The Construction Advantage – Issue 14

Welcome to the fourteenth edition of The Construction Advantage! In this issue, we bring you cases of economic loss doctrine, binding arbitration, and CGL exclusions. We hope that you enjoy our newsletter, and we welcome any comments on this edition or any of our previous issues.

Economic Loss Doctrine Applied In Construction Case

by Asha Echeverria

In Arundel Valley, LLC v. Branch River Plastics, Inc., BCD-CV-13-15 (Me. Super. Ct. Nov. 4, 2014), the ME Superior Court delves into and brings some clarity to the murky world of the economic loss doctrine. Under ME law, the economic loss doctrine states that absent personal injury or property damage, the law does not permit tort recovery for a defective product’s damage to itself, which includes when the product has not met the customer’s expectations or the customer claims receipt of insufficient product value. Under the doctrine, failure of a product to function properly, which causes only economic loss, is properly handled under contract and warranty law, whereas exposure to a hazardous product that causes personal injury or property damage falls within the purview of tort law.

Here, Arundel Valley, LLC, the owner of the constructed facility, and Kate’s Butter, Inc., its lessor, sued Branch River Plastics, Inc., the manufacturer of the Structural Insulated Panels (SIPs) used for the project, and others, including Arundel Valley’s general contractor claiming that Branch River was negligent and made negligent misrepresentations when it provided SIPs for the project that were not R-Control SIPs as Arundel Valley and Kate’s Butter had expected. Branch River filed for summary judgment on all counts against it.

As to the negligence claim, which is based on a breach of a societal duty, the Court acknowledged that ME law is unsettled as to whether the economic loss doctrine bars recover when the loss is purely economic and there is no contractual relationship between the parties. Here Branch River’s contract was with the general contractor not with Arundel Valley or Kate’s Butter. Courts of other states have gone both ways on the issue, but the ME court ultimately sided with the majority of states, which hold that privity is not an element of the doctrine since commercial disputes, like this one, should be resolved according to principles of commercial law, not tort principles. The ME court went on to state that injecting negligence into what is fundamentally a breach of warranty case is inappropriate. Ruling in favor of Branch River on the negligence claim the ME court stated that where no personal injury or property damage occurs, no reason exists to break from contractual and warranty remedies.

As to the negligent misrepresentation claim, the court held that though other ME Superior Courts have held that under certain circumstances a claim for only economic loss is not barred by the economic loss doctrine, here, there is no reason not to limit Arundel Valley to its remedies under the warranty. Therefore, on the negligent misrepresentation count, the court again ruled in favor of Branch River.

The court goes on to note that ME law is unclear on whether claims of fraudulent misrepresentation and tortious interference of contract survive the economic loss doctrine, but noted in most states, such claims are not barred by the doctrine. Ultimately, based on the facts, the Court ruled in favor of Branch River on these and other counts, leaving Arundel Valley only the breach of warranty claim to pursue at trial.

As discussed by the court itself, aspects of the economic loss doctrine remain uncertain under ME law, Though the Superior Court decision is not binding on other courts in ME, decisions like Arundel Valley, LLC v. Branch River Plastics, Inc. move us toward a better understanding of the doctrine and its application to construction cases.

Rhode Island – You Get One, and Only One, Bite at the Apple

by Mike Bosse

A recent Rhode Island case reminds us that, in litigation, you usually only get one bite at the apple. In Torrado Architects v. Rhode Island Department of Human Services, decided November 25, 2014, Torrado was denied the ability to conduct a second binding arbitration after the first one was concluded and confirmed. In litigation, you must usually put forth all of your claims in one proceeding, and this case is a painful reminder of that fact.

Torrado signed an agreement to perform architectural, engineering and design services for renovations at a Rhode Island-owned veterans home in Bristol. A not to exceed purchase order was used with a cap of $61,500, calculated as a fee that was a percentage of expected construction costs. Torrado sought additional compensation for services provided outside of the purchase order, and after exhausting administrative proceedings, filed a lawsuit that was stayed pending the parties conducting a binding arbitration. After the arbitration, the arbitrator concluded that while he sympathized with Torrado regarding the additional costs, they were not authorized under the state procurement regulations. Torrado requested that the arbitrator also rule on equitable issues, but he refused to do so. Instead, the arbitrator declared as part of the arbitration award that he was not making any determination on whether Torrado had other equitable claims, such as unjust enrichment or quantum meruit, that could be litigated further. That award was confirmed by stipulation of the parties.

Torrrado then sought a motion to compel a second arbitration, but the court concluded that the second arbitration was barred, because those equitable issues could have been raised in the first arbitration. The Rhode Island Supreme Court upheld the dismissal of the second Torrado action. Torrado argued that it really could not have made equitable claims in the first proceeding, and therefore should not have been barred from a second action. The Court, however, found that the equitable claims arose out of the same set of facts that were present in the first arbitration and that Torrado either should have presented those issues by an Amended Complaint in court, and should not have stipulated to the eventual arbitration award.

For a litigator, this decision is harsh given that Torrado did try to raise the equitable issues with the arbitrator but was denied from doing so. It is possible that if Torrado took additional steps in court to present the issue before the arbitration was concluded, or objected to the final order from the arbitrator, the case might have come out differently. Nonetheless, lawyers and clients alike have to ask initially at either an arbitration or court claim whether all issues are being raised that could be raised. You are not likely to get a second bite at the apple.

CGL Exclusions for Contractual Liability – The existence of a contract does not dictate the exclusion

by Mike Hodgins

Just when contractors think they have insurance coverage for a claim under their Commercial General Liability policy, they find they do not, often because of the application of one of many policy exclusions. Contractors are understandably confused. Sometimes these policy exclusions can prove elusive even for the same court, in a single case.

On October 29, 2014, after a unanimous ruling in June 2014 that there was no insurance coverage for the cost to repair cracking interior and foundation walls, or damages relating to an improperly installed HVAC system, the U.S. Court of Appeals for the 5th Circuit granted rehearing, and withdrew its earlier decision in the case of Crownover et al v. Mid-Continent Casualty Company on appeal from the Northern District of Texas. The appeals court reissued a decision which held that the insurance policy did indeed provide coverage for the damages, because the “contractual-liability exclusion” was not applicable. The true beneficiary of this decision was the homeowner, who spent several hundred thousand dollars in repairs of the defective work. The contractor has since filed for bankruptcy and is out of the picture for potential payment, so the insurance coverage was the only available avenue for the homeowner to receive compensation for the repairs.

In the initial claim between the owner and the contractor, an arbitrator ruled that the contractor was liable for breach of the express warranty in the contract to repair defective or non-conforming work. Based upon the restriction of the damages award to this specific contractual provision, the U.S. District Court then found in favor of the contractor’s insurer, Mid-Continent Casualty, in a suit by the homeowner against the contractor’s insurance carrier, because liability to the homeowner arose “under the contract.” Therefore, the claim and resulting damages were logically subject to the policy exclusion for any obligation to pay damages “by reason of the assumption of liability in a contract or agreement.”

Although the Court of Appeals initially agreed with that finding, the court reversed itself in October after withdrawing its earlier decision, affirming a line of cases holding that one has not “assumed liability” under a contract, if that same liability would have existed under the common law, or general law. This later (and final) decision was based upon language in the policy that creates an exception to the exclusion, for “liability… [t]hat the insured would have had in the absence of the contract or agreement.” In this case, because the obligation to perform work in a workmanlike manner and correct defective work already exists at common law, this obligation was not extended by contract, despite the “express warranty” language. The policy exclusion did not apply because there was no assumption of additional liability.

At first blush this may appear to be a distinction of common law tort vs. contract principles, but it is not. The common law principles relied upon by the court remain common law contract principles, such as the obligation to perform the contracted work in a workmanlike manner, and the remedy for the cost of the repairs. The true issue for the application of this policy exclusion is whether the potentially responsible party has assumed liability through express contractual language that exceeds the liability it would have incurred under the common law. For example, an agreement to defend and indemnify a third party whose acts the contractor was not otherwise responsible. The CGL exclusion for contractual liability applies to liability that is assumed only by virtue of the specific contract. As the Court of Appeals said, “[t]he issue is not whether the relevant duty is contractual; it is whether the contractual duty represents an expansion of liability.” (emphasis in the original decision)

If you have had experience with CGL coverage issues, you might ask why the exclusion for damage to “Your Work” does not apply. The insurer raised this argument, in addition to the contractual liability exclusion, among others. The court held that the exclusion for damage to the contractor’s own work did not apply because there was a further exception to that exclusion for work performed on behalf of the contractor, by a subcontractor, such as the foundations and HVAC work in this case. In an interesting twist, the exception to the exclusion was removed from later CGL policies covering this insured contractor, but the exception was included in the operative policy at the time the defective work and damage occurred.

We hope that you have found these tips and pointers in the fourteenth issue of The Construction Advantage helpful to you in your daily business. Each of the attorneys in our Construction Law Practice is available to answer the day to day questions of your business as you work on projects.