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Mitigating Pandemic-Prompted Construction Defect Risk

By James Prichard and Megan Picataggio · Oct 20, 2020, 5:38 PM EDT

James Prichard
James Prichard
Megan Picataggio
Megan Picataggio
Over time, high volume and demand in development and construction of real estate projects, including multifamily and commercial construction ventures, have resulted in a rise in construction defect claims and litigation. The opportunity of these projects must be weighed against the inherent risk to ensure proactive mitigation efforts are achieved.

The effects of COVID-19 on the construction industry cannot be ignored in the evaluation of construction defect litigation. While construction on new office and retail space has come to a halt in response to vast changes in the market, the opposite is true for residential construction.[1]

The need for affordable housing remains high and surges in single-family home construction are supported by low interest rates. Many nonessential construction projects are back in full swing with the industry adapting in a variety of ways to meet new demands.

Industry experts predict a rise in offsite construction operations, incorporation of new technologies and greater reliance on prefabrication.[2] The impact of these trends will be significant in construction defect litigation.

Historically, a surge in construction demand results in corner-cutting, in part to ensure that projects are delivery quickly. For example, increased demand results in skilled labor shortages, higher materials and labor costs, and the resulting implementation of cost-saving measures to preserve already slim profit margins, which frequently means less quality assurance and quality control throughout the design and construction process.

Simply put, surges in demand cause developers, homebuilders and general contractors to modify means and methods to keep up and stay profitable, and, ultimately, this results in an explosion of construction defect claims. In high demand economic boom times like the present, construction defects and the resulting litigation can be anticipated and developers and contractors need to be prepared for such exposure.

While each construction project presents its own issues, almost all construction defect claims originate from common deficiencies and legal theories. Construction defect lawsuits relate to deficiencies in the design, construction work or manufactured materials. These suits are typically filed after a project is complete but may arise during construction as well.

Against developers, common theories of liability include negligence, violations of building code and breach of warranties. Developers are pursued for breaching a duty to non-negligently develop the project — including duties to (1) non-negligently supervise and oversee the construction of the project, and (2) exercise reasonable care in ensuring the construction was in compliance with permitted plans and specifications, the building code, industry standards and manufacturers' recommendations.

Often, in the context of multifamily construction, including townhomes and condominiums, homeowners' associations bring claims for breach of warranties against developers.

This is premised on the theory that a developer warrants to a purchaser that each unit, home or condominium was designed and constructed free from defects or deficiencies in materials or workmanship, and built in accordance with the plans and specifications, the applicable building code, all applicable local and national codes, ordinances and industry standards, and good design, engineering and construction practices. These warranties are described as warranties of fitness and habitability.

Contractors are typically brought into construction defect actions on similar theories of liability including breach of contract, negligence and vicarious liability, breach of applicable building codes, breach of warranties, and negligent supervision.

The crux of contractor liability arises from the nondelegable duty of a general contractor to exercise reasonable care in constructing a project.[3] A contractor may not escape legal responsibilities to an owner by delegating responsibility for the work to its subcontractors.[4] Qualifying agents may even be brought into the suit for negligently supervising the project and found personally liable.[5]

In preparing for liability exposure, developers and contractors must take steps to mitigate risk and preserve downstream claims.

Developers and contractors must pursue a proactive risk management approach which makes quality control and assessment of risk a high priority. Developers and contractors must not blindly trust subcontractors, superintendents, design professionals or owners' representatives in the construction of the project.

Rather, main sources of risk should be identified early in a project — ideally before breaking ground. Parties must ensure that there is no corner-cutting, including improper substitutions of materials or practices. Developers and contractors should be familiar with all codes, standards and best practices where they perform work. Additionally, skills of design professionals must be scrutinized and thoroughly vetted.

One avenue to mitigate the risk of construction defect litigation is effective construction administration. Potential risks and liabilities should be evaluated and transferred where appropriate. This begins with the preparation of the contract documents and ends with thoughtful preservation of project records. Developers and contractors should properly document all communications, including all verbal agreements, and memorialize all in writing.

Developers and contractors should also consider their risk allocation in their construction contracts and consult with their counsel to evaluate the same. A healthy indemnity and defense provision should be included in all construction contracts as a mechanism to shift risk.

An indemnity provision transfers risk from one party (the indemnitee, here the developer or contractor) to another party (the indemnitor) such as a downstream contractor, design professional or subcontractor.

Most commonly, the indemnitor will defend, indemnify and hold harmless the indemnitee from claims arising out of, resulting from or occurring in connection with the indemnitor's work. A properly drafted indemnification agreement will be triggered when a developer or contractor is brought into a construction defect lawsuit.

Parties should evaluate anti-indemnity statutes in their jurisdiction which mandate specific requirements related to the enforceability of indemnification provisions.

Another tool to mitigate risk is including an additional insured provision in the construction contract. Developers and contractors should require downstream parties to name them as an additional insured on the applicable insurance policies, often commercial general liability and umbrella policies.

Requiring additional insured endorsements opens the door for the developer or contractor in bringing a claim against the insurance carrier and obtaining the right to a legal defense from a construction defect claim.

A well-drafted construction contract can ensure risks are mitigated at the start of a project long before the inception of a construction defect lawsuit.

Proactive Evaluation of Risk Transfer if Brought Into a Construction Defect Action

If a developer or contractor is brought into a construction defect action, appropriate risk-transfer mechanisms must be swiftly and effectively evaluated. Developers and contractors should immediately review project records to identify key players in order to preserve downstream claims against contractors, design professionals and subcontractors responsible for the allegedly deficient work.

If a valid indemnification provision is present, developers and contractors will bring claims under theories of indemnity and defense in addition to negligence, breach of applicable building codes and breach of contract.

Developers and contractors must also keep an eye on the applicable statutes of limitation and repose to ensure the construction defect action and their subsequent downstream claims are timely. Timing is governed by the applicable statutes of limitation and repose. These statutes vary greatly between jurisdictions.

For example, in Florida, the statute of ultimate repose is 10 years and the statute of limitation is four years.[6] The statute of repose states that an action founded on construction of real property must be commenced within 10 years the later of (1) the date of actual possession by owner; (2) the date of completion of the contract; or (3) the date of the issuance of a certificate of occupancy.[7] Florida is also a right to cure state as prescribed by Florida Statute Sections 558.001-558.005.[8]

By contrast, Tennessee has only a four-year statute of repose and a one year statute of limitation.[9] It is also essential for developers and contractors to stay up to date on modifications in the interpretation of the law in the jurisdictions where work is performed.

Florida contractors should be especially aware of the recent Spring Isle Community Association v. Pulte Home Corp. matter, which may have significant impacts on Florida's statute of repose.[10]

Conclusion

Through effective contract administration and proactive risk management, developers and contractors can effectively prepare for exposure to construction defect litigation and mitigate risk.



James C. Prichard is a managing partner and Megan A. Picataggio is an associate at Ball Janik LLP

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] Construction Spending Rises 1.4% in August as Residential Boom Outweighs Private Nonresidential Decline and Flat Public Categories, Associated General Contractors of America, October 1, 2020, https://www.agc.org/news/2020/10/01/construction-spending-rises-14-percent-august-residential-boom-outweighs-private.

[2] The Next Normal in Construction: How Disruption is Reshaping the World's Largest Ecosystem, McKinsey & Company, June 4, 2020, https://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/the-next-normal-in-construction-how-disruption-is-reshaping-the-worlds-largest-ecosystem.

[3] See Mills v. Krauss , 114 So. 2d 817, 820 (Fla. 2d DCA 1959)(holding that "the duty of a general contractor to use due care in repairing the premises of another, insofar as it is applicable to the owner of the premises, is a non-delegable duty which may not be committed to an independent contractor."); see also Bialkowicz v. Pan Am . Condominium No. 3., Inc., 215 So. 2d 767, 771 (Fla. 3d DCA 1968) (holding that the "duty of care, with respect to the property of others, imposed by a city building permit upon a general contractor cannot be delegated to an independent sub-contractor.").

[4] See Mastrandrea v. J. Mann, Inc. , 128 So. 2d 146, 148 (Fla. 3d DCA 1961)(holding that the general contractor's duty to comply with the building code cannot be delegated to independent contractors).

[5] See Murphy v. N. Sinha Corp. , 644 So. 2d 983 (Fla. 1994).

[6] Fla. Stat. § 95.11(3)(c).

[7] Id.

[8] Fla. Stat. §§ 558.001-558.005.

[9] Tenn. Code Ann. § 28-3-202 (An action to recover damages for any deficiency in an improvement shall be brought within 4 years of substantial completion).; see also Tenn. Code Ann. § 28-3-203 (If an injury occurred in the 4th year after substantial completion, action should be brought within 1 year after injury, but in any event the action must be brought within 5 years after substantial completion).

[10] Spring Isle Community Association, Inc. v. Pulte Home Corporation, et al., Case No.: 2017-CA-001953-O.

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