News
Construction Law Newsletter
[Volume 5, Issue 1– Spring 2008]
David S. Coats
[dcoats@bdixon.com]
David S. Wisz [dwisz@bdixon.com]
Bailey & Dixon, L.L.P.
434 Fayetteville Street – Suite
2500
Post Office Box 1351
Raleigh, North Carolina 27602-1351
Telephone (919) 828-0731
Facsimile (919) 828-6592
Website: www.bdixon.com
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Should you have questions
about any of the recent developments discussed in this issue of Bailey &
Dixon’s “Construction Law Newsletter,” please do not hesitate to contact us at
your convenience. If you would like to
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Inside this Issue:
Court of Appeals creates professional negligence
exception to Ports Authority
doctrine
(See page 1 for details)
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Court of Appeals holds that risk allocation/ liability limitation clause does not
violate G.S. § 22B-1 and is enforceable
(See page 2 for details)
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Court of Appeals elaborates on “builder-vendor”
requirement of implied warranty of habitability for residential construction
defect claims
(See page 3 for details)
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Court of Appeals upholds “mold endorsement” in homeowners’
insurance policy
(See page 4 for details)
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Federal court strictly construes “property damage”
requirement for coverage under CGL insurance policy
(See page 5 for details)
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I. Court of Appeals creates professional negligence exception to Ports Authority doctrine.
In North
Carolina Ports Authority v. Fry Roofing Co., 294 N.C. 73, 240 S.E.2d 345
(1978), the North Carolina Supreme Court created the seminal rule which holds that a tort or negligence action cannot be maintained between the parties to a
contract, even if the failure to properly perform the terms of the contract was due to the intentional conduct of the breaching party, when the injury resulting from the breach is simply damage to the subject matter of the contract. The Court further set forth 4 exceptions, however, in which a negligence action
could be maintained: (1) the damages are to the person or property of someone
outside of the contract; (2) the damages are to property other than property
which is the subject of the contract; (3) the promisor is charged as a matter
of public policy with the duty of using due care to protect the property from
harm (such as an innkeeper or common carrier); or (4) there was a willful
conversion of the property by the promisor.
In PVC, Inc. v. McKim & Creed, P.A., 656 S.E.16, 2008 WL
304729 (N.C.App. 2008), the Court of Appeals for the first time recognized an
additional exception to the Ports
Authority doctrine – a professional negligence exception.
In PVC,
Inc., PVC contracted with an architectural firm for the construction of a
hotel. The architect subsequently hired McKim & Creed to be the engineer of record on the project. McKim & Creed in turn contracted with a third-party (CCS) to design and oversee the installation of a cable support
system for the hotel. McKim & Creed also contracted with S&ME to provide certain data to the architect during the installation of the cable support system. When the support system was later found to be defective, PVC thus filed suit against both S&ME and McKim & Creed. S&ME in turn filed a third-party complaint against CCS arguing that if it were found negligent, it was entitled to contribution or indemnity from CCS based on their negligent design of the support system. CCS filed a motion for
summary judgment seeking to dismiss the third-party complaint on the grounds
that the Ports Authority doctrine prevented PVC from suing S&ME in negligence, and thus S&ME could not get contribution or indemnity against CCS. The trial court agreed and granted summary judgment in CCS’s favor.
On
appeal, the Court of Appeals held that even though none of the recognized
exceptions to the Ports Authority
applied to PVC’s claims against S&ME, PVC could still sue S&ME
professional negligence even though the parties’ relationship was based in contract. Relying on language from the Ports Authority decision which suggested that the list of 4 exceptions was “not all inclusive,” the Court held that “an engineer may be held liable in tort for breach of professional duty, even if its work is pursuant to a contract with the injured party and the injury suffered is to property which is the subject matter of the contract.” Id at *3. Consequently, the Court held that S&ME could overcome CCS’s defense of the Ports Authority doctrine;
however, on the facts before it the Court further held that the evidence did
not support the existence of any duty owed by CCS to PVC and thus summary
judgment was still warranted.
Commentary – Given the fact that the Court in PVC ultimately found that the contractor was entitled to summary judgment, it is curious that the Court will undertake finding a new exception to the Ports Authority doctrine for the first time since that decision was issued 30 years ago. It is left to be seen what sort of professions will be entitled to the benefit of this “professional negligence” exception, but there is the definite potential that all licensed professionals involved in a construction project other than the general contractor will be entitled to rely on this new exception. Additionally, it is unclear whether the PVC decision will lead to a weakening of the Ports Authority doctrine or the development of any new exceptions.
II. Court of Appeals holds that risk allocation/liability limitation clause does not violate G.S. § 22B-1 and is enforceable.
North Carolina General Statute § 22B-1 provides that indemnity provisions in construction contracts which attempt to require one party to indemnity the other party for the latter’s own negligence are
against public policy and are void and unenforceable. In Blaylock Grading Co., L.L.P. v. Smith, 2008 WL 850133 (N.C.App. 2008), however, the Court of Appeals held that a contractual “risk allocation” which merely limited a party’s damages to the value of services provided under the contract did not run afoul of G.S. § 22B-1 and was enforceable.
In Blaylock,
Smith and Blaylock entered into a contract by which Smith would provide land
surveying services to Blaylock at a military housing site where Blaylock was
providing grading services. The parties’
contract included a “risk allocation” provision which indicated that Smith’s
liability for any claims arising out of the contract “shall not exceed the
total amount of $50,000 or the amount of Smith’s fee (whichever is
greater).” Smith mistakenly set the
benchmarks over 1.5 feet higher than specified in the design plan, requiring
Blaylock to import additional fill to raise the elevation of the site. Blaylock subsequently filed a lawsuit against
Smith for breach of contract and negligence and at trial was awarded damages in
the amount of $574,714 for the cost of additional fill and additional
consequential damages. When Smith argued
that its liability was limited to $50,000 pursuant to the “risk allocation”
provision, the trial court held that provision was void as against public
policy and entered a judgment in accordance with the jury verdict.
On
appeal, the Court initially found that the “risk allocation” clause was not
void merely because it limited Blaylock’s damages, holding that where the
contract was not unconscionable and there was no inequality between the parties
as a general rule it should be upheld. Id.
at *3. The Court further rejected
Blaylock’s argument that the provision was unenforceable under G.S. § 22B-1. In doing so, the Court recognized that the
“risk allocation” provision was not truly an indemnity clause whereby one party
agrees to be liable for the negligence of the other party which causes damage
to a third-party. As the Court stated,
G.S. § 22B-1 “does not apply to contracts between a promisor and promise
limiting the amount of damages recoverable by one from the other.” Id. at 4. As a result, the Court reversed the trial
court’s decision and remanded the case for entry of a judgment in favor of
Blaylock for $50,000.
III.
Court of Appeals elaborates on “builder-vendor”
requirement of implied warranty of habitability for residential construction
defect claims
The
implied warranty of habitability is a warranty that flows from a general
contractor of a newly constructed residence and is a warranty that the
dwelling, including all of its fixtures, is sufficiently free from major
structural defects and is constructed in a workmanlike manner. A claim for breach of the implied warranty of
habitability exists, however, only when the general contractor is not only the
builder of the residence, but also the vendor of the real property to which it
is attached. In Burek v. Mancuso,
657 S.E.2d 446, 2008 WL 565112 (N.C.App. 2008), the Court of Appeals recently
explored the “builder-vendor” requirement of the implied warranty of
habitability.
In Burek, the plaintiffs purchased a newly
constructed residence from Defendants Mancuso.
The general contractor of the residence was not actually Defendants
Mancuso, however, but a company named Mancuso Development, Inc., which had construction
the house pursuant to a written contract with Defendants Mancuso. After the plaintiffs discovered problems with
a bulkhead on the property, they sued Defendants Mancuso for breach of the
implied warranty of habitability.
Agreeing with Defendants Mancuso’s argument that they were not the
“builder-vendor” of the residence and bulkhead, the trial court granted
Defendants Mancuso’s motion for summary judgment. Id. at *3.
On appeal, however, the Court of Appeals reversed and
held that an issue of fact existed with regard to whether Defendants Mancuso
were the “builder-vendor” given that they were the sole directors, officers, and
shareholders of Mancuso Development, Inc. and the fact that Mr. Mancuso was the qualifier for the corporation’s general contractor’s license. Id.
at *4. Noting that “it appears as though defendants were attempting to avoid the implied warranty of habitability by contracting with their own corporation,” the Court remanded the case to the lower court to determine whether Defendants Mancuso were in fact the “builder-vendor” of the residence.
Commentary – The Burek case clearly
represents an attempt to stop general contractors from avoiding potential
liability under the implied warranty of habitability by maintaining a
development company to sell their finished homes separate and apart from the
general contracting entity which builds the homes. As this represents a common practice in residential construction, builders are best served trying to include specific disclaimer language in their construction contracts if they want to truly avoid implied warranty liability.
IV. Court of Appeals upholds “mold endorsement” in homeowners’ insurance policy
Following
a rash of mold-related litigation, many insurers added a so-called “mold
endorsement” to their standard homeowners’ insurance policies. Although labeled an “endorsement” the policy, the typical language in effect limits the coverage for claims for mold-related damages to $5,000 for the total of all losses and costs from incidental wet rot, bacteria, and fungi damage. In Burrell v. Sparkles Reconstruction Company, 657 S.E.2d 712 (N.C.App. 2008), a lawsuit arising out water and mold damage resulting from a ruptured toilet valve, the Court of Appeals upheld such a “mold endorsement” as being an
enforceable limitation of coverage.
Specifically,
the claims in Burrell arose out of a botched water and mold remediation
project following the toilet rupture, and the homeowner’s claims against her
homeowner’s insurer (Piedmont Mutual Insurance Company) sounded in breach of
contract and unfair/deceptive trade practices. Plaintiff’s evidence at trial suggested that the cost of mold remediation exceeded $40,000, she was entitled to nearly $90,000 for mold damage to personal property items, and that she had incurred $60,000 in medical bills related to mold-related injuries.
Notwithstanding the plaintiff’s assertions that Piedmont did not explain
the “mold endorsement” to her, nor did they mention to same to her in any of
the initial correspondence following the water-damage event, the Court of
Appeals upheld the mold endorsement and held that the plaintiff’s contractual damages against Piedmont were subject to the $5,000 limitation. Id at 717. As the Court stated, “as the insured party, Ms. Burrell had a responsibility to read her own policy; moreover, she was bound by the terms of the contract just as Piedmont
was. We see no reason – nor did Ms. Burrell present evidence at trial – why the language of the mold endorsement should not control here.” Id. The Court further rejected the plaintiff’s argument that directed verdict had been improperly granted in Piedmont’s favor on the unfair/deceptive trade practices claim, holding the Piedmont’s allegedly slow response to the mold damage was not a proximate cause of the damage itself, and thus not actionable. Id.
at 718.
V.
Federal court strictly construes “property damage” requirement for coverage under CGL insurance policy
In
the recent case of Breezewood of Wilmington Condominiums Homeowners’
Association, Inc. v. Amerisure Mut. Insurance Co., 2008 WL 859018 (E.D.N.C.
2008), the Federal District Court once again applied North Carolina law and
strictly construed the “property damage” requirement for coverage under a
commercial general liability (CGL) insurance policy. The facts in Breezewood indicate that
the Association filed a lawsuit against the developer and general contractor
(Quality Built) of a 344 unit residential condominium complex for damages
resulting from alleged construction defects.
When Quality Built’s liability insurance carrier (Amerisure) denied
coverage for the claims, the contractor settled the claims against it for
$2,000,000, and assigned its rights under the Amerisure policy to the
Association. The Association then sued
Amerisure seeking a declaratory judgment regarding Amerisure’s duty to defend
and indemnify Quality Built for the property damage allegedly suffered as a
result of the defective construction.
Both parties filed motions for summary judgment.
Relying
on the Fourth Circuit Court of Appeals’ decision in Travelers Indemnity Co.
v. Miller Building Corp., 97 Fed. Appx. 431 (4th Cir. 2004), the
Court held that “property allegedly damaged has to have been undamaged or
uninjured at some previously point in time.
Allegations of faulty workmanship are inconsistent with this inference,
and accordingly do not constitute ‘property damage’.” Consequently, where the Complaint in the
underlying lawsuit against Quality Built identified construction defects such
as extensive drainage problems, lack of flashing around windows, doors, and
roofs, the Court held that to the extent the Association tried to recover the
cost of correcting Quality Built’s faulty workmanship, those claims did not
fall within the scope of the Amerisure policy. Id. at *4.
The
Association next argued that water damage resulting from Quality Built’s faulty
workmanship should constitute “property damage” within the meaning of the
policy. Once again, however, the Court
found that no coverage existed.
Specifically, the Court noted that any “limited” exception created by
the Travelers Indemnity case for water damage resulting from faulty
workmanship applied only to the property owner’s property that was separate
from any property supplied by the contractor.
Finding that none of the Association’s underlying claims alleged damages
to property separate from the condominium buildings or to property provided by
a party other than Quality Built, therefore, the Court rejected the
Association’s argument that covered “property damage” was present. Id. at * 5.
Finally,
the Court also summarily rejected the Association’s argument that the water damage
losses were covered since they resulted from wet weather events, and thus
constituted an “occurrence” or “accident” under the policy. Noting that the Association had failed to
provide evidence regarding a particular wet weather event or pervasive weather
conditions during the covered period, the Court held that the evidence did not
support a finding that “wet weather events were a separate, intervening cause,
or joint yet distinct cause, of the water damage” from the contractor’s faulty
workmanship. Id.
at * 6. The Court thus granted Amerisure’s summary judgment motion, and denied
the Association’s similar motion.
Commentary – The Breezewood case represents the latest in
a series of federal court cases which have significantly limited the coverage
afforded to general contractors under CGL insurance polices for most
construction defect claims. Although the
federal courts purport to be interpreting North Carolina law in their decisions, it is
uncertain that the North Carolina
courts themselves would give such a strict interpretation to “property damage.”
David S. Coats and David S. Wisz win a N.C. Court of Appeals case
In October 2007,
David S. Coats and
David S. Wisz won a significant case in the North Carolina Court of Appeals. In Park v. Young Homes, Inc. (No. COA07-67; North Carolina Court of Appeals), Bailey & Dixon represented the general contractor that constructed a multi-million dollar residential project in Wake County. The plaintiffs-owners sued the general contractor for alleged construction defects and, after a multi-week trial in April 2006, a jury verdict was rendered in favor of the general contractor on all claims. The Court of Appeals recently affirmed the Judgment entered in favor of the general contractor and dismissed the plaintiffs' appeal.
Anna Baird Choi successfully keeps Gavin Grant at NCSU
On August 1, 2007,
Anna Baird Choi. successfully negotiated an Order administratively closing the removal proceedings against N.C. State University basketball player Gavin Grant, a Jamaican national and captain of the NCSU men's basketball team. Grant's case, which began with the issuance of a Notice to Appear (NTA) by Immigration and Customs Enforcement on October 3, 2005, took a dramatic turn in August when the presiding immigration judge closed the pending removal action against Grant that, if not terminated, would have required Grant to return to Jamaica,his country of birth.
Ms. Choi began representing Grant in October of 2005 immediately after the issuance of the NTA. Though the Department of Homeland Security alleged that Grant entered the United States without inspection by an immigration officer, Ms. Choi began building a case for cancellation of the removal proceedings. After reviewing the evidence submitted by Ms. Choi and after discussion with both Ms. Choi and district counsel, the judge administratively closed the removal proceedings.
With Grant no longer under pending action to remove him to Jamaica, he is now able to move forward with his application for permanent resident status. Grant is expected to complete his undergraduate degree at N.C. State University in the Spring of 2008, and he hopes to pursue his goal of playing professional basketball.
David S. Coats wins a pro bono case...
In April 2007,
David S. Coats won a pro bono case referred to him by the Volunteer Lawyers Program. The client was an older woman who had been denied long term disability benefits by her employer's long term disability insurer. Bailey & Dixon convinced the insurer to reverse their previous denial and the client was awarded a large lump sum award for past due benefits and was also to receive future disability benefits on a monthly basis. This case was featrued in
http://www.probono.net/NC
David S. Coats and J.T. Crook win a North Carolina Supreme Court case...
In January 2007,
David S. Coats and
J.T. Crook won a significant case in the North Carolina Supreme Court. Bailey & Dixon represented the defendants in Magnolia Manufacturing of N.C., Inc. v. Erie Insurance Exchange et al (525A06; North Carolina Supreme Court), which involved a seven-figure claim for lost business income arising out of a contended roof collapse at a manufacturing facility. After securing summary judgment for the defendants in Orange County Suprior Court, the case went all the way through the Appellate Division. The Supreme Court ruled that summary judgment had been properly granted to the defendants, all claims against the defendants were dismissed with prejudice, and it was judicially declared that defendants had complied with all policy requisites and had properly denied the claims at issue.
January 2007
In January of 2007,
Anna Baird Choi was elected to the Board of Directors of the PLAYSPACE Children's Museum in Raleigh. PLAYSPACE is a non-profit children's museum dedicated to the education and development of young children through hands-on, creative, and interactive play.
December 2006
David S. Coats and
J. Heydt Philbeck were named in December 2006 to
North Carolina Business Magazine's "Legal Elite" for 2007.