Tarriffs, a Pandemic and War: Construction Contracts Must Withstand the Unforeseeable
May 16, 2022 —
Brett Moritz, Adrian Bastianelli III & Adam Handfinger - Construction ExecutiveSince the tariffs on steel and the first wave of the COVID-19 pandemic, the construction industry has been reeling from the impact of material shortages and price increases, labor shortages, breakdowns in the supply chain and the inflationary effect of these issues. Unfortunately, the war in Ukraine has only exacerbated the situation.
International conflicts can constrain supply, resulting in delays and price increases for contractors, subcontractors and suppliers. The disruption caused by the war is expected to be particularly acute due to the role that Russia and Ukraine play in the world economy and the effect of the economic sanctions that have been imposed on Russia by the United States and other countries. Russia controls approximately 10% of the global copper reserves and is estimated to produce about 10% of the world’s nickel supply. It also provides at least 30% of Europe’s oil and natural gas. Ukraine is a significant source of raw materials, such as iron. Thus, the war will cause significant shortages and price increases to the global construction industry. There are already reports of delays and cost increases for commodities such as nickel, aluminum, copper and—most importantly—steel, which have resulted in impacts to construction costs and schedules. Suppliers are especially sensitive to the volatile markets caused by these conditions. Some are insisting on automatic price increases in their purchase orders.
All of this, not to mention the anticipation of what may come next, points to the necessity for a new paradigm to achieve a successful project. It is more important today than ever that owners, contractors, subcontractors and suppliers reasonably address the economic and time impacts of these unforeseeable events in preparing contracts for future work and in administering existing contracts. Otherwise, the risk of a default on more than one level may put projects in jeopardy, to no one’s benefit.
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Construction Executive, a publication of Associated Builders and Contractors. All rights reserved.
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Court Agrees to Stay Coverage Matter While Underlying State Action is Pending
October 29, 2014 —
Tred R. Eyerly – Insurance Law HawaiiThe federal district court granted the insured's motion to stay the coverage action while the construction defect case was pending in state court. Auto Owners Ins. Co. v. Essex Homes Southeast, Inc., 2014 U.S. Dist. LEXIS 133120 (D. S.C., Sept. 23, 2014).
The homeowners sued Essex Homes in state court for construction defects in a home built and sold to them by Essex Homes. The suit sought damages for property damage based on negligence, breach of implied warranty, and breach of express warranties arising out of the alleged construction defects. The complaint alleged that a water leak in the house caused water damage and resulted in mold growth that was not discovered for several years.
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Tred R. Eyerly, Insurance Law HawaiiMr. Eyerly may be contacted at
te@hawaiilawyer.com
Conflicts of Laws, Deficiency Actions, and Statutes of Limitations – Oh My!
May 10, 2017 —
Ben Reeves - Snell & Wilmer Real Estate Litigation BlogWhat law governs a deficiency action if the choice-of-law provisions in the note and deed of trust conflict? The Arizona Court of Appeals answered that very question in ZB, N.A. v. Hoeller, No. 1 CA-CV 16-0071 (Ct. App. April 15, 2017). It turns out, the note controls.
The Facts
In ZB, ZB, N.A. (ZB), a Utah bank, lent money to the Hoellers to purchase a commercial property in Missouri. The note included a choice-of-law provision stating that Utah law governed the debt. The deed of trust securing the commercial property, however, provided that Missouri law controlled “procedural matters related to the perfection and enforcement of [ZB’s] rights and remedies against the [p]roperty.” In 2012, the Hoellers defaulted, and the bank recovered the property through a trustee’s sale.
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Ben Reeves, Snell & WilmerMr. Reeves may be contacted at
breeves@swlaw.com
Housing Agency Claims It Is Not a Party in Construction Defect Case
February 28, 2013 —
CDJ STAFFThe Aspen/Pitkin County Housing Authority (APCHA) is seeking to be removed from a construction defect suit filed by Aspen homeowners. APCHA claims that it should not be a party to the suit, since it had nothing to do with the development of the Burlingame Ranch community. Responsibility should instead, according to the agency, rest with the City of Aspen. APCHA’s role was to sell the homes to individuals whom it had verified were eligible to purchase affordable housing. Tom McCabe, the director of APCHA said that “APCHA has no part in the building of housing anymore, and we haven’t for a long time.”
Chris Rhody, who represents the Burlingame homeowners, feels that APCHA should be involved. The homeowners are alleging that construction defects, including cracked exterior siding, are the result of faulty materials and improper installation.
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Insurer Fails to Establish Prejudice Due to Late Notice
October 17, 2022 —
Tred R. Eyerly - Insurance Law HawaiiSummary judgment awarded to the insurer was reversed because the insurer presented no evidence of prejudice caused by untimely notice. Perez v. Citizens Prop. Ins. Corp., 2022 Fla. App. LEXIS 5435 (Fla. Ct. App. Aug. 10, 2022).
The insureds' home suffered water damage due to Hurricane Irma around September 10, 2017. A claim was submitted to Citizens on November 27, 2018. Citizens had an independent adjuster inspect, but then denied the claim due to untimely notice.
The insureds sued and Citizens moved for summary judgment. Citizens argued it was prejudiced because it could not confirm the cause of the loss or the property damage attributed to it.
The court agreed that the insureds' notice was untimely. The insureds were notified by tenants renting the property that leaks appeared around the time of Hurriane Irma. The policy language, however, placed the burden to rebut the presumption of prejudice caused by late notice on Citizens. Whether the insurer was prejudiced was a question of fact. Citizens failed to demonstrate any prejudice due to the untimely notice.
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Tred R. Eyerly, Damon Key Leong Kupchak HastertMr. Eyerly may be contacted at
te@hawaiilawyer.com
Road to Record $199 Million Award Began With Hunch on Guardrails
June 17, 2015 —
Patrick G. Lee – BloombergIt started with a hunch about malfunctioning highway guardrails. It led to the biggest known whistle-blower award in U.S. history.
Joshua Harman, a Virginian with two small highway safety companies, made a discovery in late 2011 that perhaps only a guardrail maker could: A big competitor had changed the dimensions of its roadside safety device by as much as an inch here and there, he said, without telling federal regulators.
As designed, Trinity Industries Inc.’s ET-Plus system was meant to turn the end of a guardrail into a de facto shock absorber. The altered units, as Harman saw it, were locking up when hit, spearing cars and their occupants.
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Patrick G. Lee, Bloomberg
Wait! Don’t Sign Yet: Reviewing Contract Protections During the COVID Pandemic
April 13, 2020 —
Danielle S. Ward - Balestreri Potocki & HolmesAs the circumstances of the COVID pandemic change day by day, and we all rush to keep business moving where and when we can, companies should consider hitting the “pause button” before renewing or executing any new contracts. Developing contracts often takes considerable time and expense, and companies are not in the habit of reworking them often. A change in law may prompt a company to revisit their contract terms, but otherwise business is often carried out with a standard form contract for a period of years. With the COVID pandemic affecting nearly every business and industry, life is not business as usual, and companies should make sure their contracts consider what previously seemed like an unforeseeable event.
Force Majeure clauses are included in many contracts to excuse contract performance when made impossible by some unforeseen circumstance. These clauses typically fall under two categories: general and specific. General force majeure clauses excuse performance if performance is prevented by circumstances outside the parties’ control. By contrast, specific force majeure clauses detail the exhaustive list of circumstances (acts of god, extreme weather, war, riot, terrorism, embargoes) which would excuse contract performance. Force majeure clauses are typically interpreted narrowly. If your contract has a specific clause and pandemic or virus is not one of the listed circumstances it may not apply. Whether a particular existing contract covers the ongoing COVID pandemic will vary depending on the language of the contract.
Force majeure clauses previously made headlines when the great economic recession hit in 2008. A number of courts held that simple economic hardship was not enough to invoke force majeure. The inability to pay or lack of desire to pay for the contracted goods or services did not qualify as force majeure. In California, impossibility turns on the nature of the contractual performance, and not in the inability of the obligor to do it. (Kennedy v. Reece (1964) 225 Cal. App. 2d 717, 725.) In other words, the task is objectively impossible not merely impossible or more burdensome to the specific contracting party.
California has codified “force majeure” protection where the parties haven’t included any language or the circumstances in the clause don’t apply to the situation at hand. Civil Code section 1511 excuses performance when “prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary.” (Civ. Code § 1511.) What qualifies as a “superhuman cause”? In California, the test is whether under the particular circumstances there was such an insuperable interference occurring without the party's intervention as could not have been prevented by the exercise of prudence, diligence and care. (Pacific Vegetable Oil Corp. v. C. S. T., Ltd. (1946) 29 Cal.2d 228, 238.)
If you find yourself in an existing contract without a force majeure clause, or the statute does not apply, you may consider the doctrine of frustration of purpose. This doctrine is applied narrowly where performance remains possible, but the fundamental reason the parties entered into the contract has been severely or substantially frustrated by an unanticipated supervening circumstance, thus destroying substantially the value of the contract. (Cutter Laboratories, Inc. v. Twining (1963) 221 Cal. App. 2d 302, 314-15.) In other words, performance is still possible but valueless. Note this defense is not likely to apply where the contract has simply become less profitable for one party.
Now that COVID is no longer an unforeseeable event, but rather a current and grave reality, a party executing a contract today without adequate protections may have a difficult time proving unforeseeability. Scientists are not sure whether warm weather will suppress the spread of the virus, as it does with the seasonal flu, but to the extent we get a reprieve during the summer we may see a resurgence of cases this Fall or Winter. Companies should take care in reviewing force majeure clauses, and other clauses tied to timely performance such as delay and liquidated damages before renewing or executing new contracts.
Your contract scenario may vary from the summary provided above. Please contact legal counsel before making any decisions. During this critical time, BPH’s attorneys can be reached via email to answer your questions.
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Danielle S. Ward, Balestreri Potocki & HolmesMs. Ward may be contacted at
dward@bph-law.com
$24 Million Verdict Against Material Supplier Overturned Where Plaintiff Failed to Prove Supplier’s Negligence or Breach of Contract Caused an SB800 Violation
March 16, 2017 —
Jon A. Turigliatto, Esq. & Chelsea L. Zwart, Esq. – Chapman Glucksman Dean Roeb & Barger BulletinAcqua Vista Homeowners Assoc. v. MWL Inc. (2017) 2017 WL 371379
COURT OF APPEAL EXTENDS GREYSTONE HOMES, INC. v. MIDTEC, INC., HOLDING THAT CIVIL CODE §936 CREATES A NEGLIGENCE STANDARD FOR CLAIMS AGAINST MATERIAL SUPPLIERS BROUGHT UNDER SB800.
The Fourth District California Court of Appeal recently published its decision Acqua Vista Homeowners Assoc. v. MWI, Inc. (2017) 2017 WL 371379, holding that claims against a material supplier under SB800 (Civil Code §895 and §936) require proof that the SB800 violation was caused by the supplier's negligence or breach of contract.
Civil Code §936 states in relevant part, that it applies "to general contractors, subcontractors, material suppliers, individual product manufacturers, and design professionals to the extent that the general contractors, subcontractors, material suppliers, individual product manufacturers, and design professionals caused, in whole or in part, a violation of a particular standard as the result of a negligent act or omission or a breach of contract .... [T]he negligence standard in this section does not apply to any general contractor, subcontractor, material supplier, individual product manufacturer, or design professional with respect to claims for which strict liability would apply."
Acqua Vista Homeowners Association (the "HOA") sued MWI, a supplier of Chinese pipe used in the construction of the Acqua Vista condominium development. The HOA's complaint asserted a single cause of action for violation of SB800 standards, and alleged that defective cast iron pipe was used throughout the building. After trial, the trial court entered a judgment against MWI in the amount of $23,955,796.28, reflecting the jury's finding that MWI was 92% responsible for the HOA's damages.
MWI filed a motion for a directed verdict and motion for judgment notwithstanding the verdict on the grounds that the HOA had failed to present any evidence that MWI had caused an SB800 violation as a result of its negligence or breach of contract, and had therefore failed to prove negligence and causation as required by SB800, citing to Greystone Homes, Inc. v. Midtec, Inc.(2008) 168 Cal.App.4th 1194. The trial court denied both motions, relying on the last sentence of Civil Code §936, which states in part, "[T]he negligence standard in this section does not apply to any ... material supplier ... with respect to claims for which strict liability would apply."
The Court of Appeal reversed and ordered the trial court to enter judgment in favor of MWI. The Court of Appeal relied on the legislative history of S8800 and Greystone, which held that the first sentence of Civil Code §936 contains an "explicit adoption of a negligence standard" for S8800 claims against product manufacturers. The Court of Appeal reasoned that since §936 treats product manufacturers and material suppliers identically, the holding of Greystone must equally apply to material suppliers.
Because the complaint did not state a common law cause of action for strict liability, the HOA was required to prove that the damages were caused by MWI' s negligence or breach of contract. Although, the Court of Appeal found that while the HOA's evidence may have supported a finding that the manufacturer of the leaking pipes was negligent, the HOA had not provided any evidence that MWI, the supplier, had failed to supply the type of pipe ordered, acted unreasonably in failing to detect any manufacturing defects present in the pipe, or damaged it during transportation. Accordingly, the HOA could not prove that the alleged S8800 violation was caused, in whole or in part, by MWI' s negligence, omission, or breach of contract.
In light of the decision, homeowner and associations that allege only violations of SB800 standards without asserting a common law cause of action for strict liability cannot prevail by simply producing evidence of a violation, and are required to prove that violation was caused by the negligent act or omission, or breach of contract, of the defendant contractor, material supplier, and/or product manufacturer.
Reprinted courtesy of
Jon A. Turigliatto, Esq, Chapman Glucksman Dean Roeb & Barger and
Chelsea L. Zwart, Esq., Chapman Glucksman Dean Roeb & Barger
Mr. Turigliatto may be contacted at jturigliatto@cgdrblaw.com
Ms. Zwart may be contacted at czwart@cgdrblaw.com
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