Inside this Issue

A1 - Implied Warranty of Habitability Extended Beyond Initial Home Purchaser to Second Purchasers
A2 - Common Law Indemnity Not Owed by Architect to Developer Where Developer’s Own Alleged Negligence was Subject of Suit by Owner
A3 - Indemnification Clause in Prime Contract is not Incorporated by Reference into Subcontract Under New York Law in Absence of Express Agreement to Do So
A4 - Spoliation of Evidence: Contractor Had no Duty to Preserve Concrete I-Beam that Fell and Caused Injuries

Article 1

Implied Warranty of Habitability Extended Beyond Initial Home Purchaser to Second Purchasers

See similar articles: Habitability | Warranty

After having a house built by a Homebuilder, the purchasers sold it to another family three years later, and the new owners discovered water infiltration around their windows two years after that and filed suit against the Builder asserting breach of implied warranty of habitability. The Supreme Court of Pennsylvania explained that the court had never before considered whether the implied warranty of habitability extends beyond the initial user-purchaser of a home to a second or subsequent purchaser. After explaining the policy reasons for establishing the Builder’s implied warranty, the court held the implied warranty of habitability extends to the subsequent purchasers of a home. Rejecting the Builder’s argument that this would lead to unlimited liability against homebuilders, the court stated that the homeowner still has the burden to show that the alleged defect is “latent” and attributable to the builder's design or construction, and affects habitability. Moreover, said the court, all homeowners must still bring their claims within the 12-year period set out by the statute of repose. Conway v. Cutler Group, Inc., 58 A.3d 155 (PA 2012).

In reaching its decision here, the court analyzed the public policy reasons for the implied warranty. It stated that previous decisions had recognized that the implied warranties of habitability and reasonable workmanship were necessary to equalize the disparate positions of the builder-vendor and the average home purchaser by safeguarding the reasonable expectations of the purchaser who is compelled to depend upon the builder-vendor’s greater manufacturing and marketing expertise. The implied warranty of habitability covers “defects which would not be apparent to the ordinary purchaser as a result of reasonable inspection.” Privity of contract was previously found by the court not to be a requirement for asserting a breach of warranty claim against the builder of a new residential unit.

Citing previous decisions, the court stated:

“Our Supreme Court observed that a purchaser of a new home ‘justifiably relies on the skill of the [builder] that the house will be a suitable living unit.’ By the same token, a second or subsequent purchaser also implicitly relies on the home builder’s skill that the home will be a habitable one…. [A] builder ‘holds himself out as having the necessary expertise with which to produce an adequate dwelling…. Therefore, the builder is certifying that the home as a structure will be habitable and free from latent construction defects affecting habitability; regardless of how many times title changes hands. A second or subsequent purchaser is entitled to the same assurances as the original purchaser that the home the builder has constructed is habitable for human living. By its very nature the implied warranty of habitability shifts the risk of latent defects from the initial homeowner to the builder because the builder is the party with the ‘necessary ‘expertise’ that the initial purchaser does not possess. When a home is sold form the initial purchaser to a second purchaser, neither party to that sale possesses the expertise that the builder does.”

“If we were to accept Builder’s position, it would present problematic consequences. For example, if a given structural defect does not materialize until a home is five-hears old, and the original purchaser is still occupying the home, he or she may recover under the implied warranty of habitability. However, if the same defect materializes when a home is five-years-old, but the original purchaser sold the home after the third year, the current homeowner cannot recover. We conclude that allowing such divided recovery based on whether the home is sold, a factor that is immaterial to whether a ‘defect would be apparent to ordinary purchaser as a result of a reasonable inspection,’ would be inherently unfair…. Therefore, the risk of latent defects affecting habitability in the home that do not materialize for years after construction properly rests with the party who built the home, irrespective of whether the homeowner is the original buyer.”

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 15, No. 3 (Mar 2013).

Article 2

Common Law Indemnity Not Owed by Architect to Developer Where Developer’s Own Alleged Negligence was Subject of Suit by Owner

See similar articles: Indemnification clause | Unjust Enrichment

When a project owner (YMCA) sued a developer (Bovis Lend Lease) for breach of contract for approving a defective design proposed by the Architect and also for approving inferior or improper construction materials, Bovis could not legally maintain a common law indemnity claim against the Architect who was under separate contract to the project owner. This is because, as explained by the court, “Since the predicate of common-law indemnity is vicarious liability without actual fault on the part of the proposed Indemnitee, it follows that a party who has itself actually participated to some degree in the wrongdoing cannot receive the benefit of the doctrine.” Here, the court concluded that the Owner’s complaint against Bovis was not limited to vicarious liability issues. The complaint contained allegations that Bovis itself failed to perform some of its own contractual obligations. The common law indemnity claim, therefore, had to be dismissed as a matter of law.

A second issue in the case, however, was decided in favor of Bovis, with the court dismissing the Owner’s claim of “unjust enrichment” against Bovis for fees previously paid for allegedly defective services. The court explained that this claim must be dismissed because “Recovery for unjust enrichment is barred by the existence of a valid and enforceable contract….” Genesse/Wyoming YMCA v. Bovis Lend Lease, 951 N.Y.S. 2d 768 (NY 2012).

Article 3

Indemnification Clause in Prime Contract is not Incorporated by Reference into Subcontract Under New York Law in Absence of Express Agreement to Do So

See similar articles: Flow down | Incorporation by Reference | Indemnification clause

Where an employee of an electrical sub-subcontractor was injured on the jobsite, he sued the project developer, the prime contractor, and others. Those firms in turn filed a third-party claim against the sub-sub claiming the right to common law indemnity as well as contractual indemnity. The court concluded that the provisions of the prime contract related to contractual indemnification were not incorporated by reference because they did not concern “scope, quality, character and manner of the work.” Lawrence Persaud v. Bovis Lend Lease, 941 N.Y.S.2d 208 (NY 2012).

The court held that the claim for common law indemnity must be dismissed because under New York law an employer may only be held liable for contribution or indemnification at common law if there has been “grave injury” to the employee. In this case, the court found there was no “grave injury” as that term is defined in the state statute.

With regard to the contractual indemnity claim, the court held it must be dismissed because there was no written agreement requiring the sub-sub to indemnify the others. Although there was a prime contract containing an indemnification clause, that provision was not deemed to be incorporated by reference into the subcontract under New York law. “Under New York law, incorporation clauses in a construction subcontract, incorporating prime contract clauses by reference into a subcontract, bind a subcontractor only as to the prime contract provisions relating to the scope, quality, character and manner of the work to be performed by the subcontractor.” The court concluded that the provisions of the prime contract related to contractual indemnification were not incorporated by reference because they did not concern “scope, quality, character and manner of the work.” Lawrence Persaud v. Bovis Lend Lease, 941 N.Y.S.2d 208 (NY 2012).

Article 4

Spoliation of Evidence: Contractor Had no Duty to Preserve Concrete I-Beam that Fell and Caused Injuries

See similar articles: Evidence | Jobsite Safety | Spoliation of Evidence

Where employees were injured when a concrete I-Beam feel from a bridge, their employer destroyed the beam the following day. The Illinois Supreme Court found there was no evidence to support the existence of a duty to preserve the I-beam because (1) there was no agreement, contract, or statute that required the preservation of the I-beam as evidence, and (2) merely by doing its own investigation of the accident, including photographing the site and the I-beam after it fell, did not constitute voluntarily undertaking to preserve the I-beam for the contractor’s own purposes, and (3) the employer-employee relationship in itself did not constitute a special circumstance that would impose a duty on an employer to preserve potential evidence. Martin v. Keeley & Sons, 979 N.E. 2d 22 (Illinois 2012).

Several employees of a contractor suffered injuries when a concrete I-beam, that they were standing on while installing a handrail on a bridge, collapsed, and they fell into the creek below. The Illinois DOT and the U.S. OSHA did an immediate, same day inspection of the accident site. The following day, the contractor destroyed the I-beam by breaking it up with a hydraulic hammer. Sometime later, the laborers filed suit against the manufacturer of the I-Beam, and against the designer of the bearing assembly that supported the I-beam that was incorporated into the bridge deck. They also sued their employer, the contractor, based on negligent spoliation of evidence. The other defendants made cross-claims against the contractor based on spoliation of evidence.

OSHA’s investigation concluded that the beam had rolled over, causing it to fall. After the OHSA inspection, the beam was broken up with a hydraulic hammer and left where it had fallen – being turned to riprap in the creek. The rebar was hauled to an auto shredder. The embedded steel plates on the ends of the beam were saved and sent to the manufacturer to be used in the manufacturing of a replacement beam.

In explaining why he had destroyed the beam, the contractor testified he had been informed by the manufacturer that (1) the replacement beams could be manufactured more quickly if they retrieved the embedded steel plates and sent them to the manufacturer as soon as possible for use in the new beam, and (2) the Illinois DOT construction engineer advised that the beam needed to removed from the creek to prevent a condition called “scouring” – erosion caused by water washing up around the bridge abutment.

As far as the potential for litigation, the contractor testified that, although he knew the workers had been sent to the hospital, he assumed there would be workers’ compensation claims but that a lawsuit “really didn’t enter my mind at the time.” He stated he did not receive any requests to preserve the beam from the plaintiffs, the manufacturer or the engineer. The engineer, however, testified by affidavit of its vice president, that no personnel from the engineer were present at the construction site during the accident and that the contractor never contacted the engineer to inquire whether a representative wished to inspect the site. He further testified that the engineer was not aware of the accident until well after the I-beam had been destroyed.

At issue in the claims against the contractor by the plaintiff, the manufacturer and the engineer, for spoliation of evidence, was whether the contractor was entitled to summary judgment. The Supreme Court held he was. In reaching that conclusion, the court reviewed numerous court decisions addressing evidence and the duty to preserve it. The court stated that under Illinois law, spoliation is a form of negligence and that a plaintiff claiming spoliation must prove that (1) the defendant owed the plaintiff a duty to preserve the evidence; (2) the defendant breached the duty; (3) the loss or destruction of the evidence was the proximate cause of the plaintiff’s inability to prove an underlying lawsuit; and (4) as a result, the plaintiff suffered actual damages.

The general rule in Illinois, said the court, is that there is no duty to preserve evidence. A plaintiff, in order to establish an exception to the no-duty rule, must meet a two-prong test. The first test is that the plaintiff must show that an agreement, contract, statute, special circumstance, or voluntary undertaking has given rise to a duty to preserve the evidence. Under the second test, the plaintiff must show that the duty extends to specific evidence at issue by demonstrating that “a reasonable person in the defendant’s position should have foreseen that the evidence was material to a potential civil action.”

In this case, the court found the evidence did not support a finding that the contractor owed a duty to preserve the I-beam, and that a summary judgment was appropriately granted for the contractor.

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ConstructionRisk.com Report (March 2013)