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

Many plaintiffs attempt to allege fraud claims in construction cases.  These attempts generally fail in Virginia because a claimant must allege a basis for a fraud claim that arises outside the context of a contractual duty.  This theory was clearly established in the Richmond v. McDevitt Street Bovis case in 1998, but we still see it regularly playing out in Virginia state and federal courts. 

Fraud claims have a couple interesting features.  First, they must be pleaded with specificity and particularity.  Second, a host of case law establishes that the types of "representations" that can support a fraud claim are quite limited.  These first two features mean that a plaintiff can expect extensive aggressive motions practice attacking their offensive pleading and courts often throw out fraud cases.  Third, fraud claims have an elevated burden of proof.  Rather than proving fraud by a preponderance of evidence, the plaintiff must prove fraud by clear and convincing evidence.  Fourth, fraud claims allow recovery of punitive damages in egregious cases.  Fifth, fraud claims can also allow recovery of attorney's fees in some circumstances.

Why invite all this hassle and increased expense and effort into a case?  The reality is that recovery of punitive damages is extremely rare and punitive damages are capped in Virginia at $350,000.  The potential for attorney fee recovery is nice and may represent leverage in negotiations, but in my estimation this is not the driving issue.  The two biggest reasons in my mind are 1) attempting to gain the benefit of a discovery accrual trigger for statute of limitations, and 2) finding ways to circumvent the economic loss rule.

As we recently discussed, Virginia law has a hair trigger on when the limitations clock starts to run.  Unlike neighboring Maryland and DC, Virginia uses a damage trigger instead of starting from when a plaintiff knows they have a problem.  In construction cases, many elements of the project are covered up and defective work can take years to manifest in observable damages.

Fraud also may offer a way to sidestep the economic loss rule.  We have often discussed the economic loss rule which is critical to analyzing who can be sued for what.  In cases where a party is not in contract with the plaintiff, options are limited under Virginia law.  Fraud is one way to potentially get around that boundary, but it is a very narrow passage and subject to significant obstacles.

That being said, many plaintiffs seem to use the kitchen sink method of pleading and allege every cause of action that exists in Virginia.  This may not only be risky from a perspective of good faith pleading, it can be a strategic nightmare.  Why drive up litigation costs, invite hosts of well taken motions, and lost credibility in a case just to stretch to allege a claim that will ultimately fail?

Links to recent fraud posts by Heidi Meinzer:

Broken Promises Won't Get You a Fraud in the Inducement Claim

Broken Promises, Part 2

Construction Law Musings Reply: Fraud and Construction Contracts: Like Oil and Water?

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Statute of limitations defenses are a hotly litigated and important aspect of construction law.  This is particularly true in Virginia where the clock often starts ticking based on a literal bright line trigger.  This means the time for filing suit can often start running in Virginia before anyone even knows there is a case.  In construction litigation, where problems can stem from latent defects which do not manifest for an extended period, these rules can be pivotal in limiting risk.

This backdrop is in sharp relief when you consider the impact of the huge snow storms throughout the DC metro region this winter.  There are numerous roof collapse cases working their way throught the system.  A couple weeks ago, ENR highlighted a story from the Roanoke Times about the Blacksburg Virginia High School roof collapse.

What caught my eye in the story were these quotes:

The entire school remains closed as officials also examine the safety of classroom areas after engineers, in the wake of the gym collapse, found six concrete beams that did not meet 1974 building codes ... The school board filed several lawsuits against Fralin's company, along with other contractors and suppliers involved in the high school's construction, in 1977. Three suits were settled out of court in 1978 with the defendants agreeing to pay $371,000 to provide the school with a new roof.

Beyond the question of whether any claim is already settled by the prior litigation, going after parties involved in the design and construction of facilities built in 1977 has some significant potential timing hurdles.  As can be seen from the report below, the school is forced to address a very serious roof collapse at this point.

Most construction cases focus on a five year written (or occasionally three year unwritten) contract statute of limitations.  The rub comes in that the limitations period begins to run "when the breach of contract occurs in actions ex contractu and not when the resulting damage is discovered".  Cases looking at this issue in Virginia had generally stated that the owner suffers damage when a project is defectively built, not when those defects translate into problems such as a collapsed roof.

We have talked in passing regarding statute of limitations matters and statute of repose matters in the past, but we are going to delve into them a bit over several post over the next few weeks.  For those interested in looking at North Carolina law on the topic, our friend Melissa Brumback has recently covered limitations and repose issues under that state's law.

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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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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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