Cases of the Month
Significant Cases and Decisions Impacting the Construction Industry
By: Ira Genberg and Cory Menees
1. Mold Report Triggers Running of Statute of Limitations on Negligent Construction Claim, Buscher v. Montag Dev., Inc., 770 N.W.2d 199 (Minn. Ct. App. 2009).
* What the Court Considered: Evidence of moisture-related damage to a private residence became apparent four years after remodeling of the home. The damage was repaired and an air-quality inspection performed to check for mold. The mold report revealed elevated mold levels in certain areas of the home and noted that the type of mold found was associated with “damp materials and finishes.” Two years later, the owner discovered a major leak and inspections revealed water between the home’s interior and exterior walls. Two additional years later, a total of eight years after the home was remodeled and four years after the mold report was performed, the owner sued the renovation-conducting contractor for defective construction. The contractor moved for summary judgment, arguing that the owner’s claim was time barred by the Minnesota statute of limitations providing that claims for defective improvements to real property must be filed within two years of “discovery of the injury.” Finding that the owner discovered the injury forming the basis for his claim upon receipt of the mold report, the trial court granted summary judgment in favor of the contractor. The owner appealed.
* What the Court Said: Affirming the trial court’s grant of summary judgment, the court ruled that the applicable limitations period “begins to run when an actionable injury is discovered, or, with due diligence, should have been discovered, regardless of whether the precise nature of the defect causing the injury is known.”
* What the Opinion Means: In Minnesota, as in many other jurisdictions, evidence of a defect will trigger the running of the statute of limitations on defective construction claims, even if the specific nature of the defect is unknown. The limitations period begins to run when the effect – as opposed to the cause – of the defect becomes evident because the manifestation of the defect is sufficient to alert an owner to the fact of the defect.
2. California Owners Held to Have Limited Recourse Against Environmental Consultants Hired by Public Agencies to Perform Statutorily Required Impact Reports, Lake Almanor Assoc. L.P. v. Huffman-Broadway Group, Inc., 178 Cal. App. 4th 1194 (Cal. Ct. App. 2009).
* What the Court Considered: A California developer sought county approval for a 1,000-plus acre lakefront development. Under the California Environmental Quality Act (“CEQA”), the county was required to obtain an environmental impact report (“EIR”) assessing the potential impact of the proposed development. CEQA requires that EIRs be performed by public agencies or parties hired by public agencies. The county hired a consultant to complete the EIR and required the developer to reimburse the county for fees paid to the consultant. Although the consultant failed to complete the EIR on time and was terminated by the county, the county demanded that the developer reimburse it for fees paid to the consultant. The developer thereafter sued the consultant for breach of contract and negligence, seeking damages including $50 million allegedly lost as a result of the loss of a sale of the project property because of the consultant’s failure to complete the EIR on time. The trial court dismissed the developer’s complaint, finding that it failed to state claim for either breach of contract or negligence. The developer appealed.
* What the Court Said: The developer could not sue the consultant in contract because the developer had no contract with the consultant, and the public, not the developer was the intended beneficiary of the statutorily required EIR. Furthermore, allowing suit by the developer against the consultant would be at odds with the public policy encouraging consultants to act with independence and in the public interest when scrutinizing environmental impacts. The developer’s negligence claim was likewise dismissed because the consultant’s work was intended to benefit the public, not the developer.
* What the Opinion Means: In California, no recourse will be available to owners and developers against third parties hired by public agencies to perform statutorily required EIRs. Where a third party fails to complete an EIR on time, the appropriate course of action is to apply for a writ of mandate seeking the hiring agency’s compliance with CEQA.
3. Significant Punitive Damages Awarded to Owner Following Illegal Dumping by Contractor, Goff v. Elmo Greer & Sons Construction Co., Inc., Case No. M2006-02660-SC-R11-CV (Tenn. 2009).
* What the Court Considered: A contractor performing work on a Tennessee highway project leased property adjacent to the highway for the disposal of fill materials. The property owner grew concerned when the contractor began using the property for the storage of tires, batteries, 55-gallon drums, and other environmentally hazardous items. At the conclusion of the highway project, the contractor removed his equipment and “compacted, graded, and seeded” the leased property. The owner thereafter sued the contractor, alleging breach of contract for the contractor’s failure to pay for the dumping of fill. Not believing the contractor had removed all of the hazardous materials as promised, the owner excavated a portion of the leased property and discovered solid waste, including tires, buried eight feet below the surface. Upon discovering the buried waste, the owner amended his complaint to assert various claims, including claims for violations of environmental laws and nuisance. After a three-day trial, the jury rejected the “environmental tort” claim made by the owner, but found for the owner on all other claims and awarded $2 million in punitive damages. The trial court reduced the punitive damages award to $1 million. The contractor appealed on several grounds, arguing that the reduced punitive damages award still violated due process.
* What the Court Said: The appeals court further reduced the punitive damages award to $500,000, finding that an award of half a million dollars in punitive damages would not violate due process in part because of the “reprehensibility” of the nuisance created by the contractor’s intentional actions.
* What the Opinion Means: In considering whether the size of a punitive damages award comports with the requirements of due process, courts are called on to consider several factors, including the reprehensibility of the conduct giving rise to the award and the ratio of actual damages and civil or criminal penalties to the award.
4. Owners Maintain Broad Rights to Force Disgorgement of Monies Paid to Unlicensed California Contractors, White v. Cridlebaugh, 178 Cal. App. 4th 506 (Cal. Ct. App. 2009).
* What the Court Considered: A contractor hired by owners to build improvements on their property was discovered to be unlicensed. In litigation between the owner and contractor, the owners sought to recoup payments made to the contractor. Despite a California law allowing such recoupment, the trial court denied the owner’s motion for recoupment by reasoning that the contractor was prejudiced by the owners’ failure to affirmatively plead the claim. The court noted that the owners’ failure to plead recoupment denied the contractor the opportunity to litigate certain defenses, including the defense of offset. Having lost at trial, the owners appealed.
* What the Court Said: Reversing the trial court, the appellate court found that California’s licensing statutes provide that “a person who utilizes the services of an unlicensed contractor may bring an action . . . to recover all compensation paid to the unlicensed contractor . . . . “ As a consequence, the contractor could not have asserted the defense of offset at trial.
* What the Opinion Means: California’s contractor licensure statutes continue to be construed to provide owners significant protection against unlicensed contractors.
5. Absent Ambiguity in Contract Language, Implied Terms Cannot Be Read into Florida Contracts on the Basis of Industry Custom and Practice, Peach State Roofing, Inc. v. South Trail Corp., 3 So. 3d 442 (Fla. Dist. Ct. App. 2009).
* What the Court Considered: An owner sued a roofing contractor three years after the installation of a new roof upon discovering that metal decking underlying the roof was severely corroded. The owner’s contract with the roofer required that the existing roof system be removed and replaced but did not obligate the roofer to replace any of the metal decking. At trial, the court admitted expert testimony providing that industry custom called for contractors to notify owners of evidence of corrosion. The same expert testified that there was no way to determine the condition of the decking at the time the roofer completed the contract. The trial court entered a $364,000 judgment in favor of the owner, finding that the decking was corroded at the time the roofer finished the contract. The court held that, although the terms of the contract were unambiguous, the roofer breached an “implied term in the contract based on custom and usage” requiring the roofer to notify the owner of corrosion to the decking. The roofer appealed.
* What the Court Said: Overturning the trial court’s ruling, the appeals court held that the trial court erroneously used the testimony of the owner’s expert relative to industry custom as the basis for finding the contract to contain an implied term. Absent ambiguity on the face of the contract, Florida’s courts are precluded from finding implied terms of contract on the basis of extrinsic evidence of industry custom and practice, like the expert’s testimony.
* What the Opinion Means: In Florida, a court must first find contract language ambiguous before reading implied terms into the contract on the basis of evidence of industry custom and practice.
Ira Genberg is a Partner at Troutman Sanders LLP in Atlanta, Georgia, and is General Counsel for Associated Owners & Developers (AOD) in McLean, Virginia. Cory Menees is an Associate at Troutman Sanders LLP. For more information, or if you have any questions, contact us at firstname.lastname@example.org.