Oregon Construction Law – “Dazed and Confused”
By David P. Morrison and Andrew T. Burns
A. Inconsistency between jurisdictions
1. Example: Negligent Construction rulings in Portland Metro area.
2. Statute of Limitations rulings around Oregon.
3. Forum and Judge Shopping
B. Oregon Legislature Lack of Direction
1. No bill last session
2. Construction Law task force
C. Result: Very Difficult to Assess and Predict Risk.
II. IS THERE A CLAIM FOR NEGLIGENT CONSTRUCTION IN OREGON?
A. Jones v. Emerald Pacific: In the case of Jones v. Emerald Pacific decided in 2003, the Court of Appeals ruled that where a homeowner contracted with a general and later sued for defective construction, the homeowner had no claim for negligence in that the contact spelled out all their rights and responsibilities thus eliminating any negligence claims.
1. Jones will not be reviewed by the Oregon Supreme Court.
2. Jones did not spell out what the result would be where, for example, a subsequent purchaser who has no contract with the general wants to sue the general for defective construction.
3. If Jones is held to eliminate all claims for negligent construction, a subsequent purchaser would have no claims against a general or any other contractor.
4. If Jones is read narrowly to only apply to situations were two parties have entered into a contract, spelling out their rights and responsibilities in that document, subsequent purchasers would have claims for negligent construction.
B. Economic Loss Rule
1. In order to understand the debate regarding Negligent Construction you must understand the Economic Loss Rule.
2. In Oregon, the case of Onita Pacific v. Bronson held that there is no claim for negligence in a situation where the complaint seeks “economic loss” unless plaintiff can show a “special relationship”.
a) What is economic loss?
(1) Money Damages
(a) Lost profit
(b) Decreased Value etc.
(2) Property Damage is not Economic Loss
(a) Onita specifically held that personal injury of property damage was not subject to the Economic Loss Rule.
C. Is Dryrot property damage?
1. Jones did not specifically address this question.
2. In Jones, plaintiff was making a claim for property damage. They alleged that their builder’s negligence led to a leaking roof which caused property damage.
3. Plaintiffs argue that dryrot is damage to wood which is part of the property and is thus property damage.
4. Defendants argue that dryrot damages the value of the home, reduces the owner’s expectation of profit and thus is economic loss.
5. In International Paper v. TVR, a Federal Court case, Judge Jeldricks held:
a) that in order to get to the question Jones did address (the special relationship issue), the court had to first go through the analysis of whether the economic loss rule applied.
b) Thus, Jones held that the exception for property damage did not apply and he dismissed a claim for negligent construction.
D. What is a Special Relationship?
1. Lawyer, Doctor, Architect Engineer
2. Professional, Trust, Fiduciary Relationship
3. Architects and Engineers are not subject to Jones: Negligence claims are allowed against them subject to their very restrictive statute of limitations.
4. Jones did clearly hold that there is not special relationship between a home owner and a builder.
E. What about a subsequent purchaser?
1. If International Paper is accepted as the rule in Oregon, subsequent purchasers cannot sue the builder at all.
a) No breach of contract claim/no contract with builder.
b) No negligence claim.
2. Unless subsequent purchaser can prove that seller knew about the defect and didn’t disclose, they have no remedy.
F. Current status of Negligent Construction Claims
1. At trial court: 50% dismissed, 50% allowed.
2. Currently on appeal: Harris v. Suniga was argued last Thursday. Report on oral argument.
3. No case yet has been decided that answers the economic loss rule question.
4. It could be one to two years before Harris is ultimately decided.
G. Will Oregon Legislature Repeal Jones?
1. If subsequent purchasers are left without a remedy, we predict that the Legislature will step in and allow negligent construction claims
2. Builders construct homes knowing that they may be sold several times in the 10 year period of ultimate repose.
H. So, the answer to the question posed in §II is maybe yes, maybe no; we all wait for the Court of Appeals and possibly the Legislature to provide greater direction.
I. IF THERE IS NO CLAIM FOR NEGLIGENT CONSTRUCTION, ARE WE ALL OUT OF A JOB?
1. Current Oregon coverage cases: No coverage for claims for breach of contract.
a) CGL policies cover property damage caused by an “occurrence,” which is usually defined as an “accident.” The Oregon Supreme Court has held that the “occurrence,” thus defined, has a “tortious connotation” and thus does not include a breach of contract. See Oak Crest Const. Co. v. Austin Mutual Ins. Co., 329 Or. 620, 998 P.2d 1254 (2000).
2. In Washington, There is no similar ruling. There, an “occurrence” is any conduct that is not intended to cause harm. So if the complaint does not allege that the contractor intended to cause the property damage, the “occurrence” requirement is satisfied.
3. Imagine the backlash if suddenly, every claim for construction coverage is denied.
a) The CCB requires every contractor to purchase insurance.
b) Now that insurance does not cover any construction defect claim.
4. We can’t see how the Oregon Legislature would not step in if that occurred.
III. INDEMNITY: PASSING THE BUCK: BOTH DEFENSE COSTS AND DAMAGE EXPOSURE.
A. What is it? Three requirements at common law:
1. General liable to plaintiff;
2. Sub liable to plaintiff; and
3. As between the two, the general’s fault is passive or secondary and the sub’s fault is active or primary.
B. In California, the general tenders to all subs. They dutifully accept the tender and jointly defend the general. In California, everyone wants to insure the generals.
C. Here, no one accepts tenders partly due to our strong anti-indemnity statute: ORS 30.140.
1. ORS 30.140 states that a construction indemnity agreement is “void” if it requires a sub to indemnify the general for the general’s own fault.
2. In Oregon subs always deny a tender from a general because the complaint always alleges active fault by the general in either self-performing defective work, design issues, sequencing work and communicating with subs.
a) If the complaint alleges any active fault on the part of the party seeking indemnity, it is permissible to deny the tender of defense, because the jury could find that there was active fault and thus no right to indemnity.
3. If the only fault that the general could have is failing to discover the fault of the sub, the Del Morrow case holds that the general’s fault is secondary and indemnity if allowed.
D. Contractual Indemnity: The best situation.
1. If general in the construction contract requires sub to indemnity general for the liability the general incurs caused by the fault of the sub, the general has an enforceable indemnity agreement.
2. The general can obtain judgment against the sub for the amount of damage caused by the sub’s fault.
3. If the indemnity agreement specifically includes defense costs and attorney fees, the general may be able to add its costs of defense and attorney fees it has to pay to the plaintiff to the indemnity claim.
a) There is no clear way to allocate attorney fees.
b) Either pro rata, i.e., if sub pays 20% of damage judgment, sub pays 20% of cost of defense.
c) Or: divide total defense costs by number of subs and each pays an equal share.
d) Pro rata is probably the most equitable way to assess fees.
4. If no claim for negligent construction, written indemnity clauses become much more important.
a) If a general has valid indemnity clause in the contract, the sub owes indemnity even if there is no joint liability.
b) Without the contract, the general would have to rely on common law indemnity which requires joint liability.
(1) The sub has no contract with the owner and thus has no contractual or tort based liability to the owner.
(2) In this situation, the general cannot obtain any indemnity from the sub.
c) The general may still have a claim for straight breach of contract, depending on the statute of limitations which we will discuss later.
IV. ADDITIONAL INSURED ENDORSEMENTS AFTER WALSH
1. Until recently, insurers for subs provided additional insured endorsements with little regard for the contractual terms underlying the request or the extent of the risk they were undertaking.
2. Different forms:
a) No Completed Operations Coverage: ISO Form 20 09 and 20 33 provide coverage for the endorsement holder only during the time it takes for the subcontractor to complete the job. Upon completion, the certificate expires.
(1) Thus, it provides no coverage for construction defect claims that arise after completion of the project.
b) Completed Operations Coverage: Form 20 10 provides completed operations coverage as long as the damage results from a defect that occurred during the operation.
(1) This form provides coverage for construction defects arising after completion of the project.
(2) However, if the endorsement is not included in renewal policies, coverage under the endorsement would cease.
B. In 2003, in the case of Walsh v. Mutual of Enumclaw, the Oregon Court of Appeals held that, if the contractual terms that created the obligation for a sub to provide an additional insured endorsement violated ORS 30.140, an insurer who failed to provide an endorsement had no obligation to provide insurance benefits to a general contractor.
a) In Walsh, even through the contract between Walsh and Rust Drywall (the sub insured by Mutual of Enumclaw) required that an additional insured endorsement be issued, no endorsement was actually issued.
b) Had one been issued, we feel that the court may have enforced it on the basis that the endorsement was a separate contract between the insurer and the general, not, itself, governed by ORS 30.140. Thus, additional insured endorsements that have already been issued, may be enforceable.
C. Supreme Court’s review of Walsh
1. The Oregon Supreme Court upheld the lower court’s ruling in Walsh last year without change and without clarification.
2. They missed an opportunity to state whether the case would be read to include specific ISO additional insured endorsements or blanket endorsements only.
D. What is the real world effect of Walsh?
1. Regarding endorsements not yet issued, or contracts not yet drafted, we feel there is no reason why indemnity agreements in contracts and additional insured endorsements cannot be drafted so that they comply with ORS 30.140.
a) They must restrict themselves to a general=s vicarious liability for the mistakes of their subs.
b) Many Additional insured endorsements by virtue of the language Aresulting from your work@ restrict coverage afforded a general through the endorsement to liability arising out of the sub=s work only. In other words, the endorsement does not cover a general=s own separate negligence.
c) To that extent, Walsh would not affect significant changes to what always should have been the practice.
2. The provision at issue in Walsh was a blanket AI endorsement in Rust’s policy. It didn’t name any individual. It stated that anyone who Rust agreed to make an AI would automatically become an AI under the policy. Thus the provision depended on an outside agreement which the court invalidated, thus invalidating the trigger for the blanket AI endorsement.
3. If an insurer agrees to issue a specific AI endorsement, despite the fact that the contractual provision between the general and the insured is void, that endorsement – a contract between the general and the sub’s insurer – may still be enforceable. ORS 30.140 applies to construction agreements. It can be argued that a specific AI endorsement is not a construction agreement.
V. THE WACKY WORLD OF CONSTRUCTION STATUTES OF LIMITATION IN OREGON
A. Breach of Contract Statute of Limitations
1. ORS 12.080 (1) states that a breach of contract claim must be filed within 6 years from the date the claim accrues.
2. When does the statute begin to run?
a) Date of Discovery of the damage?
(1) In Gladhart, the court suggested that any statute using the word “accrue” would be subject to a discovery rule.
(2) The discovery rule generally holds that the statute begins to run from the date that the plaintiffs knew or should have known that they had been damaged due to the fault of the defendant.
b) Or date of the breach:
(1) Recently, trial courts have held that the statute of limitations for breach of contract begins to run on the date of the breach.
c) AIA contract term
(1) Article 9.3 of the AIA form B141 General Conditions states that the applicable statute of limitations begins to run from the date of substantial completion.
(2) Thus, regardless of discovery, plaintiffs have 6 years from substantial completion to bring any claims.
(3) This provision has been specifically upheld in Maryland.
3. There are no Oregon appellate cases, at this point, that answer the question of how long the statute of limitations for breach of contract is and when it begins to run.
B. The 10 year statute of limitations
1. ORS 12.135 is the 10 year statute of ultimate repose for construction claims. It provides the outside limitation for any claim to be made.
2. Recently plaintiffs have begin to argue that in 1991, when the Legislature amended 12.135 to include a shorter limitation for claims against architects and engineers, they also amended ORS 12.080 (the 6 year statute) to reference 12.135 (the 10 year statute).
3. They argue that, by making this reference, the Legislature intended to change the statute of limitation for construction claims in Oregon to 10 years.
4. Judge Gardner who handles most motions in Washington County recently bought this argument in a case we handled for Unitrin.
5. It has been rejected by a number of other judges in other venues.
VI. COMMON CONSTRUCTION CONTRACT TERMS THAT COULD AFFECT ADJUSTMENT OF CLAIMS
A. Indemnity provisions: Discussed above.
B. Flow Down Clauses.
1. A general contractor uses this clause to transfer obligations it undertakes which relate to work that is to be done by a subcontractor down to the subcontractor actually performing the work.
2. For example, warranties the general gives to the owner are transferred down to the subcontractor so the subcontractor gives the exact same warranties to the general contractor.
3. A typical subcontract flow down provision is as follows:
a) AThe term Contract Documents means the Prime Contract between the Owner and Contractor, together with all plans, drawings, specifications, general conditions, supplemental conditions, special conditions and other conditions, addenda, amendments, together with all other documents referred to in the Contract Documents. The Contract Documents are incorporated into the Subcontract by reference. Subcontractor agrees to be bound by all of the terms and conditions of the contract documents and to assume toward Contractor all of the duties, obligations and responsibilities that Contractor by those documents assumes toward the Owner, whether relating directly or indirectly to the Subcontract Work. Contractor shall have all of the rights and remedies against Subcontractor, that the Owner by the Contract Documents has against Contractor, and Subcontractors shall have all of the rights and remedies against Contractor that the Contractor by those documents has against Owner. Subcontractor shall include a similar provision in its sub-subcontracts, which binds its subcontractor to the terms and conditions of this Subcontract, including the Contract Documents.
4. Rights flow both ways under this clause. Subcontractor can gain the same rights against the owner as the general has.
C. Arbitration test Provisions.
1. Arbitration is procedurally very different.
a) It is binding.
b) You often can’t bring dispositive motions asserting legal defenses until the hearing on the merits. You are forced to prepare the merits in case you lose.
c) AAA arbitration is expensive due to endless administrative charges and the frequent use of three panel arbitrations.
d) On the plus side, the case is decided by experts in construction.
2. All contracts, on the project, must contain arbitration clauses for it to be an effective remedy.
a) If the subs’ contracts don’t have arbitration provisions, there is no way to have one proceeding decide the case.
b) Often the architect’s contract does not have an arbitration provision when everyone else does.
D. Attorney Fees.
1. Put your money on the table early.
a) In Oregon, a statutory offer (ORCP54) includes allowable fees and costs unless specifically excluded.
b) Thus, assume plaintiff can recover fees and has incurred $10,000 in fees to date. You file an offer for $20,000 and are either silent on fees or specifically exclude them.
(1) Your offer is really $10,000 in damages because plaintiff is entitled to fees. If plaintiff obtains more than $10,000 at trial, they recover all their fees.
(2) The best way to handle the problem is to state that you offer is in addition to reasonable fees and cost to be determined by the court.
VII. ARCHITECTS (Don’t blame me, I’m an artist.)
A. Spearin Doctrine
1. Based on a 1905 US Supreme Court case in which the court held that a builder that constructs a project pursuant to plans and specifications issued by the owner or the owner’s agent (the architect) which are defective is not liable for the defect.
2. It survives today in the argument that the architect is responsible for the design and specification of the project.
a) Many architects attempt to skirt around the responsibility by stating in the specifications that component of the building should be built to “manufacturer’s specifications”.
b) However, what about submittals:
(1) Most commercial projects require submittals. These are shop drawings and manufacturer’s installation instructions or specifications.
(2) The common practice is that the sub submits them to the general who reviews them for size and dimension (will it fit?) and then sends them to the architect who reviews them for compliance with the plans and specifications.
c) If this process is followed, the submittals become part of the plans and if the project is built in compliance with them, the general and sub are not liable for defects.
B. Architect is agent of owner
1. Typically the owner (plaintiff) hires the architect and thus is responsible for the architect’s mistakes.
2. If the owner does not sue the architect, design mistakes can be alleged against the owner as comparative fault.
3. If claims against the architect are not available due to their shorter statute of limitations, design mistakes can still be imputed to the owner.
C. Beware of the Design Build contract.
1. This is used mostly in commercial construction.
2. In this type of project, the general either hires the architect or has an architect on staff.
3. The general contractor has all design and performance liability. The GC is responsible for design, sequencing, supervision and subcontractor performance.
D. Only an architect can testify.
1. The architect’s lobby convinced the Legislature to pass a statute that before an architect can be brought into a case, the suing party must file an affidavit that they have retained an architect, licensed in that jurisdiction, that will testify that the architect’s work was below the standard of care.
E. Contract Administration
1. Some contracts contain the requirement, some are design only (plans and specs only)
2. An architect performing contract administration inspects construction and runs periodic (usually weekly) job site meetings.
a) The meetings are used to assess progress
b) Work out problems and plan upcoming events
3. The architect controls pay requests and thus reviews the progress of construction.
4. If the contract includes contract administration, the architect has a much higher degree of involvement in observing and detecting potential problems with construction.
VIII. THE LAST LEGISLATIVE SESSION
A. Many ideas
1. Decrease the statute of limitations.
2. Repeal Walsh.
3. Self-insurance fund for subcontractors.
4. Mandatory arbitration for all construction claims.
B. None of these passed
C. All that came out of the session was a Construction Task Force that is to investigate issues and report to the Governor for the next session.
1. Expect serious bills to shorten time for filing construction claims.
2. Repeal of Walsh: Bill allowing additional insured endorsements.
IX. COVERAGE QUICKIE
A. Wyoming Sawmills: The “Your Work” exclusion
1. Facts: Owner building sawmill hires framer. Framer uses bad lumber which bows. In order to repair, other work must be removed to get to the bad lumber.
2. Framer settles and then sues his insurer for failing to cover settlement.
3. Court holds:
a) No one disputes that the cost of removing and replacing just the bad lumber is not covered due to the “your work” exclusion.
b) The cost of repairing other contractor’s work which is damaged in the process of removing the bad lumber is covered.
4. General Contractor’s CGL policies do not contain a “Your Work” exclusion as the entire project is typically their work.
5. Many siding subcontractors use this exclusion to try to avoid paying for the cost of the removal and replacement of their siding.
6. The issue of the cost to remove certain other work to access defective work and replacement of same was not specifically addressed in Wyoming Sawmills. However, the court suggested that the cost of removing other work to get to the defective work would be covered.
B. Orphan Years: Subs with no coverage.
1. Assume 8 years of defect, Unitrin has 2 years, Zurich 2 years, Farmers 2 years and the insured has no coverage for 2 years.
2. Typically, the 3 companies would agree to split the cost of defense 3 ways and 100% of the indemnity 3 ways.
3. Last year, Judge Haggarty, an Oregon Federal Court Judge opined that if the insured had no coverage for two of the years, they were on their own for those years.
a) Under the above example, the companies would split 6 of the 8 years of damage.
b) Judge Haggarty did not cite any Oregon law to support his holding. He simply stated that he felt this was the most logical way to address the issue.
4. This opinion is not binding on Oregon courts.
5. Our appellate attorneys feel that the case would be decided the opposite way given the McCormick group of cases.