Construction Defect Litigation: Allegations, Defenses, and Proving Your Case
The following provides a broad overview of issues to consider in preparing for a construction defect litigation. Any discussion is influenced by the facts and circumstances of each case and this is meant to provide some areas of thought to consider.
COMMON ALLEGATIONS AND DEFENSES
The following are the most common claims brought by plaintiffs in construction defect claims:
· Breach of Contract – In most cases, the primary claim for construction defect claims will be breach of contract. A breach of contract claim will necessarily allege the existence of a contract and breach of specific terms of that contract. Construction contracts can be especially demanding in terms, as one Pennsylvania court noted these contracts will denote the “kinds, quality, and quantity of work to be done, the details, time and manner of construction, without which the contract would be incomplete and ineffective.” Z&L Lumber Co. of Atlasburg v. Nordquist, 502 A.2d 697, 701 (Pa. Super. Ct. 1985). Due to the complexity involved, a breach can be alleged over any violation of the terms of the contract, regardless of the apparent import. See Restatement (Second) of Contracts §235(2) (1981) (“When performance of a duty under a contract is due any non-performance is a breach.”); see also True R.R. Assocs., L.P. v. Ames True Temper, Inc., 152 A.3d 324, 340 (Pa. Super. Ct. 2016) and Crescent Trading, LLC v. Chera, 2010 N.J. Super. Unpub. LEXIS 2405, at *21 (Oct. 4 2010) (citing Restatement). As such, the allegations for breach of contract can vary in scope from material breach justifying non-performance by a buyer or contractor to a partial breach seeking nominal or limited damages. For example, a builder who uses the wrong type of pipes from those specified in a contract document, but that are otherwise identical in size and performance quality, would be in breach, but it is unlikely that the buyer would be entitled to a claim of material breach or substantial damages. In many cases, a key fight (and one that often leads to cross-claims for breach of contract for failure to pay under a contract) is whether a breach is material. The Restatement (Second) of Contracts §241 (1981) provides several criteria to determine when a breach is material:
(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected;
(b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;
(c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture;
(d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances;
(e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.
See True R.R. Assocs., L.P., 152 A.3d at 340 and Roach v. BM Motoring, LLC, 228 N.J. 163, 174-75 (2017) (citing Restatement). The allegations will also likely include that the plaintiff complied with his or her obligations, which is a requirement to maintain a breach of contract action.
· Negligence – Negligence claims are common in construction defect litigation and the allegations in support normally allege a breach by the builder of its duty of reasonable care, reasonable workmanship, and/or violated some statutory obligation. As will be discussed below, builders will often dispute the right to bring these claims under the economic loss doctrine or gist of the action doctrine.
· Breach of Warranty – Another common claim in construction defect litigation is the breach of warranty claim. These claims can arise from an express warranty provision offered by the builder or an implied warranty claim. Express warranties will have their own specific terms that can be breached. However, in New Jersey, the New Home Warranty and Builders’ Registration Act (NJSA 46:3B-1 et seq.) provides warranties that apply to all new home builders and also provide for certain dispute resolution if disagreements arise. This New Jersey default warranty provides for warranting for: one year for defective systems, workmanship, materials, plumbing, electrical and mechanical systems, appliances, fixtures, equipment, and major structural defects; two years for mechanical, electrical, plumbing systems, and major structural defects; and for up to ten years for only major structural defects. Any claim under the New Jersey warranty goes to arbitration and there is a state fund that will cover costs if the builder is found in breach and unable or unwilling to pay. Builders risk losing their license as part of this process, so it is a powerful tool in New Jersey.
The implied warranties that most often come up in these cases are the implied warranty of habitability and the implied warranty of workmanship. Habitability is a somewhat factual issue, but courts have found leaking, lead paint, carbon monoxide issues, and lack of potable water all as examples of violations of the implied warranty of habitability. The implied warranty of workmanship is a general allegation that the work is done to generally accepted industry standards and the materials used are safe. However, if the building or site owner provides detailed plans and specifications and the building is defective, the contractor can allege that the owner breached the implied warranty that the building is capable of construction. See Stabler Constr. v. DOT, 692 A.2d 1150 (Pa. Commw. Ct. 1997).
· Negligent Misrepresentation – Claims against design professionals can include negligent misrepresentation. Under Restatement (Second) of Torts §552, the claim is “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.” This claim allows for a tort exception to the general bar against tort claims for economic loss. See Bilt-Rite Contractors v. Architectural Studios, 866 A.2d 270 (Pa. 2005); People Express Airlines v. Consolidated Rail. Corp., 100 N.J. 246 (1985). The allegations for this claim will require that the builder relied upon drawings, plans, or similar documents from a professional and that misrepresentations in those documents led to the defect. As such, it is common for this to be a third-party claim by a contractor bringing in the design professionals. The lack of privity between the contractor and the design professional does not bar this claim.
· Constructive Fraud – This claim is brought by contractors against an owner based on representations made by the owner in the pre-bid documents regarding the site conditions. The representations must include positive, inaccurate representations regarding the site. Pennsylvania courts look to five factors to determine if a constructive fraud claim will survive: “(1) Whether a positive representation of specifications or conditions relative to the work is made by the [owner or its agent]. (2) Whether this representation goes to a material specification in the contract. (3) Whether the contractor, either by time or cost constraints, has no reasonable means of making an independent investigation of the conditions or representations. (4) Whether these representations later prove to be false and/or misleading either due to actual misrepresentation on the part of the [owner or its agents] or, by what amounts to misrepresentation through either gross mistake or arbitrary action on the part of the [owner or its agents]. (5) Whether, as a result of the misrepresentation, the contractor suffers financial harm due to his reliance on the misrepresentation in the bidding and performance of the contract.” Acchione & Canuso v. Commonwealth, 501 Pa. 337, 343-44 (1983).
There are several common defenses often alleged in construction defect litigation. In addition to these defenses, many construction defect litigation will involve numerous parties with crossclaims, counterclaims, and third-party claims of the types described above being by defendants (as well as claims for indemnification either contractually or by common law). In many ways, construction defect litigations often involve the old adage that the best defense is a good offense. Nonetheless, some defenses are often involved.
· Statute of Limitations – Most of the tort claims for construction defect, such as negligence resulting in property damage, have a two year limitation. For actions involving contracts, the limitation is 4 years in Pennsylvania and 6 years in New Jersey. If a claim is being brought after the statute of limitations has run, plaintiffs may claim either the discovery rule or fraudulent concealment tolls the statute. The discovery rule is effectively a question of what did the plaintiff know and when did they know it (or reasonably should have known it). For construction defect cases, a latent defect could toll the statute of limitations. The fraudulent concealment argument is an estoppel theory that the defendant cannot rely on his or her own concealment to run out the clock. A common example would be a builder returning to a property to inspect and claiming everything is fine, despite discovering a defect.
· Statute of Repose – The statute of repose is the period following “improvement to real property” in which a claim can be brought. If an injury occurs outside of this period, the claims are barred under the statute of repose. For Pennsylvania the period is 12 years and in New Jersey it is 10 years.
· Economic Loss Doctrine – This doctrine limits the right to recover economic loss, absent physical injury or property damage, to only claims arising from contract, not tort claims. As such, a negligence claim seeking only economic loss and not property damage will not survive.
· Gist of the Action Doctrine – This doctrine effectively attempts to determine if the claim raised is really a contract or tort claim. If the duties allegedly breached arise from contract, not general duties of care, than the tort claims should be dismissed and the plaintiff is limited to recovery only under breach of contract.
NOTICE OF CLAIM
Some states have strict notice requirements providing time prior to filing a claim. This period is designed to allow the contractor to investigate and for the potential of resolution prior to the filing of a complaint and full on litigation beginning. In addition, many contracts involved in construction include language regarding notice and providing an opportunity to repair. For example, the American Institute of Architects A201-2007 General Conditions for the Contract for Construction include the following notice provisions:
§ 10.2.8 INJURY OR DAMAGE TO PERSON OR PROPERTY
If either party suffers injury or damage to person or property because of an act or omission of the other party, or of others for whose acts such party is legally responsible, written notice of such injury or damage, whether or not insured, shall be given to the other party within a reasonable time not exceeding 21 days after discovery. The notice shall provide sufficient detail to enable the other party to investigate the matter.
§ 12.2.2 AFTER SUBSTANTIAL COMPLETION
§ 12.2.2.1 In addition to the Contractor’s obligations under Section 3.5, if, within one year after the date of Substantial Completion of the Work or designated portion thereof or after the date for commencement of warranties established under Section 9.9.1, or by terms of an applicable special warranty required by the Contract Documents, any of the Work is found to be not in accordance with the requirements of the Contract Documents, the Contractor shall correct it promptly after receipt of written notice from the Owner to do so unless the Owner has previously given the Contractor a written acceptance of such condition. The Owner shall give such notice promptly after discovery of the condition. During the one-year period for correction of Work, if the Owner fails to notify the Contractor and give the Contractor an opportunity to make the correction, the Owner waives the rights to require correction by the Contractor and to make a claim for breach of warranty …
§ 15.1.2 NOTICE OF CLAIMS
Claims by either the Owner or Contractor must be initiated by written notice to the other party and to the Initial Decision Maker with a copy sent to the Architect, if the Architect is not serving as the Initial Decision Maker. Claims by either party must be initiated within 21 days after occurrence of the event giving rise to such Claim or within 21 days after the claimant first recognizes the condition giving rise to the Claim, whichever is later.
The AIA B101-2007 Standard Form of Agreement Between Owner and Architect also contains notice provisions applicable to the discovery of defects in Section 5.9:
The Owner shall provide prompt written notice to the Architect if the Owner becomes aware of any fault or defect in the Project, including 2 ADMIN/21448041v5 errors, omissions or inconsistencies in the Architect’s Instruments of Service.
Failure to abide by contractual notice terms can result in claims being barred. As such, it is very important to review the contracts to determine notice. If notice is in the contract, it likely also provides for an opportunity for the contractor to cure the work at the contractor’s own expense. A party who bypasses notice or did not provide a reasonable time to make the cures may be left without the right to recover based simply on failure to provide notice.
DISCOVERY
Discovery is often viewed as the contentious discovery that is part of litigation. However, construction defect claims are best viewed as involving multiple layers. The first issue is the investigation and, if possible, repair phase. During this phase, parties may want to figure out what went wrong and repair as quickly as possible. However, failing to prepare for potential litigation by inviting parties to investigations, keeping material, and documenting actions could expose a party to claims of spoliation. A testing firm will likely be an essential component of this investigation discovery. This testing firm can be retained with an eye towards being your eventual expert witness, but some parties prefer that the initial testing firm serves the role of a consulting expert to allow for privileged communications with that firm in order to develop one’s case. While this approach allows for a clear trial strategy to be established early, the risk is that a party may need duplicative and expensive work to be completed by two professionals (or to have the consulting experts’ records and materials become part of the record when relied upon by your testifying expert). In addition, it is important that the testing firm documents and maintains excellent records, including chain of custody, and, to the extent destructive testing is necessary, maintains as much material as possible for other parties to perform their own work.
If a non-testifying expert is being retained, it is important to note the non-testifying expert will likely be identified at some point, but the information and opinions formed by that expert likely will not be produced. There is an exception to this general rule in the Federal Rules of Civil Procedure for evidence that cannot be obtained by other means. This would mean that a non-testifying expert that was involved in destructive testing or testing prior to repairs may have to reveal his or her information if a party can show that it would be impracticable or financially prohibitive for that party to obtain the facts or opinions elsewhere.
In addition, the privilege for non-testifying experts would not apply to experts retained in the ordinary course of business and not in anticipation of litigation. This may result in some material, such as information related to remediation, being discoverable, while opinions to assist in litigation being undiscoverable. These type of issues should be considered at the outset to avoid protracted fights down the road.
Spoliation, as discussed briefly above, is also a real risk in any construction defect litigation. Parties generally have a duty to preserve evidence when litigation seems foreseeable. Spoliation is the intentional destruction of evidence and can lead to sanctions by the court ranging from an adverse inference – i.e. the Court instructs jurors that the evidence would have been bad for the party who destroyed it – to dismissal of claims entirely. However, a party is allowed to make repairs or remediate, despite this general rule, so the best course of action is to inform all potential parties of the work to be done and allow them a chance to inspect. Also, provide parties notice of the work to be performed so that parties can inspect and collect data prior (or waive the argument later). On the inverse, if a contractor suspects a defect claim will be made, the contractor should alert the property owner to preserve evidence and request the opportunity to inspect and collect data. If destruction occurs after such a request, the spoliation argument will be strengthened.
For discovery during litigation, lawyers would be well-advised to consult with an expert (unless the attorney has a wealth of experience in this area). Discovery will often benefit with an eye towards strengthening the primary allegations or defenses. This is especially important in jurisdictions, such as federal court, where there may be limitations on the number of interrogatories and witnesses who can be deposed.
JURY INSTRUCTIONS
Jury instructions are another thing to consider going into the litigation and during discovery. There are numerous model jury instructions covering a range of topics, but parties would be well-served to consider these instructions in formulating the discovery strategy. Examples of jury instructions for Defective Construction include the following (these are from the American Bar Association Model Jury Instructions):
10.01 Contractor’s Liability for Defective Work
[The owner] claims that it was damaged by [the contractor]’s [defective/incomplete] work. To succeed on this claim, [the owner] must prove the following:
(1) [The contractor] did not comply with the [contract requirements] [plans and specifications] [industry standards].
(2) [The contractor]’s [defective/incomplete] work caused the owner damages.
10.02 Notice of Defective Work
The contract in this case requires that the owner had to give the contractor notice of any defective work and an opportunity to cure the work at the contractor’s own cost. In order to award damages to the owner, you must find the following:
(1) The owner gave the contractor notice of the defective work.
(2) The owner gave the contractor a reasonable opportunity or reasonable time to fix the defective work [or the opportunity to cure was excused].
10.03 Damages for Contractor’s Defective Work
If you find that the Contractor performed defective work, the Owner is entitled to recover as damages the amount of money that will reasonably compensate the Owner for the harm resulting from the defective improvements. The measure of damages will be either (1) the cost of repair or (2) diminution in value.
10.04 Cost of Repair
If you find that the owner was damaged by the contractor’s [defective/incomplete] work and if repairing the improvements is possible and would not be unreasonably wasteful, the owner is entitled to recover as damages the reasonable cost to [repair/complete] the construction according to the [contract requirements] [plans and specifications] [industry standards].
It is the owner’s burden to demonstrate the reasonable cost of repair by a preponderance of the evidence. The owner is entitled to the “reasonable” cost of repair. This can be either (1) the actual cost incurred by the owner to repair or (2) the reasonable estimated costs that will be required to repair.
10.05 Diminution in Value
The law recognizes that sometimes even though work deviated from contract requirements, it would require great waste to remove and replace the work that has been completed. In such cases, “diminution in value” is the appropriate measure of damages to compensate an owner. A “diminution in value” measure of damages is appropriate when the following occur:
(1) The contractor failed to perform its work in strict compliance with the contract.
(2) The work performed by the contractor resulted in a usable project.
(3) The cost to remove and replace the work to the form required by the contract would result in unnecessary waste or very high cost.
If you find these elements exist in this case, then you must award the owner damages as follows: (1) the contract price [minus] (2) the value of the work actually performed.
10.06 Consequential Damages
Owner also seeks to recover damages for [lost profits/lost use/lost rent]. To recover for these alleged damages, the owner must prove the following:
(1) It was foreseeable to the parties when they entered into the contract that these damages would probably result if the contract was breached.
(2) These damages were in fact caused by the contractor’s [defective/incomplete] construction.
(3) The amount of damages.
10.07 Substantial Performance
The contractor claims that it is entitled to payment because it substantially performed its work on the project. The contractor must demonstrate by a preponderance of the evidence that
(1) the contractor completed the work in such a manner that the owner obtains substantially what is called for by the contract, and
(2) the defects in performance are not so serious as to deprive the owner of the intended use of the property.
If you find that the contractor has substantially performed, the contractor is entitled to recover the contract price, minus a fair allowance for the defects or omissions in performance.
If you find that the contractor has substantially performed, the owner bears the burden to prove the cost of any defects or omissions in performance.
Model Jury Instructions: Construction Litigation, Second Edition. Edited by Edward B. Gentilcore and Melissa A. Beutler.
EXPERT DEPOSITIONS
The first challenge with expert depositions is whether one can even undertake the deposition. Pennsylvania generally does not allow oral deposition unless cause is shown (which is rarely granted). And, even if cause is shown, Pennsylvania courts have favored depositions by written interrogatories over oral depositions. However, a party can serve interrogatories (and should) on the opposing party that will necessarily require that the expert provide certain essential information. In addition, since How
this discovery is often requested and objected to as premature, parties should push the issue of expert disclosures if none are provided. The basic request that should be made is for the expert to provide any reports, for the expert to provide the facts and opinions on which the expert will testify, the basis for the expert’s opinion, the material reviewed by the expert, and the CV of the expert.
If an expert deposition is allowed, then these depositions can be an excellent chance to develop one’s case and find the strengths and weaknesses of the opposing case. First, preparation is essential. The expert should be thoroughly researched, including his or her qualifications and history of testimony. There are numerous resources to perform such searches, including performing Lexis or Westlaw searches to see prior cases in which they may have been cited as part of the record. Your own expert will also be helpful in preparing questions regarding the methodology used by the opposing expert, the adequacy of the facts relied upon, and the application of the methodology to the facts. The goal of preparation will include finding inconsistent statements or situations where this own expert has challenged the methodology already relied upon. An expert’s own prior words can be an excellent weapon to be used against the expert.
At the deposition itself, a good strategy is to get the expert talking about herself. Beginning a discussion about her background, including education and experience in her field can be useful in getting the expert to relax. This will also allow you to commit the expert to her CV, if you eventually plan on challenging qualifications (under the general standard, the expert must be qualified by “knowledge, skill, experience, training, or education” and it is possible an expert may reveal her qualifications lie more in an unrelated field). If the CV has inflated qualifications, the deposition is a good time to lock the expert in on those inflations, but leave the impeachment for trial (unless the inflated resume can disqualify them in a challenge, in which case you need to develop the record for the motion). Asking the expert to explain what actually goes in to obtaining any credentials she may claim is a useful tool as well.
Another area to review is the expert’s prior writing and publications, as well as any texts or treatises relied upon by the expert. These various writings may provide you an opportunity to impeach the expert or, at a minimum, get them to seem confused or unprepared.
As for demeanor, I find that acting like a student who wishes to learn from a teacher is the most effective tactic. Most experts are proud of their accomplishments and knowledge, but also will bristle at a sense of being challenged. An adversarial deposition may not be as informative as a more casual deposition where you focus on getting the expert to opine freely. In addition, considering the importance the expert will play at trial, it is important to see how effective they are in providing knowledge to a jury. Treating the deposition more like the direct and not the cross will provide you insight into how she will perform at the time of trial. Obviously, some challenges to the expert will be necessary at the deposition, but avoiding a continuous battle and challenging in an inquisitive versus aggressive manner may lead to longer discussions that will provide you far more information than short, defensive answers. Open-ended questions are an excellent way to encourage this type of discussion. In addition, asking about jargon and coming off uninformed may disarm the expert, as well as give you more insight into how well the expert can explain potentially complex concepts to a jury. The key element in demeanor to remember is that you do not benefit outsmarting the expert at the deposition versus holding some of the fire for the trial.
Some specific areas that should be discussed are questions regarding the potential bias of the expert including fees, how often they perform work for opposing type of parties, any prior relationship with the opposing counsel, and how much work derives from being a paid expert. Ask about their opinion and the basis of opinion, including assumptions made in forming that opinion. Ask about the facts and evidence that helped reach those opinion and assumptions. Finally, if the expert appears to be wanting to leave themselves wiggle room, it is important to nail her down so you understand what she will say at trial.
An expert deposition is often long and laborious. Opposing counsel may object or ask to move on, but don’t allow yourself to be bullied or rushed. Every topic should be explored to your satisfaction and ensuring that you are on the same page with the expert with “Let me understand what you have just told me …” comments is appropriate. Furthermore, if you receive an answer to a different question, keep pressing the question either by noting that she didn’t answer the question, proposing a counterfactual question, or turning the question into a yes or no and pushing for that answer.
Finally, consider the Daubert factors in formulating your questions and topics to explore: (1) Can the scientific knowledge be tested? (2) If it can be tested, has it been tested and recorded? (3) Has the technique been subjected to peer review and publication? (4) What is the known potential rate of error? (5) What is the general acceptance of the data within the expert’s own community of peers.
DAMAGES: WHAT CAN BE RECOVERED?
· Direct Damages – Direct damages for a building or other real property are normally the cost of repair (either the cost already paid or the estimate to repair) or the decrease in the fair market value of the property, if the property cannot be repaired. Repair costs should not be greater than the value of the property (in which case damages should be limited to the value of the property).
· Loss of Use – Loss of use normally comes up in business or rental properties and would include the lost income from the property being unusable.
· Punitive Damages – Generally not allowed under breach of contract and, therefore, not normally allowed for construction defect cases.
· Attorneys’ Fees and Costs – This will likely depend on the contract terms, which might allow for fees and costs, but otherwise are most likely not allowed.
· Emotional Distress – A homeowner may be entitled to compensation for the discomfort and inconvenience caused him during the time the home is uninhabitable.
ALTERNATIVE DISPUTE RESOLUTION
Initially, mediation or arbitration may be required under either the contract or applicable law (such as New Jersey’s warranty law). Contractual ADR provisions are generally upheld and may be an effective way to resolve a dispute without extreme costs. In addition, an early mediation can be effective in cutting off a litigation before it becomes a multi-year fight between many parties who have committed large sums to attorneys. For early mediation, it is important to have a mediator who is knowledgeable and can speak with some comfort to professional builders. In addition, treating the mediation as a miniature trial by providing demonstrative evidence, experts, and a succinct discussion of your case may prove very helpful. Mediation is also a chance to demonstrate the strength of your case at an early point.