuity is promoted
via good documentation during a lengthy project or in the event
of personnel turnover.
- Be project-specific
by separating project files, to the extent possible, from documentation
relating to financial/budget issues, liability issues, corporate
policy issues, personnel evaluation issues, and insurance issues.
Avoid references to company policies and/or practices or to practices
followed on other projects.
- Documentation pertaining
to negotiation of limitation of liability provisions is particularly
important to retain, as in many states the enforceability of such
provisions are dependent upon the ability to show that they were
the subject of actual negotiations.
- Be sure to keep detailed
documentation of all critical decisions and major events relating
to the actual planning, design, and construction of the project.
- Documentation should
be contemporaneous with decisions and events. Respond promptly
to correspondence from others. Promptly confirm important oral
understandings in writing.
- Be objective and avoid
self-criticism and derogatory or unprofessional comments regardless
of how accurate or appropriate they might seem at the time.
- Avoid writing on or
otherwise marking up original documents.
- Be particularly careful
about making informal characterizations concerning contractual
provisions or scope of work.
Retain Qualified
Expert Witnesses and Consultants
Depending on the extent
of the professional negligence allegations directed against the
designer, it is usually necessary that the architect, engineer,
or other professional retain the services of an independent expert
consultant or expert witness to assist in the defense of a construction-defect
case. The scope of services provided by the expert depends on the
extent of the contractual services provided by the design professional
and the nature of the work product prepared by the designer during
the project's design phase. Similar considerations apply when
a contractor is brought into a construction case and needs to retain
an expert.
A key to retaining the
appropriate expert witness is to identify, early in the case, the
full scope of services provided by the design professional or contractor,
as well as the contractual responsibilities undertaken. Most residential
construction-defect litigation currently filed contains a broad
array of issues: architectural design and construction deficiencies,
civil drainage and grading problems, HVAC and mechanical criticisms,
structural failure, and movement of foundations of individual housing
units.
When examining the scope
of services provided, ask the following questions:
- Did the professional's
contract call for architectural design services only, or was the
architect specifically retained to subconsult directly with the
structural engineers, mechanical/electrical/plumbing engineers,
and other disciplines?
- Did the civil scope
of engineering design services include preparation of improvement
plans only, or did the civil engineer's office also provide
construction staking services or survey work?
- Did the architect's
or engineer's contractual responsibilities also include construction
administration phase services, or was the engagement's sole
purpose to prepare construction documents with no onsite visitation
requirement?
- What were the contractor's
responsibilities and scope of work set forth in the contract documents?
Identifying the full
extent of the services rendered will allow the parties as well as
counsel to make appropriate decisions in retaining qualified expert
witnesses.
Once an expert is retained,
full cooperation with the expert's evaluation and investigation
is essential. Usually the CMO gives expert witnesses a narrow time
window within which to conduct visual inspections of the project
site, undertake any intrusive testing that might be necessary, and
prepare a written report for deposit into a designated document
depository. The quality and thoroughness of the expert's report
and evaluation is contingent upon the cooperation the consultant
receives from the client in this investigation.
Role of the Liability
Insurance Carrier
When served with a direct
or third-party complaint in a construction-defect litigation, or
even a claim demanding participation in presuit mediation, the design
professional or contractor should immediately contact his or her
liability insurance company and tender the claim to the company
for representation and defense. Provided that the insured's
policy is in good standing and that there is no specific exclusion
to coverage set forth, the carrier should immediately undertake
to provide defense and representation and assist in the investigation
and evaluation of the claim.
The carrier's role
in participating in the defense of the claim becomes especially
acute during mediation or settlement discussions. Pursuant to many
operative CMO provisions, every litigated construction-defect case
involving multiple housing units is referred to court-ordered
mediation at various intervals while the matter is pending. The
cases are usually handled with the assistance of a court-appointed
mediator, who attempts to negotiate a settlement on behalf of all
or certain parties to the case before the trial begins.
Mediation typically concerns
questions of liability for the negligence arguments raised, as well
as the availability of insurance coverage and the applicable limits
of coverage. Other factors pertaining to the negotiation include
the extent of any deductible or self-insured retention maintained
by the policyholder and whether there is a "consent" clause
in the policy that requires a party's approval over any settlement.
Other factors affecting the mediating position of the parties include
the extent of other claims currently being made against the policy
and the exposure of the party to a judgment in excess of the available
policy limits, in the event the matter goes to trial.
The design professional
or contractor should work closely with counsel and the insurance
representative to ensure that all relevant factors are evaluated
as part of the case-handling and mediation process.
Defenses and Disposition
Alternatives
Construction-defect litigation
can be costly to both the design professional/contractor and any
participating professional-liability carrier. Although residential
HOA and other construction-defect cases are entitled to preferential
trial setting in certain jurisdictions (NRS 40.689), typically construction-defect
cases can remain pending in the court system for three years–or
longer in some instances–after the initial complaint is filed
and before commencing trial.
As a means of avoiding
unnecessary expense and as a potential strategy in handling the
case, the party and its attorney should consider early dismissal
or summary judgment based upon the contractual provisions. A well-crafted
contract includes various contractual provisions that can serve
as a basis for early disposition of various claims. For example,
certain claims filed against a design professional might be based
on the mistaken assumption that an architect, engineer, or other
designer performed services on a project based on the developer's
identification of the designer's firm from job-file records.
In reality, the designer might have been consulted on a discreet
matter, generating an invoice or a report, without having participated
in the overall design of the job's improvement plans or construction
documents. If the contractual scope of services can be limited,
a dispositive motion for summary judgment on the contractual scope
of services is available pursuant to Nevada Rule of Civil Procedure
56.
Similarly, an agreement
may contain a limitation of liability provision whereby the maximum
economic exposure of the party for any negligence claim arising
from services performed on the project is capped at a certain dollar
figure. If this provision is explicit within the executed agreement
between the parties, a motion may be filed to enforce the limitation
of liability provision and cap the potential exposure at the stated
amount. In Nevada, limitation of liability provisions are recognized
by the courts and are enforceable (see, for example, Bernstein
v. GTE Directories Corp., 827 F.2d 480 [9th Cir.,
1987]).
Additionally, many design-service
agreements and construction contracts include arbitration or mediation
provisions. These alternative dispute resolution clauses in the
agreement are also enforceable and, if brought before the court
via motion, can force the developer or builder to resolve its claims
outside of the court system in a less formal and less expensive
setting.
Conclusion
Construction-defect cases
are certainly on the rise in many areas of the US and promise to
be a fact of life for builders, design professionals, and contractors
in the foreseeable future. These individuals, however, need not
be passive participants in defending themselves in these cases.
By applying some of the suggestions set forth here and by taking
a proactive stance, parties can greatly assist themselves, their
attorneys, and their claims-handling professionals in defending
the construction-defect lawsuits that might come their way.
Guest authors Nicholas
M. Wieczorek and Stephen J. Kane are attorneys with Wieczorek &
Associates in Las Vegas, NV, a member of Morris, Polich & Purdy
LLP.
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