Economic Loss Doctrine Does Not Apply to Condo Associations Says the Massachusetts Supreme Judicial Court

The Massachusetts Supreme Judicial Court recently held that the economic loss doctrine does not apply to condo associations. In Wyman, et al. v. Ayer Properties, LLC. 469 Mass. 64, (July 10, 2014), the Plaintiffs, as trustees of a condo trust, sought damages stemming from the negligent construction of elements of a condominium building constructed by Ayer. The Plaintiffs alleged that Ayer, which had purchased and converted the building in question into condominiums, negligently constructed the window frames, the exterior brick masonry, and the roof of the building. The negligent construction allegedly led to damage to both the common areas of the building and individual residential units.

The SJC reviewed the history of the economic loss rule, noting that the rule was developed in part to prevent the progression of tort concepts from undermining contract expectations. The rationale for excluding tort recovery for economic loss is that, “when a product injures only itself,” a party should be left to its contractual remedies. The commercial user can protect himself by seeking express contractual assurances concerning the product (and thereby perhaps paying more for the product) or by obtaining insurance against losses. The rationale underlying the economic loss doctrine is that damage to a product itself means simply that the product has not met the customer's expectations, or, in other words, that the customer has received “insufficient product value.” The maintenance of product value and quality is precisely the purpose of express and implied warranties"). As a result, “when a product injures only itself the reasons for imposing a tort duty are weak and those for leaving the party to its contractual remedies are strong.”

The SJC pointed out that the nature of condo ownership supports their conclusion that claims such as those presented here do not fit into the rubric of claims intended to be covered by the rule, as condo ownership gives both exclusive possession and ownership of the unit, and an undivided interest in the common areas. The court noted that as part of the statutory structure of condo ownership, “condominium owners cede the management and control of the common areas to the organization of unit owners, which is the only party that may bring litigation relating to the common areas of the condominium development on their behalf.”

In applying the rationale of the economic loss doctrine to the underlying case, the SJC noted a problem arises where the party exclusively responsible for bringing litigation on behalf of the unit owners for the negligent construction of common areas (here, the trustees) has no contract with the builder under which it can recover its costs of repair and replacement. Phrased differently, they cannot recover economic losses caused by defective construction. The SJC noted that the fundamental purpose of the economic loss doctrine is to confine the indeterminacy of damages, not to nullify a right and remedy for a demonstrated wrong and its harm. The court wrote that the rationale for applying the rule in this instance is made even weaker where the trustees seek damages which are finite and foreseeable, as the rule is intended to preclude recovery for intangible and unknown damages for lost contract or economic opportunity. The court reasoned that here, there was no such danger, as a lengthy trial established Ayer’s fault, the harm suffered by the trustees (as representatives of the unit owners’ rights in the common areas), and the exact amount of the damages. There were no allegations of consequential damages, but simply a reliably proven amount needed to repair or replace the negligently constructed window frames, masonry and roof. The purposes of the economic loss rule have little applicability in this circumstance.

Massachusetts Superior Court Holds Construction Manager At-Risk Responsible for Design Errors / Holds that Spearin Doctrine Does Not Apply to CM At-Risk

The Worcester Superior Court recently issued a potentially landmark decision clarifying the risk that construction managers assume when entering into CM-At Risk contracts. A copy of the Court’s decision is attached here.

In Coghlin Electrical Contractors, Inc. v. Gilbane Building Company, a subcontractor filed suit against the construction manager for additional costs resulting from the purported mismanagement of the project. The construction manager, in turn, sued the owner, asserting that the owner was legally responsible for damages caused by design changes and design errors that caused the additional subcontractor costs. The Court dismissed the construction manager’s claim against the owner, holding that the construction manager could not pass along the additional costs.

In making this ruling, the Court focused on the construction manager’s “extensive ‘Design Review’ responsibilities,” as well as the construction manager’s “broad obligation to ‘indemnify, defend and hold harmless’ [the owner]....” The Court held that this language served to “trump the long-standing Massachusetts common law principles to the effect that “where one party furnishes plans and specifications for a contractor to follow in a construction job...the party furnishing such plans impliedly warrants their sufficiency for the purpose intended’ [also known as the Spearin Doctrine].” Thus the relationship between the Owner and the Construction Manager under a CMR contract is not the same as the relationship between Owner and General Contractor under a traditional design-bid-build arrangement... Given the material changes in the roles and responsibilities voluntarily undertaken by the parties in a modern CMR contracts, the protections that Massachusetts courts historically have extended to construction contractors in the traditional design-bid-build context...simply are inapplicable to such contracts.

This decision is almost certain to be appealed and will be closely watched by industry groups.

U.S. Department of Labor Fighting for Right to Force Federal Contractors to Post Notices Informing Employees of Their Right to Unionize

An interesting battle is developing in a federal court in Washington, D.C.  The National Association of Manufacturers (NAM) is seeking summary judgment in an action it brought (along with the Virginia Manufacturer’s Association) in December 2013. They asserted that the poster informing employees of their right to unionize (required of federal contractors by the DOL's Office of Federal Contract Compliance Programs in accordance with a rule issued in 2010 by the Office of Labor-Management Standards) violates contractors' First Amendment rights. In its motion for summary judgment, NAM relies upon a prior decision in which the D.C. Circuit struck down the NLRB’s post-noticing requirement on the grounds that it compelled speech and thus violated the National Labor Rights Act.

In its opposition to NAM’s motion for summary judgment, the DOL argues that its poster requirement authority is properly derived from the Procurement Act, and that notifying federal contractor employees of their labor rights ensures efficiency in procurement of contracts by protecting against any labor unrest. The DOL asserts that the requirement does not interfere with contractors’ First Amendment free speech rights because the notices are “government” speech and not “private” speech, and does not interfere with federal contractors’ ability to disseminate their own speech regarding unionization. Finally, the DOL contends that the government is permitted to set certain conditions on the receipt of federal funds and contractors have a choice whether or not to enter into a contract with the government knowing that it will require such notices to be posted.

Mass Appeals Court Allows Recovery of Fees for In-House Counsel

The Massachusetts Court of Appeals ruled last week that attorney’s fees for legal work performed by in-house counsel are properly recoverable under M.G.L. c. 93A. A copy of the decision can be found here. 

In allowing the fee award, the Appeals court held that, “every hour spent on the []litigation was an hour when [in-house counse]’s efforts were directed away from other legal matters... Therefore, having in-house counsel engaged in the present suit had a concrete financial impact on [the plaintiff], which we conclude ‘incurred’ a cost.” The Court also applied policy considerations in awarding in-house counsel’s fees, stating, “To deny attorney’s fees to Omniglow in this case simply because it chose to utilize its own in-house counsel would undercut the deterrent purposes of c. 93A and would implicitly reward the defendants for their questionable behavior.”

Insurer Sues Municipalities Over Claims Stemming From Climate Change

Farmers Insurance has filed a series of class action lawsuits against several Chicago area municipalities for allegedly failing to address climate change in their storm water runoff plan. Farmers claims that this led to massive damage to Chicago area homes during a two day deluge last April – leading to claims against Farmers' insurance policies. Farmers points to certain assertions that local officials made in the Chicago Climate Action Plan to show that the municipalities knew about the risks posed by climate change, but failed to take appropriate action. According to the suit, "The defendant knew or should have known that climate change in Cook County has resulted in greater rain fall [sic] volume, greater rainfall intensity and greater rainfall duration than pre-1970 rainfall history evidenced, resulting in greater stormwater runoff."

These suits carry far reaching implications, particularly to public and institutional owners and engineering firms, who now face potential claims for failing to give full consideration to the impacts of climate change.

Going Green With New Building Materials Can Lead to Expensive New Issues

Synthetic stone veneer, fast-growing wood, and green roofs are just a few examples of green building materials and techniques that are rising in popularity as individuals, companies, and local, state and federal governments embrace sustainable building practices. However, for as aesthetically pleasing, environmentally beneficial, and socially conscious as these efforts may be, costly problems can arise if green building materials are used inappropriately or designed and installed ineffectively.

Many green building products are so new that they have limited in-service data indicating whether they are code compliant, compatible with other materials, or will work as intended. For example, synthetic stone veneer (or adhered manufactured stone masonry veneer - “AMSMV”) has been to known to lead to moisture intrusion and buckling. Although the lightweight nature of the veneer can drive down building costs, if installed improperly – such as without appropriate weatherproofing – the later cost of repairing water damage could outweigh its benefits. It is therefore important for construction projects to utilize contractors who are familiar with the appropriate installation techniques (a specific ASTM standard for AMSMV installation was published in 2013) and have worked with AMSMV products before.

Wood from fast-growing trees can earn LEED credits, and may be desirable in green building projects. However, lumber from these trees must be treated using particular sealants to prevent deterioration due to exposure to the elements. One lawsuit exemplifies the pitfalls of using green products inappropriately. The Chesapeake Bay Foundation, Inc. et al v. Weyerhaeuser Company lawsuit involved the effort to build the nation’s first LEED platinum building using a lumber product made from wood waste from fast growing trees: Parallal Strand Lumber (also known as Parallam). The supplier allegedly provided Parallam that it claimed had been treated with a suitable sealant, when in reality the sealant had not been approved for use on that product. Deterioration, including wide-spread rot, was later found on the exposed beams. The Chesapeake Bay Foundation sued the supplier for $6,000,000 in damages alleging breach of contract and negligent misrepresentation, among other claims. Although the case was ultimately resolved due to statute of limitations grounds, it demonstrates how costly litigation can result where green building products do not perform as originally anticipated or promised.

Vegetation has also become an important part of sustainable building projects. Roof gardens and vertical gardens (“living facades”) are becoming more popular, especially in dense urban spaces. Their benefits include evaporative cooling (leading to energy savings), reduced urban heat island effect, oxygen production, LEED credits, and pleasing aesthetics. However, leaks, dampness, rotting vegetation, molds and bacteria can also result due to poor design or maintenance, and leaks can be difficult to assess and remedy. One often overlooked aspect is the sometimes close proximity between the vegetation and HVAC systems. These systems can transmit spores from rotting vegetation inside, or any pesticides used on the green space. Other important design considerations include the load bearing capacity of the roof, utilization of appropriate weatherproof membranes, and suitable draining. Design limitations must be respected when considering green roofs or walls in order to maintain structural safety and moisture control.

Ultimately, as green building continues to grow in popularity (most especially in government-funded or high-end private projects) new issues will arise due to the use of new products in new applications. Time, effort, and care must therefore be taken when designing new projects, ascertaining what green building products are appropriate to use, and most especially, determining the appropriate means to install and apply these new materials.

Lawsuit Seeking Payment Under the Miller Act does not Require a Contractor or Subcontractor to be Licensed in the State in Which it is Seeking Payment

In Technica LLC, et al. v. Carolina Cas. Ins. Co., et al., 2014 U.S. App. LEXIS 8023, (9th Circuit 2014), the court held that the fact that Technica was not a licensed California contractor, as required by California law, did not bar its Miller Act (40 U.S.C. §§ 3131-3134) claim for payments due under a subcontract. The Miller Act is the modern-day remedy to the historical dilemma faced by contractors and materialmen denied compensation in federal construction projects. The common law doctrine of sovereign immunity prevented liens against property of the federal government, and federal statutes only allowed those in privity of contract to sue to enforce contractual rights. The Miller Act requires a general contractor on a federal construction project to furnish a payment bond “for the protection of all persons supplying labor and material in carrying out the work provided for in the contract.” If anyone supplying labor or material has not been paid after 90 days, they may bring a civil action on the payment bond for the amount due. The Miller Act explicitly extends to subcontractors.

California Law precludes any contractor from maintaining an action for collection of compensation for services if the contractor was not a licensed contractor during the performance of the contract. See California Business and Professions Code § 7031(a). Technica performed $893,677.77 of work, but was only paid $287,861.81. When suit was brought to recover the remaining amount due, the defendants argued that because Technica was not a licensed California contractor, it could not bring an action for collection of the money it was owed. Following similar decisions in the Eighth and Tenth Circuit Courts of Appeal, the Ninth Circuit held that the state law limitation on the right of a non-licensed contractor to maintain an action for collection of unpaid services did not apply to an action under the Miller Act.

The court noted that “the federal rights affording relief under a federally declared standard could be defeated if states were permitted to have the final say as to what defenses could and could not be properly interposed to suits under the [Miller] Act. Applying the state’s licensing statute as a defense to a Miller Act claim would, at best, condition the rights of a subcontractor on the procedural requirements of the law, and, at worst, result in the nullification of those rights completely. Neither result is in accordance with the remedial purposes of the Miller Act.

The Court concluded by noting that enforcement of state licensing requirements against Miller Act claims would wreak havoc on the uniform application of the Miller Act. Federal contractors routinely bid on projects throughout the county and often perform contracts that span multiple states. Requiring them to comply with contractor licensing requirements in any given state in which the work is contrary to the intent of Congress in enacting the Miller Act, which was meant to reduce the substance and procedural hurdles placed on federal contractors, labor providers, and materialmen in seeking payment of wages denied to them.

The Court’s decision is a practical one and provides protections to contractors and subcontractors who are brought into a different state, where they are not licensed, to work on a federal project.