Construction Developments

Federal Court Expresses Public Policy Concern Regarding Economic Loss RuleIn Prestress Services Industries of TN, LLC v. W.G. Yates & Sons Construction Co., 280 F.Supp.3d 908 (N.D. Miss. 2017), the United States District Court for the Northern District of Mississippi faced a “rather interesting issue of tort law” involving the economic loss rule that has not been addressed by either the Mississippi Supreme Court or the Fifth Circuit. The action arose out of a project to construct a garage on the University of Mississippi campus. In dicta, the court opined that the economic loss rule should not be used to immunize an engineer’s defective design of precast concrete components that did not meet the applicable seismic standards.

The project, which was located in the New Madrid fault’s earthquake zone, was being managed by the Ole Miss Athletic Foundation (Ole Miss). In addition to employing W.G. Yates & Sons Construction (Yates) as the general contractor, and AECOM Design as the architect, Ole Miss had a purchase order with Prestress Services Industries (PSI) to design, fabricate, and deliver, the precast concrete components of the garage. PSI, in turn, hired an engineering firm, Hoch Associates (Hoch),[1] to design the precast concrete components.

The project ultimately suffered delays and cost overruns, which led to numerous disputes. Pertinent here, Yates brought an action against Hoch, asserting, among other things, a negligence claim for Hoch’s failure to design the precast concrete components in accordance with the applicable seismic requirements.

Hoch moved for summary judgment on Yates’ negligence claim, arguing that it was barred by the economic loss rule. In asserting the economic loss rule as a defense, Hoch claimed that the precast components were goods or products and thus, that Yates was barred from recovering any economic damages—such as damages for delay—because the economic loss rule restricts recovery of damages arising out of a defective good to damages for physical harm and excludes recovery for purely economic losses.

Yates argued that the economic loss rule didn’t apply because its negligence claim was directed at the services Hoch provided, i.e. the design of the precast concrete components, not how the components were manufactured. Yates pointed out that it was PSI—not Hoch—that manufactured the components at issue. Yates explained that the components themselves were not defective; they all remained as originally erected but “[i]n order to bring the design into compliance with the seismic code, Hoch had to design additional cabling, curbs, and plates to go on top of the existing precast structures.”

The court reasoned that because the nature of Hoch’s role was, “at least potentially, relevant as to whether or not [Hoch] may validly raise the economic loss rule as a defense, the issue would be better decided at the directed verdict stage after the court had viewed the evidence and had a fuller picture regarding the exact nature of Hoch’s role in designing and manufacturing the precast concrete components. The court ultimately did not rule on the issue because the case settled before it reached the directed verdict stage but the court did contemplate the propriety of allowing a design professional to raise the economic loss rule as a defense where a negligence claim is brought against the design professional for its failure to comply with relevant professional standards.

In declining to infer a broad “professional services” exception to the economic loss rule, the court expressed concern that Hoch’s position would distort the rule, which “is intended to strike a balance between encouraging products manufacturers to design their products with care and imposing essentially unlimited liability when they fail to do so.” The court reasoned that in a “more typical” products liability context, the economic loss rule appears to serve the purpose of providing some limitation of damages which a manufacturer might face. For example, “a manufacturer of a car which crashed due to a design defect might conceivably face liability for business losses suffered by individuals who were delayed in traffic following the accident.” Such concerns, the court pointed out, were inapplicable in the instant case because Hoch—unlike the car manufacturer—knew exactly what project they were working on, and it seemed clear that its job was to provide competent professional services in light of that knowledge. In other words, for Hoch and similar defendants, the economic loss is foreseeable.

The court also expressed concern that allowing Hoch to avoid liability under the theory of the economic loss rule would “lead to rather perverse financial incentives.” In the context of this case, the court opined, physical harm resulting from Hoch’s failure to comply with the relevant seismic standards would only occur in the event that an earthquake actually damaged the garage. This would give a contractor in Yates’ position, upon learning of a defect in the engineer’s work, a financial incentive to say nothing in the hopes that an earthquake would not actually occur. Hoch’s argument would leave Yates holding the financial bag for preventively fixing the defects caused by Hoch’s failure to do its job correctly.

As discussed previously, the court ultimately did not rule on this issue. However, the court noted that if it were to fashion the parameters of an exception to the economic loss rule, it would consider whether the economic harm rule serves a useful purpose in cases involving professional services whose core purpose is to produce a product with specified requirements. In closing, the court noted that failing to produce a product that meets those requirements involves “a basic failure to do one’s job correctly and it strikes this court that professionals carry liability insurance for situations such as this.”

Fifth Circuit jurisprudence has already established that the economic loss doctrine does not apply to negligence claims arising out of the performance of services contracts. See Lyndon Property Ins. Co. v. Duke Levy and Associates, LLC, 475 F.3d 268 (5th Cir. 2007) (declining to apply economic loss rule against engineer for costs incurred to fix and test work that had been inspected and approved by engineer); see also Mississippi Phosphates Corp. v. Furnace and Tube Service, Inc., No. 1:07CV1140 LG-RHW, 2008 WL 313770 (S.D. Miss. Feb. 1, 2008) (declining to apply economic loss rule to negligence claims arising out of contract to provide material, labor, and equipment to retube a waste heat boiler). The question faced here, which remains unanswered, is whether the economic loss rule will apply where the core purpose of the services contract is to produce a product that meets specific requirements. In other words, will the fact that the design services are for the manufacturing of a product somehow impact the established jurisprudence?

[1] Hoch had hired Nangia Engineering of Texas, Ltd since it had on staff the required engineer licensed to practice in Mississippi. While Nangia was a party to the case, I only refer to Hoch.

Alternative Measures of Damages in Real Property Disputes in TennesseeWhen it comes to actions arising out of damage to property by a contractor, especially in the residential real property context, Tennessee courts typically balance the cost to repair versus the diminution in value of the property in determining how to make the property owner whole. Where repair is unfeasible or repair costs are disproportionate to the diminution in value, Tennessee courts will limit damages to the lost value of the property.

The Tennessee Court of Appeals recently revisited this issue in Durkin v. MTown Construction, LLC. In that case, a homeowner hired a roofing contractor to install a new roof. During the installation, a thunderstorm rolled in, and the contractor failed to adequately protect the exposed roof. Water poured into the home and caused substantial damage throughout. Some evidence suggested remediation required complete demolition of the home.

At trial, the homeowner presented substantial testimony regarding the costs required to repair the water-damaged property. In contrast, little evidence was presented by the homeowner or the contractor regarding any diminution in value of the property.

The trial court judge expressed concern that the cost of repair was higher than what she believed the diminution in value of the home should have been, but there was insufficient evidence presented to evaluate the actual loss in value. After some consideration, the judge arrived at an award for the homeowner by deducting the assessed tax value of the property against the value of just the land itself. The contractor appealed and argued that there was no diminution in value based on very limited testimony from the homeowner that he did not believe the assessed value of the property changed after the rain event.

The appellate court rejected the contractor’s argument. The court noted that prior to consideration of awarding damages based on lost value, as opposed to the cost of repair, proof must be offered on both the cost of repair and the diminution in value.

Since diminution in value is an alternative measure of damages, the burden was on the contractor (and not the homeowner) to demonstrate that the cost of repair was unreasonable and the diminution in value was the appropriate measure of damages. Since the contractor did not present sufficient evidence to show the cost of repair to be disproportionate to the diminution in value, the appellate court held that the trial court should have awarded the homeowner the cost of repairs and remanded the case for a further determination of those costs.

At least in Tennessee, parties to construction disputes involving damage to real property should consider the appellate court’s approach to the award of damages when evaluating and litigating disputes. The damaged party in such disputes does not carry the burden to demonstrate that repair costs are reasonable or that the diminution in value is less than the cost to repair. If a party intends to rely on the diminution in value as the measure of damages, that party must be prepared to present evidence that, at a minimum, (1) shows that repairs are unfeasible or repair costs are unreasonable and (2) is sufficient to show the actual loss in value of the real property.

Texas Construction Alert: Important Reminder about Construction Claims for Builders and ContractorsIn light of the recent devastation caused by Hurricane Harvey, we want to remind area builders of the 2011 law that applies to disaster remediation contractors performing work in Texas.

In 2011, wildfires ravaged over 40,000 acres of Texas land located in Bastrop and Grimes Counties. In addition to those wildfires, Texas experiences tornadoes, hail storms, floods and hurricanes on a regular basis. As a result, residential, commercial and industrial properties and structures required construction remediation. While many honest and hardworking Texas construction companies were there to help, some communities were plagued by unscrupulous contractors, referred to as “storm chasers,” who took money up front and failed to perform services as promised. In response to the misdeeds of these storm chasers, the Texas Legislature enacted the Disaster Remediation Contracts Statute which affects contractors who engage in remediation construction projects stemming from a natural disaster.

A new law was passed in 2011 by the Texas Legislature and was included in Chapter 58 of the Texas Business & Commerce Code.

The law applies to disaster remediation contractors, which is identified as those engaged in the removal, cleaning, sanitizing, demolition, reconstruction, or other treatment of improvements to real property performed because of damage or destruction to that property caused by a natural disaster. A natural disaster is defined as widespread or severe damage, injury, or loss of life or property related to any natural cause, including fire, flood, earthquake, wind, storm, or wave action, that results in a disaster declaration by the governor. This means that any construction remediation project related to a natural disaster falls under this new law.

The statute requires any agreement for disaster remediation work be reduced to a written contract. Contracts for disaster remediation projects must contain a disclosure statement with specific language outlining the statute’s prohibitions in boldfaced type of at least 10 point font:

This contract is subject to Chapter 58, Business & Commerce Code. A contractor may not require a full or partial payment before the contractor begins work and may not require partial payments in an amount that exceeds an amount reasonably proportionate to the work performed, including any materials delivered.

The requirements and legal effects of the statute cannot be waived by any party through contract or other means. Additionally, any violation of the statute is also considered a violation of the Texas Deceptive Trade Practices Act which allows for the recovery of attorneys’ fees and multiplying damages in certain instances.

The law also provides that a contractor may not require a full or partial payment before the contractor begins work and may not require partial payments in an amount that exceeds an amount reasonably proportionate to the work performed, including any materials delivered. Therefore, a contractor cannot require a down payment, draw or other form of payment until work begins.

The law does not apply to remediation contractors if they maintain a physical business address in the county or a county adjacent to where the work is to be performed for one year prior to the date of contracting. This exception allows “local” companies to continue business as usual. However, the best practice would be to have your contracts and business practices set to comply with this law so that you can be ready to help in the event the next natural disaster is more than a county away. This new law affects all contracts entered into on or after September 1, 2011.