The details of defects

You made a mistake installing a roof system. What is your liability?

If you’re like most roofing contractors, you inevitably have received a complaint from an owner who was not satisfied with your company’s performance and claims your work was defective in some manner. Unfortunately, at some point in your roofing career, your company probably will be sued based on an alleged deficiency in your company’s work.

When that lawsuit is filed, you will need to evaluate the allegations and know the extent of your potential legal liability. As any contractor who has gone through the litigation process will tell you, it is long and expensive, and the outcome is unpredictable.

You almost always will be far better off economically trying to resolve a complaint or dispute by responding promptly and directly, correcting a disputed problem and negotiating a settlement agreement compared with following a formal dispute process to its conclusion.

What are you liable for?

The damages that can be recovered resulting from a construction defect generally follow the same principles applicable to any breach of contract. In a lawsuit by a building owner against a contractor for a construction defect, the owner is entitled to compensatory damages that will put the owner in the same position as if the work or design had not been defective.

In most construction defect cases, the measure of damages whether resulting from defective workmanship, defective materials or defective design is the cost of repair. As long as the cost of repair is not clearly disproportionate to the loss in value of the building caused by the defect, the owner usually is entitled to the reasonable cost of remedying the defect.

If the cost of remedying the deficiency is clearly disproportionate to the loss in value, the economic waste rule can be applied. In this case, the owner’s damages are measured by the difference in value between the building as constructed with the deficiency versus the value of the building had it been constructed in accordance with the contract. If the construction defect cannot be remedied without great expense or substantial damage to the rest of the building such that the cost of remedying the defect would far exceed the value of the improvement, the diminution in value rule is applied to measure the damages the owner is entitled to recover.

Here’s an example: A contractor builds a house that was not according to the precise dimensions shown on the contract drawings, and the house would have to be substantially rebuilt to comply with the contract. A contractor who contends the cost of repair is disproportionate to the loss in value has to prove damages should be measured based on diminution in value rather than cost of repair.

If a claim against a contractor arises during construction and is for failure to complete the contract, the normal measure of damages is the reasonable cost of completion in accordance with the contract.

Opportunity to cure

Most construction contracts include a provision granting the contractor an opportunity to correct a deficiency. If there is no such contract provision, you should add a provision to that effect. Many states have enacted statutes, most commonly applicable only to residential construction, that call for an owner to notify the contractor of an alleged construction defect and give the contractor an opportunity to repair the alleged defect before proceeding with a lawsuit.

Even if there is not a contract provision or statute that expressly permits you to repair a deficiency, you should, when learning of an alleged deficiency, investigate and offer to make repairs if there is a deficiency in the work. The cost to repair the deficiency will surely be far less than if the owner retains another contractor and then pursues recovery of damages from you.

In the 2016 case Magnum Construction Management Corporation v. The City of Miami Beach, the Florida Third District Court of Appeal reversed a trial court’s $1,290,037 award to the City of Miami Beach on two grounds, including failure by the owner to provide the general contractor, Magnum Construction Management, an opportunity to perform the remedial work.

Pursuant to a 2007 contract, Magnum Construction Management was responsible for landscaping and installing new turf and a new children’s playground at South Point Park. The redeveloped park was substantially completed in 2009. One of the city’s claims in its $3 million lawsuit was the contractor failed to install the playground in accordance with contractually required safety requirements.

The contract between the city and Magnum Construction Management included a common provision stating if any of the work for which Magnum Construction Management was responsible was found to be defective or not in accordance with the contract documents within one year after substantial completion or a longer period as provided in the contract or warranty, the contactor, after receipt of written notice from the city, would promptly correct any defective or nonconforming work without cost to the city.

Although Magnum Construction Management had been notified of landscaping problems in 2009, including deterioration of sod in certain areas of the park, the city unilaterally audited the playground in 2010 and, without giving notice to Magnum Construction Management, initiated litigation to recover the costs of removing, redesigning and replacing the playground in its entirety.

Based on the contract provision requiring the contractor to correct defective work after written notice from the city, the Florida Third District Court of Appeal ruled that because the contractor was not afforded an opportunity to correct the playground defects before the city awarded a contract to another contractor, the city could not recover damages relating to the playground. The court noted many of the playground defects were minor and could have been easily corrected.

In addition to failing to provide the contractor with an opportunity to make repairs, the Florida Third District Court of Appeal reversed the trial court’s $1.29 million award to the City of Miami Beach on the grounds that the damages were speculative and ordered a new trial on damages. The city presented evidence of the total costs expended to redo the landscaping at the park. However, the city’s remediation plan improved upon and differed significantly from the original design and specifications. In the absence of evidence indicating the value of the betterments in the city’s remediation plan, the appellate court said the trial court’s damage assessment was speculative.

The party claiming damages bears the burden of proving its losses with reasonable certainty by a preponderance of the evidence. Although damages do not need to be proved with mathematical precision or absolute certainty, damages must be reasonable and in a manner sufficient to allow the fact finder (such as a jury, trial court judge or arbitrator) to estimate damages with reasonable certainty. Trial courts generally have broad discretion when determining damages, and fact finders’ decisions on damages usually are upheld on appeal unless clearly erroneous or lacking an evidentiary basis.

Defense of betterment

You always should consider two distinct but sometimes overlapping concepts when evaluating the reasonableness of damages an owner seeks. These are the concepts of “betterment” and “mitigation of damages.” They are not unique to construction law.

Consistent with the legal principle that the object of contract damages is to place an owner in the same position he or she would have been had the contractor properly performed the contract, the owner is not entitled to more than what was required under the contract. The owner is not entitled to be placed in a better position because of the breach.

If the damages the owner seeks to recover include something more than was required in the contract, there is “betterment,” and the damages the owner is entitled to recover should be reduced to the extent of the improvement or enhancement above the original contract.

For example, an owner who contracted for a 45-mil-thick TPO membrane roof system over one layer of 1-inch-thick insulation obviously cannot recover the full cost of installing a replacement 60-mil-thick TPO membrane roof system over two layers of 2 1/2-inch-thick tapered insulation with a cover board. The owner would be unjustly enriched to the extent the replacement roof system was an enhancement over the original.

Betterment can take forms other than an upgrade. Suppose an owner originally contracted for a roof system that was warranted by the membrane manufacturer for 10 years. After eight years, the roof began to leak; in year nine, the roof leaked profusely and could not be repaired effectively; and in year 10, the roof system was replaced with a new, similar roof that had a new 10- or 15-year manufacturer’s warranty. In this case, the owner’s recovery should be reduced to take into account the years of satisfactory service and additional years of warranty coverage.

You bear the burden of proof to show with reasonable certainty the amount of claimed damages that should properly be attributed to betterment. You cannot claim betterment and expect the owner’s damages to be reduced.

In Nichols Construction Corp. v. Virginia Machine Tool Company, LLC, decided in 2008 by the Supreme Court of Virginia, the owner sought damages for the cost of removing and replacing a defective pre-engineered metal roof system.

The original contract price for the roof was $140,000. The owner bought the land and building on which the roof was installed for between $180,000 and $200,000. The trial court awarded damages of $450,842 to the owner based on the reroofing estimate provided by the owner’s expert witness. The trial court found the roof system installed by the defendant contractor had to be removed and replaced because repair was not a viable option. The Supreme Court of Virginia upheld the trial court’s finding because the roofing contractor failed to offer evidence either rebutting the cost estimate of the owner’s expert or showing the case was an example of unreasonable economic waste. The contractor’s failure to present expert testimony to rebut the expert testimony of the owner’s expert was fatal.

An issue that arises in cases against architects and engineers is when an architect or engineer omits an item or specifies an item that is not adequate. Is the design professional liable for the costs associated with providing the missing or inadequate items?

Consider the reasoning of the Florida Court of Appeals in its 1989 decision in Lochrane Engineering, Inc. v. Willingham Realgrowth Investment Fund, Ltd. The court posed the example of a professional engineer issuing plans calling for a 1,000-square-foot drain field and a contract being awarded based on those plans. Later, it is determined a 1,200-square-foot drain field was necessary.

Assuming the engineer’s error constitutes professional negligence, is the engineer liable for the cost of installing the additional 200 square feet of drain field? If the engineer had originally specified 1,200 square feet, the owner would be paying for the entire 1,200 square feet, so the owner receiving an additional 200 square feet of drainage field is an enhancement. If the owner sustained damages resulting from the inadequate drain field or the cost of adding the 200 square feet was greater than it would have been had the original plans called for 1,200 square feet, the engineer would be liable for those damages. But the owner receiving the additional 200 square feet constitutes betterment because it was not included in the owner’s original costs.

However, replacing a roof with a different roof system does not necessarily mean there is betterment and the owner’s damages should be reduced. A case-by-case factual analysis is needed. If an owner demonstrates roof system replacement is necessary, reasonable and cost-effective, even if it is not the same roof system as provided in the contract, the owner will be entitled to recovery.

In the 2009 case O & G Industries v. All Phase Enterprises, the Connecticut Appellate Court affirmed the ruling of the trial court that Hotchkiss School, a college preparatory school in Lakeville, Conn., could recover the cost of installing an EPDM roof system over a metal roof system that failed over the school ice arena. The contractor who installed the metal roof system argued it could have been repaired to meet the bid specifications for $38,525. The cost of the EPDM reroofing was $152,771.50. The contractor argued betterment. There was expert evidence from the owner’s roof consultant the roof leaked so severely it was irreparable, and an EPDM roof system was a reasonable way to remedy the problem and have the ice arena ready in time for the upcoming hockey season.

The Connecticut Appellate Court agreed there was evidence repairs could have been made for $38,525 but went on to state the trial court was free to credit or discredit this evidence. A review of the record indicated there was evidentiary support for the trial court’s findings and conclusions based on the testimony of the owner’s expert witness.

Mitigation of damages

Another legal principle a contractor should consider when evaluating damages is the duty to mitigate damages, also known as the doctrine of avoidable consequences. The duty to mitigate damages is an affirmative defense a contractor can make to reduce the owner’s damages if an owner fails to take reasonable steps to reduce its damages.

For example, a contractor could make a strong case for mitigation of an owner’s damages if the owner notices leaks that are damaging insulation and takes no action.

If the owner acted reasonably and notified the contractor, the contractor could repair the problem and prevent a larger area of insulation becoming wet. The legal principle is an injured party is not to recover damages that could have been avoided or limited by taking reasonable steps to minimize the damages through the use of ordinary care and diligence. Just as when asserting a betterment defense, you carry the burden to prove with a reasonable estimate the amount by which the damages could have been mitigated.

Limit your exposure

Other than claims involving U.S. government buildings, cases alleging defective construction are decided based on state law. The principles governing damages an owner can recover are based primarily on prior state appellate court decisions, which are fairly consistent from state to state. The damage recovery allowed by courts in construction defect cases is intended to arrive at a fair and reasonable result and usually focuses on a close examination of the facts of the case.

You can reduce your liability exposure by taking a proactive approach and self-performing needed repairs when a claim is made. Carefully review the damages and evaluate whether all the alleged damages are the result of a defect by you, whether the damages include betterment and whether the owner took reasonable steps to limit the damages.

Stephen M. Phillips is a senior partner with Atlanta-based law firm Hendrick Phillips Salzman & Siegel P.C.

For an article related to this topic, see “A legal out."


Be the first to comment. Please log in to leave a comment.