Construction Channel Cases of the Month

Cases of the Month

Significant Cases and Decisions Impacting the Construction Industry

By: Ira Genberg and Cory Menees

October 2009

1. Court Finds Claim Arising in “Context of Contractual Relationship” to Be Time-Barred Negligence Claim, Kroger Co. v. L.G. Barcus & Sons, Inc., 13 So.3d 1232 (La. Ct. App. 2009).

* What the Court Considered: When a grocery store experienced settling soon after its construction, the owner entered into a repair contract with the engineering firm responsible for the original design of the store. After repairs made pursuant to the repair contract further damaged the store, the owner sued the engineering firm. In its complaint, the owner failed to allege that a specific contract provision was breached, alleging only that the engineering firm’s “services were ineffective and negligently performed.” The trial court found the owner’s claim as pled to be barred by Louisiana’s one-year proscriptive period on negligence actions. The owner appealed, arguing that the ten-year statute of limitations applicable to contract actions applied to its claim.

* What the Court Said: The appellate court upheld the trial court’s ruling in favor of the engineering firm, holding that “[t]he mere fact that the circumstances arose in the context of a contractual relationship does not make the cause of action contractual. The courts are not bound to accept a plaintiff's characterization of the nature of his cause of action if unsupported by factual allegations.”

* What the Opinion Means: In Louisiana, as in all states, caution must be exercised to ensure that contract actions are pled with sufficient factual support, particularly where negligence actions are subject to far shorter statutory limitations periods.

2. Failure of Purchaser of Newly Constructed Shopping Mall to Take Assignment of Construction Contract Prevents Purchaser from Taking Advantage of Attorneys’ Fees Provision Contained in Contract, Vons Companies, Inc. v. Lyle Parks, Jr., Inc., 2009 WL 2488882 (Cal. Ct. App. 2009).

* What the Court Considered: After the purchaser of a new shopping mall discovered water damage, it sued the mall-constructing contractor for negligence and breach of warranty. The purchaser had taken assignment of the builder’s warranty issued by the contractor to the mall’s original owner but failed to take assignment of the actual construction contract. Unlike the construction contract, the warranty contained no provision for recovery of attorneys’ fees in actions against the contractor. Despite not having taken assignment of the construction contract, the purchaser sought the recovery of over $1 million in attorneys’ fees. The trial court refused to award the purchaser the requested fees, and the purchaser appealed.

* What the Court Said: As the purchaser of the mall took assignment of only the builder’s warranty and not the construction contract, the purchaser had no rights under the contract and could not exercise the attorneys’ fees provision contained therein.

* What the Opinion Means: Where improvements are sold upon completion or soon after construction, close attention must be paid to the substance of the agreements assigned to the purchaser. A purchaser should be fully aware of the rights it foregoes by not taking assignment of the construction contract from the original owner.

3. Statute of Repose Begins to Run Upon “Use” of Sub’s Work, Miller-Davis Co. v. Ahrens Constr., Inc., 2009 WL 2391790 (Mich. Ct. App. 2009).

* What the Court Considered: A roofing sub’s defectively performed work provided the foundation for completion of the roof by other subs. The work, consisting of installation of wooding decking as part of a roofing system, was discovered years later to be the cause of moisture-condensation problems. The GC, hired by the owner to perform “corrective work,” sued the sub for breach of contract due to defects in its original work. The trial court found for the GC, and the sub appealed.

* What the Court Said: Finding that the sub’s work was an “improvement” to property “used” by other subs in completing the original roof over six years prior to the filing of the GC’s lawsuit, the appellate court held that the statute of repose applicable to the GC’s claim had run. As a consequence, the GC’s contract claim was found time-barred. Mich. Comp. Laws § 600.5839 provides that the statute of repose begins to run upon completion, acceptance or “use” of an improvement.

* What the Opinion Means: In Michigan, owners must be cognizant of the date on which subs’ work is first “used,” as the state’s statute of repose begins to run not from the date of the owner’s acceptance of the project of which the work is a part, but from the date of the first use of the improvements constructed by the sub. “Use” for purposes of the statute includes “use” by other subs in completing construction on the project, as illustrated by the case above.

4. Iowa’s Statute of Repose Applies Only to Improvements, Not Repairs, St. Paul’s Evangelical Lutheran Church v. City of Webster City, 766 N.W.2d 796 (Iowa 2009).

* What the Court Considered: A city accidentally cut the sewer line connecting a church to municipal sewer services while performing work on the church’s property unrelated to the sewer line. The city negligently repaired the sewer line, later resulting in a sewer backup and damage to the church. The church sued the city for negligence, and the city defended on the basis that the suit was barred by the applicable statute of repose. A jury found the city negligent, but the trial court entered judgment notwithstanding the verdict after finding the church’s claim barred by Iowa’s statute of repose. The church appealed, arguing that reconnection of the sewer line was a repair – not an improvement implicating application of the statute of repose.

* What the Court Said: Agreeing with the church, the appeals court overturned the trial court’s decision, finding that the statute of repose did not apply because the repairs to the sewer line did not improve the “capital value” of the church or make the church more useful or valuable.

* What the Opinion Means: In Iowa, the statute of repose is applicable only to improvements constituting “[1] a permanent addition to or betterment of real property [2] that enhances its capital value and [3] that involves the expenditure of labor or money and [4] is designed to make the property more useful or valuable as distinguished from ordinary repairs.” The failure of work to satisfy the four-part test for an improvement under Iowa’s statute of repose will render the statute inapplicable to the work.

5. Insured’s Failure to Cooperate in Investigation of Claim Results in Forfeiture of CGL Coverage, Selective Ins. Co. v. Oliveira Building Contractors, LLC, et al., 3:07-CV-00918-JCH (D. Conn. 2009).

* What the Court Considered: Two employees of a sub sued their employer, the GC and project owner for negligence after sustaining on-the-job injuries. The sub failed to notify its CGL insurer of the suit and later failed to provide information requested by the insurer. In light of the sub’s total failure to cooperate in the insurer’s investigation of the claim, the insurer sought a declaratory judgment holding that it was not obligated to provide insurance coverage to the uncooperative sub.

* What the Court Said: The insured’s failure to cooperate in investigation of its claim was a material breach of the insurance policy absolving the insurer of any obligation to provide coverage pursuant to the policy.

* What the Opinion Means: While an extreme example, this case illustrates clearly the need for insured parties to cooperate with insurers in claim investigation. The sub in this case did the project owner and GC a tremendous disservice by forfeiting insurance that may have covered the claim made against the three parties. The lesson is that owners and GCs should do what they can to ensure subs’ cooperation with their insurers.

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 hlk@constructionchannel.net.