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

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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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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After a 19 day bench trial, on Wednesday evening a federal judge ruled in favor of six plaintiffs seeking compensation against the United States under the Federal Tort Claims Act for damages flowing from Hurricane Katrina.  The court ruled that the United States was liable because the flooding leading to the homeowners' damages was caused by negligent maintenance of a significant navigation channel by the US Army Corps of Engineers.  The total verdict was for under $750,000 for the six plaintiffs; however, the result exposes the United States to liability claims for many other claimants who resided in the Lower Ninth Ward of New Orleans and St. Bernard Parish.

The 156 page opinion constitutes a detailed, highly technical history of the Corps' efforts to design and maintain shipping channels while still providing protection from storms and flooding.  The clear message in the case is that the judge found the Corps was far more concerned about shipping than safety.  The opinion is filled with not only a detailed technical history, but also a series of damning quotes which simply skewer the Corps.  Page 22: "[T]he Corps clearly took the position that its primary position was to keep the shipping channel open to deep draft traffic regardless of the consequences."

Page 26:  "... the sole focus of the Corps was the guarantee the navigability of the channel without regard to the safety of the inhabitants of the area or to the environment."

Page 32: "As to the north shore, the callous and/or myopic approach of the Corps to the obvious deleterious nature of the MRGO is beyond understanding."

Page 41:

Thus, as overwhelmingly demonstrated at trial, this subsequent erosion resulting in the width of the channel increasing by more than 3 times its authorized width was caused by the Corps' failure to armor the banks of the MRGO to prevent (1) boat wakes causing erosion of the banks; 2) excavation and maintenance dredging causing bank slumping; and 3) saltwater instrusion killing vegetation and promoting organic decay.

Page 111:  "The Corps' lassitude and failure to fulfill its duties resulted in a catastrophic loss of human life and property in unprecedented proportions.  The Corps' negligence resulted in the wasting of millions of dollars in flood protection measures and billions of dollars in Congressional outlays to help this region recover from such a catastrophe."

Turning to the legal arguments in the case, the court rejected the United States' argument that the Flood Control Act barred the suit.  The court further found that the plaintiffs were entitled to recover in tort under the Federal Tort Claims Act.  The court expressly found that the Corps had failed to use due care and that its actions were not policy decisions, but instead were technical and engineering functions.  As a result, the court rejected the government's arguments that it was entitled to escape liability for its negligence.

This decision is almost certainly not the end, even for these plaintiffs.  The government is expected to appeal.  Given the precedential impact of this litigation, this is easily a case that could garner the interest of the United States Supreme Court.  Nevertheless, the extensive ruling is a damning critique on the Corps of Engineers and its role in contributing to the Katrina disasater.

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