Virginia Real Estate, Land Use & Construction Law : Virginia Construction Lawyers & Attorneys : Bean Kinney & Korman Law Firm : VA Real Estate, Land Use & Zoning

Last month, we looked at Station #2, where the Virginia Supreme Court refused to turn a breach of contract allegations into a fraud claim. Contrast that with Nathan, et al. v. Long & Foster, Real Estate, Inc., et al., in which the Circuit Court for the City of Roanoke has allowed a fraud in the inducement claim to go forward.

Geeta Nathan and Santam Singh were looking to buy a home in Roanoke, and worked with Barbara Michelsen, a Long & Foster real estate agent. They signed a Purchase Agreement to buy a home for $260,000, and the agreement listed Michelsen as the selling agent.

Under the Purchase Agreement, Long & Foster and Michelsen hired Donald Field to conduct radon testing of the home. Michelsen told Field to test for radon only on the first floor, and to ignore any readings in the basement. The testing revealed excessive levels of radon for the basement. Field mailed and faxed the results to Long & Foster and Michelsen.

In the meantime, the seller had signed a disclosure statement dated March 25, 2006, checking “yes” beside the question “Has the property been tested for radon gas?” However, Field did not conduct the testing until April 6, 2006. The seller and Michelsen had also signed a radon acknowledgment form that said they had “no knowledge concerning the testing of this property for radon or the presence or absence of radon in this property.”

Before closing, Nathan and Singh asked Michelsen about the radon test results, explaining concerns about radon and that a child would be living in the house. Michelsen assured them that everything was fine, and gave them a copy of the test results for the first floor only. Nathan and Singh closed on the house the same day.

Some time later, Nathan and Singh contacted Field when they were making repairs in the basement, and Field asked them whether the radon problem had been taken care of. Nathan and Singh had further radon testing done, and found elevated levels of radon. Not only did Nathan and Singh have to pay the costs of fixing the radon problem, but their house also diminished in value due to the fact that they would have to disclose the prior radon levels.

Nathan and Singh sued Long & Foster and Michelsen for breach of contract and fraud in the inducement. Long and Foster and Michelsen agreed that the breach of contract claim was properly pled, and Nathan and Singh agreed that they could not state a fraud claim against Long & Foster. That left the issue of whether Nathan and Singh could go after Michelsen for fraud in the inducement.

Michelsen argued that any duty to disclose the radon levels was contractual, not tort-based. She also argued that she complied with her obligations to disclose and was therefore protected by Virginia Code Section 55-523 of the Virginia Residential Property Disclosure Act (“VRPDA”).

Judge Dorsey wasn’t buying either of these arguments. Judge Dorsey found that Michelsen, as a real estate agent first employed by Nathan and Singh to be their agent, had a fiduciary duty that included the duty to disclose a complete set of the radon test results. Unlike the facts in Station #2, this duty was more than a mere contractual duty and could support fraud in the inducement. Judge Dorsey also ruled that because Michelsen and the seller never properly advised Nathan and Singh of the radon issue, Michelsen was not entitled to the protection of the VRPDA.
 

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The Virginia Supreme Court recently gave us yet another example of a breach of contract case that couldn’t rise to a fraud in the inducement claim in Station #2, LLC v. Lynch, et al., Record No. 091410.

In Station #2, the Lynches owned a three-story building in the City of Roanoke. They sold the top two floors to 237 Granby LLC in order to convert the floors to condos. The Lynches then leased the ground floor to Station #2 so it could operate a restaurant with live music and other entertainment. The lease between the Lynches and Station #2 required Station #2 to install soundproofing material in the void space between Station #2’s ceiling and the lower level of 237 Granby’s condos. 237 Granby’s agent agreed to allow Station #2 access to the void space, but the company hired by the agent to renovate and develop the condos closed off the void space before Station #2 could soundproof.

After repeated noise ordinance citations, the City of Norfolk ordered Station #2 to stop all musical performances, causing a steep decline in the restaurant’s business. Station #2 threatened to withhold rent until it was allowed access to install the soundproofing, and the Lynches responded by locking Station #2 out of the building.

Station #2 filed suit, alleging among other things breach of contract and fraud in the inducement against 237 Granby’s agent and statutory conspiracy against the agent and the Lynches. The thrust of these claims was 237 Granby’s refusal to honor the agreement to allow access to the void space. The defendants filed a demurrer based on the economic loss rule and an interesting statute of frauds argument.

Regarding the fraud claim, the Court reiterated that fraud requires a false representation of a material fact, and that mere failure to perform a promise is insufficient unless the promisor had no intention of performing at the time he made the promise. Unfortunately for Station #2, its complaint did not allege that 237 Granby’s agent had no intent to perform at the time it promised to allow access to the void space. Instead, the complaint merely claimed that the agent and the Lynches agreed to prevent Station #2 from soundproofing the void space. The only duty alleged – providing access to the void space – was a mere contractual duty that could not give rise to fraud in the inducement. In resolving this issue, the Court unfortunately sidestepped the more interesting question – whether a person who fraudulently induces someone into entering into a contract can be liable for fraud in the inducement if that person is not a party to the ultimate contract.

Regarding Station #2’s statutory conspiracy count, the Court refused to allow mere breach of contract to constitute an “unlawful act” that could form the underpinning for a conspiracy. Had Station #2 sufficiently alleged fraud in the inducement, it may have been able to also proceed with its statutory conspiracy claim.

Regarding the statute of frauds, the defendants claimed that installing soundproofing in the void space was the equivalent of creating a party wall, i.e. accessing and occupying real property. According to the defendants, Station #2 was required to have an easement, and the agreement for an easement would have had to have been in writing. The Court rejected this argument, pointing out that Station #2 did not need continuing access to and use of the void space. Instead, Station #2 needed only permission – a license – to enter the void space and install the soundproofing, and that permission could be given orally.

Stay posted until next time when we contrast Station #2 with a recent Circuit Court opinion that reached the opposite conclusion and allowed a fraud in the inducement claim to go forward.
 

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In the recent case of TC MidAtlantic Development, Inc. v. Commonwealth of Virginia, Record No. 091271, the Virginia Supreme Court was faced with the issue of properly pleading compliance with conditions precedent in a public contract. Despite the tongue-twisting nature of this issue, the crux of the case came down to simple timing.

In May 2004, TC MidAtlantic and the Virginia Department of General Services (“DGS”) entered into a contract to perform work on the Washington and Finance Buildings in Richmond, Virginia. Irreconcilable differences arose between TC MidAtlantic and DGS, with DGS ultimately sending TC MidAtlantic a letter dated February 16, 2007 terminating the contract. That letter also informed TC MidAtlantic that it was entitled to file any claims pursuant to Section 47 of the contract. Section 47 stated:

Contractual claims…shall be submitted, in writing, no later than sixty (60) days after final payment; however, written notice of the Contractor’s intent to file such claim must be given at the time of the occurrence or beginning of the Work upon which the claim is based. The filing of a timely notice is a prerequisite to recovery under this Section…. All claims shall be submitted along with all practically available supporting evidence and documentation.

TC MidAtlantic filed a complaint in the Circuit Court for the City of Richmond on April 24, 2007. The trial court concluded that DGS’s February 16, 2007 letter initiated the sixty-day period for TC MidAtlantic to submit a written claim, and that its April 24, 2007 complaint came too late to comply with Section 47.

On appeal, TC MidAtlantic argued that it sufficiently pled compliance with Section 47, pointing to paragraphs in its complaint alleging that it made written demands on DGS for payment and performance. The Virginia Supreme Court pointed out that the complaint never specifically alleged that TC MidAtlantic submitted a claim within the 60-day window or in a timely fashion, as required by Section 47. TC MidAtlantic also tried to escape the 60-day requirement by unsuccessfully characterizing the February 16, 2007 letter as a “final written decision” on its claim, arguing that it then had six months from February 16, 2007 to file suit. The Court likewise rejected that argument, and went out of its way in a footnote to say that TC MidAtlantic did not appeal the trial court's conclusion that the letter initated the claim procedure.

Most frustrating of all, TC MidAtlantic had filed a motion to reconsider with the trial court, attaching March 23, 2007 letters and supporting schedules showing amounts owed under its claim. But the Virginia Supreme Court concluded that TC MidAtlantic forgot to ask leave to amend its complaint to allege that the March 23, 2007 letters complied with the condition precedent of Section 47’s notice requirement. The Court instead held TC MidAtlantic to the original wording of its complaint, including the argument that the February 16, 2007 letter was a “final written decision” rather than the initiation of Section 47’s claim procedure.

The lessons to take from this case are:

1. If you are confronted with a party who insists on including a contractual provision that will shorten the time frame in which you must give notice of a claim or file suit, be realistic about the deadlines you agree to, and stick to them.
2. The second a dispute arises, get the contract out and read it carefully to ensure that you comply with all notice and claim provisions.
3. And if your case involves a condition precedent with notice or claim provisions, don’t forget to acknowledge the condition precedent in your pleadings, assert that you complied, and attach exhibits demonstrating exactly how you complied. 

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Here is a new sampling of cases in which the Virginia Supreme Court has recently granted appeals.

In April, the Court granted the petition for appeal in Studio Center Corporation v. WKW Construction, LLC, Record No. 092257, challenging the ruling of Judge Shockley from the Circuit Court of the City of Virginia Beach. Studio Center is contesting Judge Shockley’s holding that Virginia Code Section 54.1-1115(C) applied when the unlicensed contractor admitted it knew Virginia law required a license, but did not realize that it could not use someone else’s license. This case should give us some much needed guidance on Section 54.1-1115(C)’s requirement of “good faith” and “actual knowledge.”

What “Case Watch” would be complete without an appeal involving one of my favorite topics – BPOL tax! In March, the Court accepted the petition for appeal in Ford Motor Credit Company v. Chesterfield County, Record No. 092158. This case will delve into, among other issues, when a tax payer can take a deduction for out-of-state gross receipts under Virginia Code Section 58.1-3732(B)(2), and when it is appropriate to use the default apportionment method in Virginia Code Section 58.1-3703.1(A)(3)(b) to measure the tax payer's gross receipts.

In January, the Court also granted the petition for appeal in AMEC Civil, LLC v. Commonwealth of Virginia, et al., Record No. 091662. AMEC Civil designated no less than twenty-two assignments of error, with the Commonwealth designating seven assignments of cross-error. Much of the debate revolves around whether AMEC was required to give VDOT written notice of its claims at the “beginning of the work,” or whether AMEC could have given notice at the “time of the occurrence” under Virginia Code Section 33.1-386, whether that notice requirement could be satisfied by VDOT’s actual notice, and whether VDOT must show prejudice by any delay in providing notice. Some of the other issues involve whether sustained elevated lake levels constituted a differing site condition, and whether VDOT had a reciprocal duty to provide AMEC notice of that condition under the contract.

As always, stay posted!
 

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Typically, Virginia courts will simply review and apply the terms of contracts.  This is great if you have a good contract, horrible if the contract tilts towards your opponent.  In contrast to the general rule, Virginia courts are quite hostile to non-compete agreements and are more than willing to throw them completely out when the clauses go overly broad.

Another recent example was highlighted yesterday in The VLW Blog.  The case, Specialty Marketing v. Brunson, involved Specialty, a wholesale distributor of electronics.  Brunson was a sales representative.  When he became a director and purchased stock in the company, Brunson signed a non-compete.  Brunson left Specialty's employment and was hired six months later to act as an account representative for a competitor in his old territory. 

The non-compete stated in pertinent part:

A. BRUNSON shall not own, manage, operate, control, be employed by, participate in, or be connected in any manner with the ownership, management, operation, or control, whether directly or indirectly, as an individual on his own account or as a partner, member, joint venturer, sole proprietor, officer, director or shareholder of a corporation, firm, association or other entity, of any business competitive until SPECIALTY in areas where SPECIAL]'Y has a market for its business.

 The court looked at this clause and quite easily threw it out.  The clause violated Virginia law by prohibiting the former employee from performing functions unrelated to the functions performed for the previous employer.  The court also found the geographic limitations contained elsewhere in the contract to be unreasonable in scope.

We see non-compete and non-solicitation agreements used with some regularity in the construction industry although not with the same frequency as some other industries.  If you are going to go this route as an owner, a reasonable scope is critical or the clause will get thrown out.  Ironically, for employees this is an arena where you may actually be rooting for the employer to overreach and go too far.

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The Virginia General Assembly passed a statute, HB 797, that expressly permits architects and engineers to enter into contractual limitation of liability clauses.  The ACEC, VSPE, and VSAIA actively pushed to change the statute in the wake of several cases which ruled that previous language in the corporate enabling statute barred limitation of liability clauses for design professionals.  As can be sen from the bill tracking, the measure passed fairly easily in both the House and the Senate.

In Virginia, most assuredly a freedom of contract state, why did courts feel compelled to toss these frequently used contract provisions?  The friction came from the statute which permitted architecture and engineering firms to practice as corporations.  The current statutory language provided:

No such organization shall limit the liability of any licensee or certificate holder for damages arising from his acts or limit such corporation, partnership, sole proprietorship, limited liability company, or other entity from liability for acts of its employees or agents.

In 2007, an order from the Arlington County Circuit Court used this language in the corporation statute to hold that contractual limitations of liability were unenforceable.  In 2008, the Rockingham County Circuit Court reached the same conclusion. 

Critics of the decision pointed out that the statute in question was dealing with corporate formation, not contractual allocation of risk.  The logic of these decisions is brought into serious question by the Supreme Court of Virginia's 1996 decision in Gerald R. Moore & Sons v. Drewry.  That case held that an individual engineer could not be liable in negligence based on a contract with the engineer's corporate employer (previously discussed in our economic loss series).  Thus, in the very context of corporate versus individual liability that the statute was written for, the Supreme Court of Virginia ignored the statute.  Nevertheless, the courts above used the statute language to wipe out contractually negotiated and agreed to allocations of risk.

There is no retroactivity provision in the statute and the statute involves an amendment and re-enactment of the corporate statute.  Thus, it looks to me like this will only apply prospectively.  Whether that will mean to contracts entered into after the effective date, litigation filed after the date, or motions heard after the date will likely be a matter of some discussion.  We will have to see what happens with contracts and cases in the interim, but this is certainly a very welcome development for those in the design professional community.

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Waldo Jaquith

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There are a number of important construction law and economic developments that I want to pass along to our readers.  Given timing and the plethora of topics to address, I wanted to share these developments in a more rapid fire format so these updates remained timely.

You should be on the lookout for more information on these topics in the future.  We may expand on some of these threads in the future here as well:

• The Supreme Court of Virginia will hear the appeal in AMEC Civil LLC v. VDOT.  This case is a very important case involving what is required for notice of claims on construction projects; any person or entity involved in Virginia construction needs to keep an eye on this case as it could have a major impact on future Virginia construction litigation
• As reported by our friend Chris Cheatham, the District of Columbia has attempted to fix their green building ordinance by no longer requiring a "performance bond" guaranteeing verification of green construction ... they will instead just require a "bond" guaranteeing verification of green construction.  Count me as a skeptic that this editorial change is meaningful or will fix the problem of lack of available bonds in the markets to cover this risk.
• The economy is sending some mixed messages.  Overall unemployment dropped from 10.0% to 9.7% in January according to the latest Bureau of Labor Statistics report
• Unfortunately, that improvement did not translate to the construction industry.  ENR reports a significant continued rise in construction unemployment, jumping from 22.7% in December to 24.7% in January.  The Bureau of Labor Statistics indicates that the construction sector lost 75,000 jobs in January bringing the total to 1.9 million since December 2007
• Associated Builders and Contractors released their latest Construction Economic Update.  The skinny: private non-residential construction spending rose 0.2% in December, but was down almost 18% year over year.

The continuing sluggish economy continues to place significant bidding pressure on the construction industry.  I still stand by my post last October that this bidding pressure will translate to serious claims issues over the next couple years.  Put on your seat belts, it will be a rocky ride here for a while.

Image by Ian Britton courtesy of Freefoto.com

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So, here in the Washington, DC area we are buried under a couple feet of snow.  You know we have a lot of snow when the Lincoln Memorial steps have been transformed into a good tobogan run.  Unfortunately, so much snow means a ton of dead load placed on roof structures.  There are a number of roof collapses reported around the area.  So far, the major blessing is it appears that none of these events have led to any serious personal injuries.  You can definitely expect that these significant collapse events will trigger equally significant property damage claims, business interruption issues, and perhaps threaten the long-term viability of some businesses.  These events include:

• The roof of the Bailey's Crossroads Volunteer Fire Department collapsed
• A hangar roof at Dulles Airport fully collapsed, reportedly destroying several business jets
• The roof at a commercial strip store in Forestville, MD collapsed Saturday
• The roof at St. John School in Maryland collapsed, destroying six classrooms, the computer lab, library, and offices
• A storage warehouse in California, MD collapsed
• The scariest has to be the collapse of the Prince William Ice Center which happened with the building occupied with skaters; owners were able to clear all the occupants out when they observed a ceiling beam start to twist

Here is a news report on the Baileys Crossroads roof collapse from WJLA:

With the threat of more snow potentially on the way, the region may not have seen the last of these problems.  Building owners may face some significant hurdles to full recovery, including finding out the limitations of their insurance policies, facing problems with statutes of limitations and/or statutes of repose, and finding that responsible parties are casualties of the current economic crisis and thus are judgment proof.  All of these factors point to a few very important lessons:

• Know and understand your insurance coverage and its limitations before you have problems
• When shopping for insurance, evaluate risk and consider not just shopping for the lowest price; you may find that going cheap on insurance ultimately costs you far more
• Know and understand applicable statutes of limitations and statutes of repose prior to entering into design, construction, or property purchase agreements
• Factor in the impacts of these time limitation issues when you asses the appropriate levels and types of insurance your purchase
• Do your homework - conducting detailed inspections prior to purchase and properly evaluating the strength and credentials of your consultants and contractors is an investment of time and money, but it is worth it in the long run rather than face a catastrophic loss in the future

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A post yesterday from our friend Chris Hill at Construction Law Musings really resonated with me on a critical skill that many lawyers seem to lack.  The post, "What Owners Look for in Green Building and Why Contractors Should Care" advocated that contractors should know and understand what project owners were looking for in green buildings.  As Chris states well, "Knowing the other side's playbook is one way that a football team can prepare, the same holds true in pre-construction negotiation of contracts."

This same concept can and should be applied in every legal context.  If I cannot understand the strengths and weaknesses of not only my case, but also my opponent's, I am wearing blinders and courting disaster.  Not being able to play both sides of the chessboard is asking for surprises.  In negotiations, that means losing ground unnecessarily.  In litigation, it can mean flat out losing the case.

For years, a pocket classics translation of Sun-Tzu's absolute must read, The Art of War has lived on my desk.  A classic passage from centuries ago echoes this issue:

So it is said that if you know others and know yourself, you will not be imperiled in a hundred battles; if you do not know others but know yourself, you win one and lose won; if you do not know others and do not know yourself, you will be imperiled in every single battle.

For clients on the receiving end, you should understand and cherish the need for your lawyer to play the "devil's advocate" role in testing assumptions, articulating weaknesses, and educating you regarding the strengths and weaknesses of your position.  Ultimately, that very approach may mean success or failure of your matter.

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The Supreme Court of Virginia issued an opinion last Friday in the case of Virginia Home for Boys and Girls v. Phillips  that reads like a law school examination question.  The court ruled that a man had no claim against an estate because he had no written contract and no independent verification.  

The basic principles are easy.  The statute of frauds in Virginia generally provides that all contracts for the sale of real estate must be in writing.  The so-called "Dead Man's Statute" provides that in cases where the opponent is incapable of testifying, no judgment shall be rendered if it is founded solely on uncorroborated testimony.  Both of these statutes make it incredibly difficult for a party to make a claim against an estate based on oral contracts, particularly claims involving real estate.

Despite these principles, the claimant in this case actually won at the trial court.  Part performance of the agreement can eliminate the requirement for a written contract.  Phillips claimed an agreement in 1977 that the estate should go to him if he helped on their farm and took over their operations.  The trial court was convinced based on the long history of changes in lifestyle, decades of assistance around the decedent's farm, and refusing to take more lucrative jobs in order to live by his agreement that Phillips story was on the level.  Unfortunately for Phillips, the Supreme Court of Virginia reversed and found there was no independent corroboration.

This case provides a couple important take-aways:

• All contracts involving real estate should be in writing
• Do not expect limited exceptions to basic rules to save your case, especially in Virginia
• Any arrangements that are effective upon death should be confirmed in writing
• Any business ownership transfer issues should be in writing or you risk estate planning arrangments trumping the oral business deal

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In 2004, 515 Granby, LLC proposed a $180.5 million condo development. With 34 stories and 327 units, Granby Towers would be the tallest building in Norfolk and would revitalize the northern part of the city. The following year, the federal government threatened to condemn the property, causing just enough of a delay for the ebbing economic tide to overtake the Granby Tower project and thwart 515 Granby’s ability to secure financing.

Fortunately for 515 Granby, the prime contract with Turner Construction Company had the following language:

This Agreement and any liability and obligations of the Owner…shall be subject to and expressly conditioned upon the closing by the Owner, and the initial funding by its lender, of the construction loan… and Owner shall have no obligation or liability to Construction Manager for any costs for the Construction Phase under this Agreement unless such construction loan closing is completed.

Turner and its subcontractors, who were owed over $13 million for construction on the project, challenged this language in a two-day evidentiary hearing in the Circuit Court for the City of Norfolk. In a letter opinion issued by Judge Martin, Judge Martin rejected this challenge, finding that 515 Granby “made great efforts to secure financing for the project,” but was unable to do so due to the current conditions of the credit market. Judge Martin concluded that 515 Granby would have had to pay Turner only if and when it had received initial funding of the construction loan.  For an in-depth look at the court's reasoning, and what you can do if you face such a contractual provision, go to Yes, Virginia, Contract Terms Do Matter:  Financing Term Offers Owner an Escape Hatch, by my colleague, Tim Hughes, guest blogging on Construction Law Musings. 

Fortunately for Turner, its subcontracts contained the following language:

The obligation of Turner to make a payment under this Agreement, whether a progress or final payment, or for extras or change orders or delays to the Work, is subject to the express condition precedent of payment therefor by the Owner.

One of the subcontractors, Suburban Grading & Utilities, claimed this language was unenforceable. In a second letter opinion, Judge Martin upheld this provision as well, noting that the Supreme Court of Virginia finds “pay if paid” clauses enforceable “where the language of the contract in question is clear on its face.” This language was an unambiguous “pay if paid” clause that Judge Martin had no choice but to uphold, leaving Suburban to eat the costs of $575,928 for labor and materials and another $245,662 for dewatering.  For a great and very timely discussion of this opinion and advice about "pay if paid" clauses, I urge you to read Chris Hill's Construction Law Musings post, Pay if Paid, Pay Attention Subs.

Don’t go away thinking there will be no winners in this debacle! The federal government has since conveniently renewed its desire to condemn the property in order to expand the federal courthouse next door.  It offered a paltry $6.1 million to seize the Granby Tower property, an offer that no one is jumping at yet.  If you’re interested in reading more on this very likely end to the Granby Towers saga, take a look at Harry Minium and Tim McGlone’s recent article in The Virginian-Pilot.  
 

Image by:  Hyunsoo Leo Kim/The Virginian-Pilot 

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A recent Fairfax County Circuit Court case highlights how fragile confessions of judgments can be in Virginia.  The case, Superior Paving v. Bud & The Boyz Construction, resulted in a confessed judgment being set aside by the trial court.

Virginia law provides at Code of Virginia Section 8.01-433.1 that the note, bond or other evidence of a debt with a confession of judgment provision contain a notice provision stating:

IMPORTANT NOTICE

THIS INSTRUMENT CONTAINS A CONFESSION OF JUDGMENT PROVISION WHICH CONSTITUTES A WAIVER OF IMPORTANT RIGHTS YOU MAY HAVE AS A DEBTOR AND ALLOWS THE CREDITOR TO OBTAIN A JUDGMENT AGAINST YOU WITHOUT ANY FURTHER NOTICE.

In Superior Paving, the plaintiff included the statutory notice language in the original credit agreement related to asphalt purchases.  The defendant later requested a proposal from plaintiff  for paving the entrance of an industrial building.  Defendant accepted the proposal.  According to the court's opinion, neither the proposal nor the later resulting invoices contained the statutory notice language.  The opinion is silent on whether the proposal, acceptance, and invoices expressly incorporated the terms of the credit application.

The court initially entered judgment in favor of plaintiff in March.  On October 5, the court set the judgment aside ruling that "any and all notes or evidence of debt upon which a confessed judgment is to be based must unclude the 8.01-433.1 language". 

There are a couple take-aways from this case:

• 1: Assume that confessions of judgment provisions are fragile and easily undone
• 2: Even after judgment is entered, See No. 1
• 3: Include the confession of judgment notice into the actual contracts

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Virginia law continues to apply a strict division between contract claims and tort claims.  This rule holds true in the context of professional malpractice claims as well.  Many states apply legal rules where professional malpractice claims arise from negligence or both negligence and contract.  This is not the case - from 1976 forward, the Supreme Court of Virginia stated in Oleyar v. Kerr that a claim for professional malpractice, while sounding in tort, was actually a claim for breach of contract with a contract statute of limitations.

The nature of professional services does present a somewhat different posture for the economic loss rule than simple contracts cases.  A licensed professional is regulated by the Commonwealth and required to meet express professional services prior to licensure.  Many of the statutes and regulations that govern professionals expressly provide that in addition to duties assumed pursuant to contract, the law imposes duties towards the safety of the general public on the licensed professional.

Despite these license implications, Virginia again applies the economic loss rule in the context of professional services.  In Gerald M. Moore & Son, Inc. v. Drewry, the Supreme Court of Virginia considered a case where the plaintiff had a contract with an engineering corporation.  In its claim for economic losses, the plaintiff sued both the engineering corporation and the individual engineer for negligence.  The Supreme Court of Virginia ruled that in the absence of privity, a party could not be held liable for damages caused by negligent performance of a contract and that the same rule applies to professional engineers.

See our previous economic loss rule posts.

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As we watch Chinese drywall litigation erupt nationally, we see the rapid fallout: insurance companies denying coverage; suppliers going bankrupt; homeowners filing suit against all the parties in the food chain.  We have seen this story before.  In Virginia, the applicable could translate to some very harsh results even if owner plaintiffs can prove the drywall was defective and caused damages.

Why is that?  We have learned that Virginia requires a contract to recover "economic losses".  We have also discussed that this requirement extends to products liability cases for recovery of "consequential damages" despite a statute in the Uniform Commercial Code that appears to eliminate lack of privity as a defense.  We now need to see how these definitions play out in actual context.

For home owners, the owner may want to recover the cost of repair to their home associated with defective products.  Virginia courts appear to agree that owners purchase real estate from builder/sellers rather than goods and have no UCC remedies against manufacturers and sellers of goods.  Under the Sensenbrenner case, the owner's remedy for economic repairs sounds in breach of contract against the builder.  If the builder goes bankrupt, the owner may be completely out of luck.  If there are express warranties on products that were assigned to the owner, they may have an express warranty claim; however, it is quite rare that all those t's are actually crossed.

On the builder side, if a builder is sued by the owners, they might try to drag in all the contractors, subcontractors, suppliers and manufacturers to pass through the claimed repairs of the owners.  Virginia again applies conservative principles, even on products cases, and forces people to stick to the chain of privity.  On products cases in particular, in Pulte v. Parex, the Supreme Court of Virginia stated that a builder's attempt to pass through a home owner's damages were consequential damages and, "fit into this definition like a hand in a glove."  The Court applied a conservative analysis in blocking the builder's claims for breach of express and implied warranties, indemnification, and contribution.  (Disclosure - I represented the manufacturer in this case, so if there is any apparent bias here, guilty as charged).

What are the takeaways from this series of cases?

• Construction products liability cases face significant legal hurdles under Virginia law
• The basic requirement for privity of contract appears intact on Virginia products cases relative to attempts to pass through repair cost claims
• You should assume that you need to stick to the chain of privity to recover unless you get lucky
• A bankruptcy can cripple your ability to get to the responsible party

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We have seen waves of claimed problems with construction products over the last several decades: PVC plumbing fixtures and materials; fire retardant treated (FRT) plywood; exterior insulation and finish systems (EIFS).  We are on the front edge of another eruption with Chinese drywall, and indeed we have heard the first rumblings that the drywall problems may extended to materials manufactured in the United States.  It seems like the construction industry has become the Land of Misfit Toys from my favorite old school TV special, Rudolph the Red-Nosed Reindeer.  

Construction products liability cases present a very messy interaction between tort, contract, traditional economic loss principles, and the Uniform Commercial Code (UCC).  We have previously discussed Virginia's economic loss rule which basically provides that in order to recover economic losses, you need to have a contract with the party you are suing.  To understand the interplay, we need to get a little more technical than we usually do here on the blog. 

The UCC states at Section 8.2-318, "Lack of privity ... shall be no defense in any action brought against the manfuacturer or seller of goods to recover damages for breach of warranty, express or implied, or for negligence [.]"  That should end the issue on products cases as the statute is clear, right?

Wrong.  The Supreme Court of Virginia found in the Beard Plumbing case that with regards to claims for consequential damages, the consequential damage statute was more specific and controlled over the general "anti-privity" statute.  The consequential damage allowed recovery of losses known by the seller "at the time of contracting ".  Thus, the court ruled that to recover consequential damages under the UCC, the claimant still has to demonstrate privity of contract despite the UCC anti-privity statute.

Next time, we will talk about what are direct versus consequential damages, in particular as it relates to privity and economic loss.  Teaser: if the plaintiff is stuck with the direct damages as precisely defined in the UCC, the plaintiff is one unhappy camper on a construction case.

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The economic loss rule defines that most basic of questions: who can sue whom and for what claims.  Virginia still sticks to an extremely Conservative judicial model and this philosophical thread is readily apparent in cases dealing with this question.  The Virginia economic loss rule provides that in order to sue a party for "economic losses", the plaintiff generally needs to have a contract with the defendant.

The rule is simply stated in isolation, but proves to be a source of continuing debate, especially in construction litigation.  The seminal Virginia case, Sensenbrenner v. Rust, Orling & Neale, sets the groundwork with its definition of "economic losses".  In the Sensenbrenner case, the plaintiffs purchased a home with an indoor pool from a builder.  The plaintiffs claimed that the pool was negligently designed and built on fill, settled, and caused leaking from broken pipes.  This water in turn was alleged to have caused the bottom of the pool and the foundation of the house to crack.

The court discussed the differences between contract and tort.  While tort law easily handles legally imposed duties, tort law "is not designed, however, to compensate parties for losses suffered as a breach of duties assumed only by agreement."  The court found that the plaintiffs entered into a single contract for construction of a home with a pool.  When one part of the home damaged another, the plaintiffs suffered nothing more than "disappointed economic expectations."  Thus, their remedy sounded in contract.  They had no contract with the architect or pool installation subcontractor, so their claims failed as a matter of law.

When all the parties are still standing, the economic loss rule basically forces parties to stick to the food chain for their remedies.  This naturally means that risk allocation provisions really have teeth under Virginia law because courts will often block plaintiffs from slipping away from these clauses by restating their contract claims in tort.  In today's quite risky economy, the economic loss rule means that a bankruptcy at some point in the contract chain of privity can often let a whole chain of potentially liable parties off the hook.

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Earlier this year, the Virginia Supreme Court decided Martin Brothers Contractors, Inc. v. Virginia Military Institute, taking the opportunity to revisit its decision in Blake Construction.

The Virginia Military Institute (“VMI”) contracted with Martin Brothers to renovate VMI’s main dining facility. During the project, VMI requested changes resulting in a 270-day delay. VMI agreed that it alone was responsible for the delay. Martin Brothers sought $430,242.56 in delay damages plus the costs of recovery.

VMI paid only a portion of Martin Brothers’ delay claim, relying on terms found in the contract’s General Conditions. General Condition 43(b) stated that Martin Brothers could recover damages for owner-caused delay, provided the delay was “unreasonable” [sound familiar?!]. In such a case, Martin Brothers would be permitted to submit a change order adding additional days for completion of work. The General Condition governing change orders allowed some, but not all, site direct overhead expenses for delay, and disallowed all home office expenses. The same General Condition contained a subsection allowing a fifteen percent markup for overhead and profit. Martin Brothers’ claim included $225,937.40 in site delay damages and $204,305.16 in home office delay damages. Based on the language in the relevant General Conditions, VMI agreed to pay only $99.646.20 in site damages and refused to pay any home office damages.

At the trial court level, VMI successfully convinced the Circuit Court that the contract's terms, including its markup provisions, amounted to “liquidated damages,” one of the specifically enumerated exceptions in Virginia Code Section 2.2-4335 (B). The Virginia Supreme Court didn’t buy this argument, going right back to its decision in Blake Construction. The Court reiterated that Section 2.2-4335 “means what it says”:

Any provision…to waive, release, or extinguish the rights of a contractor to recover costs or damages for unreasonable delay in performing [a public construction contract]…shall be void.

The only exceptions to this broad language are those specifically enacted by statute, including Section 2.2-4335 (B):

1. provisions allowing a public body to recoup costs for delay caused by the contractor, subcontractors, and their agents and employees;
2. notice requirements;
3. liquidated damages; and
4. arbitration or other forms of alternative dispute resolution.

In analyzing whether the terms of the contract were in fact a liquidated damages clause, the Virginia Supreme Court asked whether Martin Brothers and VMI had actually entered into an agreement for the calculation of delay damages. VMI argued that the claimed home office expenses and all site expenses beyond $99,646.20 were included in the markup provisions, amounting to an agreed method of calculating the delay damages, and therefore a valid and enforceable liquidated damages clause.

The Court saw past this argument, pointing out that the markup provisions compensate Martin Brothers for added work required by VMI’s change order, but provide no compensation at all for extra expenses resulting purely from the delay. For instance, if VMI issued a change order requiring extra work, and Martin Brothers was able to complete the extra work on time, Martin Brothers would be entitled to its fifteen percent markup. However, if the extra work delayed the project by a year, Martin Brothers would still be entitled only to its fifteen percent markup, and nothing at all for the delay.

The Court concluded that the General Conditions with its markup provisions were not actually an agreed formula to calculate delay damages, and therefore not covered by Section 2.2-4335 (B)'s liquidated damages exception. Because the terms of the contract that VMI relied up acted as an absolute bar to most of the delay expenses incurred by Martin Brothers, the Court declared those terms void and unenforceable as against public policy.

In the wake of Martin Brothers, public bodies will likely become more and more creative in drafting supposed “liquidated damages” provisions. Take comfort in the Virginia Supreme Court’s and the General Assembly’s strong protection of a contractor’s right to delay damages in public contracts, and carefully scrutinize these provisions before you sign a contract.
 

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Mediation is often touted as a time and cost-saving method of dispute resolution in construction matters.  It is not without its critics.  Don Short recently posted a discussion,  "Why Bother with Mediation?".  Mr. Short's basic postion: "... mediation of a construction dispute is just an impediment to getting the matter resolved in a timely and cost efficient manner."  Mr. Short followed up in his piece "When Not to Use Mediation?" amplifying on the theme that time was money and that mediation clauses permitted a recalcitrant party to string the process out.

I have inserted pre-litigation and/or pre-arbitration mediation clauses into literally every single construction contract I draft.  The result has been overwhelmingly positive.  In my practice, I have seen very significant cases on very significant projects get resolved regularly at mediation with no lawsuit or arbitration demand filed.  The number of cases resolved compared to the number of useless exercise mediations like those described by Mr. Short is likely on a ratio of 20:1 or greater.  Even cases that do not settle initially often resolve soon thereafter based on the foundation established during mediation.  The cases that were going to be a waste of time to mediate had warning signs all over them and we gauged our approach and investment accordingly. 

Our good friend Victoria Pynchon had a slightly different view that being contractually required to mediate before the parties were ready would probably be another roadblock to eventual resolution. I agree that mediating before the parties are ready is a waste of time, money and resources and can be counter-productive.  I generally have been able to negotiate exchange of appropriate information prior to mediation to facilitate meaningful conversations.

I am mindful that it is somewhat counterintuitive to make a party mediate.  Utimately, mediation needs two parties that are open to discussion, risk evaluation and potential settlement talks.  Sometimes that cake needs to bake in the oven far longer before the parties are ready.  Generally, however, the mediation clause represents the parties agreeing that sitting down and talking to resolve issues is better than fighting in court or arbitration.  More often than not, it works.  Call me a cynic, but at times it feels like many lawyers only want to get to mediation when "their fee has fully matured".  By that time, much of the potential benefit of mediation has evaporated and the positions of the parties may have been hardened by the emotional and financial investment of litigation.  Getting lawyers and parties to mediation without such a clause often ends up taking far too long and involve ultimately wasted significant litigation expense. 

This viewpoint is admittedly anecdotal and developed over my years of practice and experience.  Do you see these clauses working to resolve cases efficiently or simply delaying the inevitable and costing time and money like Mr. Short?  Do you believe that placing the obligation rather than allowing the parties to mutually decide to mediate facilitates resolution or acts as an impediment?  Or do you think the quicker to the mediation table the better?

Image by Judepics

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In the recent case of Martin Brothers Construction, Inc. v. Virginia Military Institute [pdf], the Virginia Supreme Court was confronted with whether Martin Brothers was able to claim delay costs, re-examining its 2003 opinion, Blake Construction Company, Inc./Poole & Kent v. Upper Occoquan Sewage Authority [pdf]. This post will review the Blake Construction opinion, and set the stage for the next blog post on Martin Brothers.

Blake Construction presented the Court with its first opportunity to examine a contract limiting delay damages in light of Virginia Code Section 2.2-4335 (A) [pdf], which states in part:

Any provision contained in any public construction contract that purports to waive, release, or extinguish the rights of a contractor to recover costs or damages for unreasonable delay in performing such contract, either on his behalf of on behalf of his subcontractor if and to the extent the delay is caused by acts or omissions of the public body, its agents or employees and due to causes within their control shall be void and unenforceable as against public policy.

The Court analyzed two contractual provisions, easily finding that the first was directly contrary to Section 2.2-4335 and therefore void as against public policy. That provision stated that an extension of time would provide the sole remedy for delay, and that the contractor agreed to make no claim for delay damages for “any sort of delay…for any reason, including but not limited to delay occasioned by any act or failure to act of the Owner.”

The rub in the case was the second provision, which tried to temper the blanket prohibition on delay damages. The second provision allowed the contractor to recover “additional compensation for the actual and direct costs” from unreasonable delay caused by the owner or engineer, provided that the contractor complied with notice and submission requirements. The provision also included a definition of “unreasonable delay” as amounting to bad faith, malice, gross negligence or abandonment.

As it should have, the Court began with the plain language of Section 2.2-4335, and the sweeping language by the General Assembly declaring any provision limiting delay damages as void. Viewed through that lens, the Court was not concerned about the language limiting delay damages to those within the owner’s control and requiring the contractor to give notice, because these were specific exceptions included in Section 2.2-4335 (A) and (B)(2). The Court was less forgiving about the bar for unreasonable delay damages except upon the owner’s bad faith, malice, gross negligence or abandonment, concluding that such a bar was void and unenforceable as against public policy under Section 2.2-4335.

The lesson to take from Blake Construction is to carefully compare any delay provisions in a public contract to Section 2.2-4335. A court is likely to find unenforceable and void delay provisions that go beyond Section 2.2-4335 (B), which specifically allows: (1) provisions allowing a public body to recoup costs for delay caused by the contractor, subcontractors, and their agents and employees; (2) notice requirements; (3) liquidated damages; and (4) arbitration or other forms of alternative dispute resolution.

Two more things to know about Section 2.2-4335: Under Subsection (C), a contractor making a delay claim is liable for a percentage of the public body’s costs to investigate, analyze, negotiate, litigate or arbitrate the claim. Under Subsection (D), a public body denying a delay claim is liable to the contractor for a percentage of the same kinds of costs, but only if determined in litigation or arbitration to have been in bad faith.

Stay tuned for the outcome of Martin Brothers in Part II of this post! I’ll give you a hint – we’ll look at Section 2.2-4335 (B)’s liquidated damages exception.
 

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Be aware that the procedural requirements of Virginia Code Section 15.2-1246 [pdf] apply to appeals denying claims arising under contracts covered by the Virginia Public Procurement Act, according to the recent case, Viking Enterprise, Inc. v. County of Chesterfield, Record No. 080215 (Jan. 16, 2009) [pdf].

In Viking Enterprise, Viking entered into a written contract with Chesterfield County to construct a fire station. The County insisted that Viking had to remove and replace part of a concrete floor. Although Viking believed the floor could be repaired without removing and re-pouring the concrete, it complied with the County’s request and submitted a claim for $86,531 for additional work. The County’s board of supervisors denied the claim on July 25, 2005, and the clerk of the County’s board of supervisors gave Viking written notice of that denial in a letter dated August 2, 2005.

Relying on Virginia Code Section 2.2-4363(E) [pdf] and 2.2-4364(E) [pdf], Viking believed that it merely needed to file suit in Circuit Court within six months of the board of supervisor’s final decision to perfect its appeal. It filed a complaint in Chesterfield County Circuit Court on January 27, 2006. It later non-suited its action and re-filed its complaint on February 13, 2007.

The County argued that Viking failed to comply with Section 15.2-1246, which would require Viking to appeal within thirty days from the date of the board of supervisors’ decision (if Viking had been present at the July 25, 2005 meeting) or within thirty days of service of the clerk’s letter (had Viking not been present at the meeting), and that Viking failed to serve written notice on the clerk and to execute a bond.

The Circuit Court and the Virginia Supreme Court agreed with the County. Because Viking conceded it had not appealed within thirty days of the decision or service of the clerk’s letter, had not served notice of the appeal on the clerk and had not executed a bond, Viking’s appeal was dismissed because it did not comply with Section 15.2-1246.

The Viking Enterprise opinion concludes with the following recap of requirements to perfect an appeal from a county’s disallowance of a claim arising out of a contract covered by the Virginia Public Procurement Act:

[T]he claimant must serve written notice of its appeal on the clerk of the county’s governing body and execute a bond to the county, both within 30 days from the date of either the decision or service of the written notice of the denial, in accordance with Code § 15.2-1246. The claimant must then institute legal action in the appropriate circuit court within six months of the date of the decision denying the claim, in accordance with Code Code §§ 2.2-4363(E) and -4364(E).

Notably, the Court recognized that Section 2.2-4363(E) also allows for an administrative appeal if available, and declined to rule on whether that subsection conflicts with section 15.2-1246. The Court also assumed without deciding that the Virginia Public Procurement Act applied, although Chesterfield County argued that it had enacted an ordinance opting out of the Act.
 

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As noted earlier today, we had the opportunity to post on the Construction Law Musings blog today as a guest blogger.  The post discusses litigation involving the failed Granby Tower project in Norfolk, Virginia - Norfolk inhabitants will likely know this project as the excavated hole in the ground downtown filling with water for the last couple years.

Here is a partial excerpt of the post:

A recent Virginia case once again demonstrates that contract terms matter. An unusual financing term allowed the owner of a project a complete escape from any liability on a project despite significant work being performed. The opinion from the Circuit Court of Norfolk involved five separate cases consolidated together, four claims by subcontractors and one by the general contractor Turner. All five cases hinged on an unusual financing clause in Turner’s contract with the owner.  The provision stated:

This Agreement and any liability … of the Owner (other than liability …. for Preconstruction Services) shall be subject to and expressly conditioned upon the closing by the Owner, and the initial funding by its lender, of the construction loan (on terms satisfactory to Owner) and Owner shall have no obligation or liability to [Turner] for any costs for the Construction Phase under this Agreement unless such construction loan closing is completed.

The court found that despite significant efforts, the owner was not able to procure such financing. Substantial construction work started, including excavation for the project, without actual financing in place. Multiple subcontractors filed liens and filed suit to enforce the liens, as did Turner. The court found that the contract clause completed absolved the owner from liability. The court further ruled that the subcontractors could not recover. Virginia statutes provide that a subcontractor cannot lien a job for amounts in excess of what the owner owes to the general contractor. While often described as “the owner only pays once”, the court held that the owner’s total defense to Turner’s claims similarly buried the subcontractors’ lien claims.

Please visit the link above to see the entire post!

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As discussed previously, USGBC has imposed extended reporting requirements as part of its minimum program requirements for LEED. It appears the extended reporting already adopted may only be an initial step. We may see extended reporting requirements backed up by decertification; we may see on-going recertification as a basic part of LEED program structure.  I admit this is speculative, but we may be seeing a shift from LEED using energy modeling towards an actual performance model.

Given the overall goal of improved building performance implicit in LEED, these changes and speculated upon shifts may make sense technically. These changes, however, raise some significant questions regarding risk and responsibility. The ultimate impact on risk, and thus embedded costs, of these changes may vary dramatically from state to state because of each state's underlying legal framework.  Placing these changes into the complex network of construction contracts, contractual allocations of risk, and shared responsibilities raises some interesting observations and questions:

• States whose limitations period runs based on "injury", such as Virginia, may experience extended limitations triggers where building performance is alleged to be the failure; such results could be different for the various players depending on their roles
• In damage trigger states, courts may find that "injuries" were suffered far earlier than owners even suffered performance problems, so results in these states are difficult to predict and there could be big winners and losers
• States with discovery based limitations accrual, such as Maryland and the District of Columbia locally, will present cases with ever longer, potentially plausible, arguments regarding why the owner "reasonably did not know" of a problem for years after occupancy of the project
• The timing issues presented by extended performance questions mean that contractual agreements on statute of limitations and when they start to run should be focal points of contract negotiations; negotiations regarding extended warranties will be pivotal as well
• The growing use of LEED certification in various local zoning approvals means decertification may carry unintended consequences. If a project is decertified, is there a possibility that its occupancy permit is threatened?
• The potential for decertification, or a failure to participate in recertification if that becomes standard, may place commercial landlords at potential for extended risk of breaches of lease agreements depending on the LEED requirements imposed
• Lease agreements in turn need to be carefully worded so that all parties are on the same page as to exactly what is the yardstick and time frame for complying with LEED related terms

These are just a few of the wrinkles that come the mind when one places an overlay of extended performance obligations into the context of LEED.  We will keep a close watch on these developments moving forward.  We believe that continued movement on the extended performance axis by USGBC will have some serious economic impact on the financial aspects of LEED projects, who "wins" and who "loses" based on these changes, and where bottlenecks may develop on the economic risk side of the equation in reaction to extended performance obligations.

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