Western District of Virginia Confronts Several Legal Issues That Frequently Impact Multi-Party Construction Disputes – Economic Loss, Damage to Other Property, Third Party Beneficiary Status, Warranties, Subrogation, and Third-Party Joinder

Robert A. Gallagher, Associate, Pepper Hamilton LLP

Allstate Insurance Company v. Structures Design/Build, LLC, 2016 U.S. Dist. LEXIS 34349 (WD VA March 17, 2016)

This construction dispute case arises from a failed pipe connector that caused water damage to a facility and insured personal property, which Hillel at Virginia Tech, Inc. (“Hillel”) owned in Blacksburg, Virginia. Hillel contracted Structures Design/Build, LLC (“Structures”) to design and construct the facility. Structures, in turn, subcontracted PJ Little Plumbing, Inc. (“PJ”) for plumbing and mechanical installation. PJ purchased the failed pipe connector from CMC Supply, Inc. (“CMC”). Allstate Insurance Company (“Allstate”) insured Hillel for the damage to the facility and the personal property.

As Hillel’s subrogee, Allstate filed a complaint against Structures and PJ. Allstate sued Structures for various state law claims. It sued PJ for negligence and breach of express and implied warranties. PJ filed a third-party complaint to join CMC on a breach of implied warranty theory. PJ and CMC moved to dismiss the claims against them.

The court granted in part and denied in part PJ’s motion. It dismissed the negligence claim against PJ with respect to damages arising from harm to the facility, because the facility was the subject of Hillel’s construction contract. The court denied the motion with respect to damages to personal property stored within the facility, because it represented damage to other property. The court denied PJ’s motion to dismiss Allstate’s implied warranty claim because it found Hillel to be a third party beneficiary to PJ’s subcontract with Structures, and all such construction contracts in Virginia contain an implied warranty to perform services in a good, safe, and workmanlike manner, free of defects. The court dismissed Allstate’s express warranty claim because it failed to plead sufficient facts to support the existence of any express warranty between PJ and Hillel.

The court granted CMC’s motion in its entirety. The court held that PJ’s third-party complaint failed to state a claim for derivative liability under Rule 14 of the Federal Rules of Civil procedure because it alleged facts that were factually distinct from those alleged in the original complaint. PJ alleged that CMC was liable to Hillel because it manufactured a defective connector, whereas Allstate alleged that PJ was liable on the basis that it improperly installed or selected an unsuitable connector. The court noted that if Allstate succeeded in proving that PJ failed to properly install or select the connector it would do little to support PJ’s claim against CMC that the connector was defective.
The following summarizes the court’s reasoning for its conclusions:

Allstate’s Negligence Claim Against PJ

PJ argued that the economic loss doctrine barred Allstate’s negligence claim. The court considered two factors: (i) whether the alleged breach involved duties outside of those assumed under contract, and (ii) whether the property damage included property that was not subject to the agreement between the parties. The court first found that the complaint failed to allege that PJ breached any duty imposed by law, as opposed to the parties’ contract.

The court next found that damage to the facility could not be recovered in tort because it represented only economic loss. According to the court, Hillel had purchased a “package” for the construction of its facility and one component of that package – the pluming work – damaged other parts of the construction package. The court found the case of Sensenbrenner v. Rust, Orling & Neale, Architect, Inc., to be instructive. 374 S.E.2d 55 (Va. 1988). In Sensenbrenner, the owner contracted a building company to design and construct a house with a pool. When a defect in the pool caused damage to the house’s foundation, the owner sued in tort to recover for damages to the pool and the house. The Virginia Supreme Court found that the owner alleged nothing more than “disappointed economic expectations,” because the owner contracted for the purchase of a package, which was “alleged to have been defective” as “one or more of its component parts was sufficiently substandard as to cause damage to the other parts.”

The court, however, held that Allstate could recover for damage to the personal property stored at the facility because that property was not part of Hillel’s contractual package for the construction of the facility. The court noted that PJ had appeared to concede that this part of Allstate’s claim could go forward. The court did not allow the mere existence of this other property damage to open the door for recovery for damages that related to property within the construction package. So the court permitted Allstate to proceed on its negligence claim against PJ for only damages to the personal property stored at the facility.

Allstate’s Breach of Warranty Claim Against PJ

Allstate alleged that PJ breached express and implied warranties. PJ argued that Allstate could not support its claims because neither Hillel nor Allstate had a contract with it. The court found that while PJ did not contract directly with Hillel, it was the third party beneficiary to PJ’s subcontract with Structures, because the subcontract contained several provisions whereby PJ agreed to provide indemnity to Hillel. Although the court found one of the indemnity provisions void under Virginia’s anti-indemnity laws, it believed that the remaining provisions were sufficient to show that Hillel was an intended beneficiary of the subcontract.

Notwithstanding Hillel’s status as a third party beneficiary to the subcontract, the court dismissed Allstate’s express warranty claim because Allstate failed to allege sufficient facts to support the existence of any express warranty between PJ and Hillel. The court concluded that Allstate had sufficiently stated a claim for breach of the implied warranty found in all construction contracts in Virginia, which require contractors to perform its services in a “good, safe, and workmanlike manner free from defects and in accordance with all applicable codes and standards.”

PJ’s Third-Party Complaint to Join CMC

CMC moved to dismiss the third-party complaint on the basis that it failed to state a claim for derivative liability under Rule 14 of the Federal Rules of Civil Procedure. Under Rule 14, a party may not implead a third-party merely because he may be liable to plaintiff. In other words, a third-party complaint that alleges “it’s him, not me” is improper under Rule 14. CMC argued that PJ’s third-party complaint simply contended that CMC was liable directly to Hillel because it manufactured a defective part, which if true wholly, or partly, excused PJ from liability.

According to the court, Rule 14 cannot be used to bring in matters that merely have some relationship to the original action. The court found that the original complaint’s allegations were factually distinct from those in the third-party complaint. PJ alleged that CMC was liable to Hillel for its damages because it manufactured a defective part, whereas Allstate alleged that PJ was liable for installing a connector that was not equipped to handle the high temperatures in the facility’s hot water system.

The court concluded that Allstate’s dispositive question was whether the connector was properly installed or selected, not whether it was properly manufactured. So if Allstate succeeded in proving that PJ failed to properly install the connector in the hot water system, such a claim would do little to support PJ’s claim against CMC that the connector was defective. The court also noted that PJ failed to allege that the parties were joint tortfeasors or that it had a right to indemnity or contribution from CMC if it were held liable to Allstate. The court ultimately dismissed PJ’s third-party complaint against CMC because it violated Rule 14 and because CMC’s dismissal promoted judicial economy and fairness.

Article originally posted July 14, 2016 on Constructlaw, an update and discussion of recent trends in construction law and construction, maintained and edited by Pepper Hamilton's Construction Law Practice Group. 

Superseding the Implied Warranty of Good and Workmanlike Repair in Texas

In a case involving foundation repairs to a residence, the Texas Supreme Court addressed the question of whether the implied warranty for good and workmanlike repair of tangible goods or property can be disclaimed or superseded.  The Court held that the implied warranty cannot be disclaimed, but it can be superseded by the parties. Gonzalez v. Southwest Olshan Foundation Repair Company, LLC, 400 S.W. 3d 52 (Tex. 2013).

In Gonzalez, a homeowner (“Gonzalez”) hired Olshan Foundation Repair Co., LLC (“Olshan”) to repair the foundation of their home.  The repair contract (the “Contract”) included two warranty provisions.  First, the Contract stated Olshan would use the Cable Lock system of foundation repair and would adjust the foundation for the life of the home.  Second, it required Olshan to perform all of the necessary work in a good and workmanlike manner.  Olshan repaired the foundation, but Gonzalez continued to experience foundation problems. 

Gonzalez ultimately sued Olshan for, among other things, breach of express warranty, breach of the common law warranty of good and workmanlike repair, and DTPA violations.  The jury found that Olshan did breach the implied warranty of good and workmanlike repair and committed DTPA violations, but did not breach any express warranty.  The Court of Appeals reversed this holding on the grounds that the implied-warranty and DTPA claims were barred by the two-year statute of limitations.  The case then proceeded to the Texas Supreme Court. 

Olshan argued that its express warranty superseded any implied warranty of good and workmanlike repair.  Therefore, because the jury held Olshan did not breach any express warranty, liability was precluded on Gonzalez’s implied-warranty claims. The Texas Supreme Court agreed.  The Court stated that Texas law recognizes an implied warranty to repair or modify existing tangible goods or property in a good and workmanlike manner, and that such implied warranty cannot be disclaimed or waived.  The Court then analogized this implied warranty with the implied warranty of good workmanship related to new home construction. See Melody Home Manufacturing Co. v. Barnes, 741 S.W.2d 349, 354 (Tex. 1984).  The Court held that the implied warranty of good and workmanlike repair may be superseded if the parties’ agreement sufficiently describes the manner, performance or quality of the services to be provided. 

In the case at bar, the Court found the Contract sufficient to supersede the implied warranty.  The Contract specified the manner, performance or quality of the services by stating that Olshan would perform the work in a good and workmanlike manner and would use the Cable Lock foundation repair system and would adjust the foundation for the life of the home.  Accordingly, because the implied warranty was superseded, the jury’s finding that there was no breach of an express warranty was conclusive on Gonzalez’s claims.  

Common Law Implied Warranties in Construction

When dealing with construction defects, lawyers seeking recovery on behalf of owners often turn to implied warranties arising under state law to provide grounds for an owner to recover for losses that otherwise might not be recoverable. Such situations arise often when the "owner" has changed from being a developer in direct privity with a contractor to being a condominium or homeowners' association with no privity.  

Today's discussion relating to this topic specifically in Florida -- but providing food for thought elsewhere also -- come from Division 1 member Jason M. Rodgers-da Cruz of Siegfried, Rivera, Hyman, Lerner, De La Torre, Mars & Sobel, P.A. of Coral Gables, Florida.  Jason's practice relates specifically to construction defect claims that often are raised on behalf of condominium associations.  This article discusses a Florida Supreme Court decision issued late last year called Maronda Homes, Inc. v. Lakeview Reserve Homeowners Ass'n, 127 So. 3d 1258 (Fla. 2013). 

(Note: There are four footnotes in this article, which are denoted with a bracketed number: e.g., [1].)

Florida’s Common Law Implied Warranties: A brief review of the scope and application of Florida’s common law implied warranties. 

In representing a purchaser, developer or a developer/builder involved in a warranty dispute pertaining to a residence in the State of Florida, consider the Florida Supreme Court’s most recent ruling concerning the scope and application of common law implied warranties in Maronda Homes, Inc. v. Lakeview Reserve Homeowners Ass’n,  127 So. 3d 1258 (Fla. 2013).

In Maronda, a homeowner’s association filed suit against its developer for breach of common law implied warranties for a defective storm water drainage system serving the entire property. The association experienced buckling, splitting of pavement and asphalt, excessive flooding, soil erosion, mosquito infestation and swamp-like conditions, which directly affected the homes and access to the homes. 

The developer filed a third party action against the contractor seeking indemnification for the allegations raised by the association. The developer and the contractor filed a motion for summary judgment against the association, and relied, in part, on the Fourth District Court of Appeal’s application of common law implied warranties in Port Seawall Harbor & Tennis Club Owners Association, Inc. v. First Federal Savings & Loan Association of Martin County, 463 So. 2d 530 (Fla. 4^th DCA 1985).  They argued that the defects did not meet the elements required for asserting common law implied warranties because the alleged defects did not immediately support the residences.[1]  

The trial court agreed with the developer and contractor and granted the motion for summary judgment.  The association appealed to the Fifth District Court of Appeal.  The Fifth District reversed the trial court and certified a conflict (to the Florida Supreme Court) with the Fourth District’s application of common law implied warranties in Port Seawall.  An appeal to the Florida Supreme Court ensued.   

The Florida Supreme Court conducted a historical review of the rationale and standards supporting common law implied warranties, including 1) the privity requirement between the seller and the owner,[2]  and 2) that common law warranties were not extended to investors. [3]  

The court then adopted the standard set forth by the Fifth District, known as the “’essential services’” standard.  The essential services standard provides that if the improvement provides an essential service to the habitability of the residence, then common law implied warranties apply. Conversely, if the improvement does not provide essential services to the residence, then the common law implied warranties do not apply. Further, the improvements need not be physically attached to the homes but rather provide essential services to the habitability of the home.  The court opined that the essential services standard is consistent with the “Florida requirement that the implied warranties apply to improvements that are ’immediately supporting’ a residence.”  However, the court noted that essential services do not include “items that provide mere convenience or aesthetic beauty, such as landscaping, sprinkler systems, recreational facilities or other similar improvements.”

The court also addressed the Florida Legislature’s attempt to limit common law implied warranties in Section 553.835, Florida Statutes. [4]   The legislative impetus for enacting Section 553.835, can be found in Section 553.835(1):

[t]he Legislature finds that the courts have reached different conclusions concerning the scope and extent of the common law doctrine or theory of implied warranty of fitness and merchantability or habitability for improvements immediately supporting the structure of a new home, which creates uncertainty in the state’s fragile real estate and construction industry.

Section 553.835(4) specifically limits common law implied warranties as a cause of action for an offsite improvement.  Section 553.835(4) provides, in part, that: 

[t]here is no cause of action in law or equity available to a purchaser of a home or to a homeowners’ association based upon the doctrine or theory of implied warranty of fitness and merchantability or habitability for damages to offsite improvements…

Although the court briefly reviewed the Legislature’s definition of an offsite improvement, it primarily focused on whether the statute could be retroactively applied. The Court held that the statute could not be retroactively applied as the Legislature attempted to limit vested common law implied warranties.  The court opined that Section 553.835 violated the right of access to the courts and that the Legislature’s attempt was a “clear violation of separation of powers because the Legislature does not sit as a supervising appellate court over our district courts of appeal.”  Accordingly, Section 553.835 “does not apply to any causes of action that accrued before the effective date of this section.”

In closing, if you are litigating in a jurisdiction that allows for common law implied warranties, consider: 1) the scope of the warranty; 2) to whom the warranty extends; 3) whether the legislature has attempted to limit those warranties; and 4) although not addressed in this article, whether those warranties can be or have been disclaimed.

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[1]Port Seawall Harbor & Tennis Club Owners Association, Inc. v. First Federal Savings & Loan Association of Martin County, 463 So. 2d 530 (Fla. 4^th DCA 1985)(declined to extend common law implied warranties to the facts in the case because "[t]he foot bridge in question and the defective work complained of involved roads and drainage in the subdivision and did not pertain to the "construction of homes or other improvements immediately supporting the residences.")

[2] Gable v. Silver, 264 So. 2d 418 (Fla. 1972).

[3] Conklin v. Hurley, 428 So. 2d 654 (Fla. 1983).

[4] The Florida Legislature enacted Section 553.835, Florida Statutes, on July 1, 2012, and intended for the statute to apply retroactively.