Patent versus Latent Construction Defects

A significant issue for homeowners and contractors alike is whether a construction defect is patent or latent. Which category the defect falls into will determine the time within which an action must be brought on the defect. Generally, this means a difference in years with latent defects enjoying a longer limitations period. For example, in California there is a four-year statute of limitations for patent defects, while the statute of limitations period for latent defects stretches to ten years.

A patent defect is one that is plainly evident or can be discovered upon an ordinary and reasonable inspection. Latent defects are essentially hidden defects. They are those that the owner does not know about and, through the exercise of reasonable care, would not be expected to discover. Generally, the statute of limitations for latent defects would run from the date of discovery or the date that the owner should have discovered the defect. However, to protect contractors from endless liability for their work on a construction project, states like California have placed an outside limit on actions for construction defects.

Oftentimes, the parties will argue over whether the defect was actually latent or on what date the homeowner knew or should have known of the defect. This becomes a question of fact with far-reaching ramifications because the limitations period would run based on the answer to the disputed questions. Though outside limitations for latent defects may be on the books in a state, the date of discovery may shorten this limitations period. So, as it is in California, even though there is a ten-year latent defect limitations period, a homeowner is nevertheless required to file his action within three years from the date of discovery or awareness of the latent defect.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.

Negligence Actions Against Contractors

In addition to a breach of contract action against a contractor, an owner may also be entitled to a negligence action against the contractor. This type of action is based upon the contractor’s negligence during the course of a construction project.

The main reason for asserting a negligence action against a contractor is that the damages in a negligence action generally exceed the damages for a breach of contract action. In a breach of contract action, an owner’s damages are limited to damages that were foreseeable at the time of entering into the contract, such as the cost of repair or replacement. In a negligence action, the damages include all injuries that were proximately caused by the contractor’s actions, which injuries or damages may not have been foreseeable at the time of the contract. The damages may include economic losses, such as lost rents, lost profits, and diminution in value of the owner’s property.

Damages in a negligence action against a contractor may also include punitive damages, that is, damages that punish the contractor for his or her negligence. Punitive damages are generally not recoverable in a breach of contract action.

Damages may be recovered against a contractor in a negligence action even when a contract bars an action against the contractor. Disclaimers or limitations of liability under the contract do not apply to a negligence action.

The elements for an owner’s negligence action against a contractor are the same as the elements for any negligence action. The owner must prove that the contractor owed a duty of care to the owner, that the contractor breached that duty, that the owner sustained damages as a result of the contractor’s actions, and that the contractor’s actions were the proximate cause of the owner’s damages.

A duty of care on the part of a contractor to an owner may arise from either the contractor’s general obligation to carry out his or her activities with regard to others or from the contractor’s specific obligation to the owner to perform his or her duties under a contract. If the contractor negligently performs the contract, the contractor has breached his or her duty to the owner.

Some courts make a distinction between nonfeasance on the part of a contractor, that is, complete failure to perform, and misfeasance or negligent performance. Those courts generally hold that only misfeasance will support a negligence action. Their rationale is that failure to perform a contract can only be remedied by a breach of contract action.

An owner may bring an action against a contractor for negligence per se when the contractor has violated a statute or an ordinance. The contractor’s violation of the statute or the ordinance establishes that the contractor was negligent as a matter of law. However, the owner must prove that there was a valid statute or ordinance, that the contractor violated the statute or the ordinance, that the statute or the ordinance was enacted in order to protect the owner, that the injury that was suffered by the owner was the type of injury that the statute or the ordinance contemplated, and that the contractor’s violation of the statute or the ordinance was the proximate cause of the owner’s damages. Examples of negligence per se include a contractor’s violation of the Occupational Safety and Health Act and local building, safety, and fire codes.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.

As-Planned versus As-Built Schedule

When construction on a project does not proceed as planned, the question of damages arises, i.e. who pays and how much. Determining the amount of damages can be accomplished by comparing the as-planned construction schedule to the as-built schedule. The damages calculation will be based on the difference between the two.

To determine the as-planned schedule, several key time components must be analyzed. Of particular importance are the date construction was planned to begin, how long construction was projected to take, and when major milestones were expected to be completed. For example, on a critical path method of scheduling, the expected completion time for each element on the critical path would need to be noted. Ascertaining these time components requires the examination of several documents. The bid documents will give the first glimpse of the contractor’s understanding of the time requirements for the projects. Then, the contract documents will verify the contractor’s understanding of the project timeline as well as the owner’s expectations for the completion date. Finally, the initial construction schedule must be inspected.

Once the as-planned schedule has been fixed, the focus moves to the as-built schedule. The as-built schedule contains those dates that actually occurred. For example, the date that construction truly began, not when it was planned, expected, or hoped to begin. Determining the as-built schedule requires an examination of the project’s records including correspondence, photos, subcontract agreements, change orders, employee time cards, progress payment information, materials delivery invoices, equipment rental leases, punch lists, the architect’s substantial completion certificate, final completion documents, occupancy documents, and the like. Once the difference between the as-planned and as-built schedules is established, with an accounting for act of God occurrences, labor events, and the like, the damages determination can begin.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.

Authority of Owner’s Agent With Respect to Contract Modifications

Owners do not always oversee every aspect of the construction process and oftentimes employ agents to represent their interests at the construction site. Commonly, the architect or construction manager will serve in the role of “agent” to the owner. A question of the agent’s authority will frequently arise when a dispute surfaces concerning modifications to the construction contract. To answer the question, courts will examine whether the agent was given express, implied, or apparent authority to act in such a capacity.

Courts may utilize the concept of estoppel when a contractor or other entity associated with the construction has changed his position based on the reasonable belief that the agent was, in fact, acting on behalf of the owner. When the owner holds the agent out as such, he clothes the agent with apparent authority. This authority is similar to the concept of estoppel, although with apparent authority the contractor does not need to show that he changed his position in reliance on the owner’s representative actions. Under implied authority, authority for the agent’s acts is gleaned from the custom in the industry or by the owner’s actions that declare his intention to authorize the agent’s actions.

On some occasions, the agent is authorized via a power of attorney to enter into a contract on the owner’s behalf and to act on behalf of the owner in all aspects of the construction. In such instances, it has been held that the agent also has authority to modify the contract. Absent such express authority, it is generally the case that a contractor who performs based on an agent’s oral requests for modifications or extras will be denied recovery if the construction contract calls for written authorization. Courts have held that the agent simply does not have the authority to alter or waive a contractual provision or enter into a collateral contract for extra work.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.

Bankruptcy Law – Effect of Bankruptcy on Construction Project

When a general contractor, subcontractor, or supplier cannot pay its debts in the ordinary course of business and files for bankruptcy, there can be substantial ramifications to the construction project. The completion of the project itself can be jeopardized, and payment for the services or materials already received or contracted for is most certainly affected. A “liquidation” under Chapter 7 of the Bankruptcy Code calls for the debtor to reduce its assets to cash, pay out a pro rata share of the funds to the creditors, and cease doing business. In contrast, a “reorganization” under Chapter 11 will allow the debtor to remain in business as a “debtor-in-possession” and deal with its creditors under a plan of reorganization.

Once the debtor files its bankruptcy petition, it is protected in that the creditors are not only prohibited from filing a lawsuit on a pre-petition claim, but are also not able to terminate their contracts with the debtor. Additionally, construction contracts are normally classed as “executory” before substantial completion of the construction project. As such, even though a debtor files for bankruptcy, these executory contracts remain viable. In both the Chapter 7 setting and the Chapter 11 setting, the debtor can either affirm or reject executory contracts. The debtor’s decision to affirm or reject an executory construction contract (especially if the debtor is a general contractor) may decide whether the construction project moves forward to completion. While the bankruptcy of a subcontractor or supplier may cause inconvenience to the construction project, the bankruptcy of a general contractor and its rejection of the executory construction contract can be catastrophic. The rejection of a contract for a residential home development, for example, would have a trickle-down impact on all the subcontractors, suppliers, and design professionals who had contracted to provide goods or services to the project.

Property of the bankruptcy estate can include materials and equipment being used in the construction project, as well as funds being dispersed or used in the construction process. The bankruptcy trustee or debtor-in-possession can, in some instances, use the materials, equipment, and funds in the liquidation or reorganization of the debtor.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.