Best Practices Construction Law : Construction Lawyer & Attorney : Matthew DeVries : Stites & Harbison Law Firm : Green Building & LEED Litigation

Every construction litigator in the residential arena knows that a state's consumer protection laws are good grounds for disputes.  Will my client get treble damages?  Will they recover attorney fees for deceptive trade practices?  Does my client have any defenses to these types of claims?

In Fayne v. Vincent (pdf), the Supreme Court of Tennessee held that the Consumer Protection Act applied to real estate professionals engaged in the sale of their personal residence. The case involved problems with a septic tank that were discovered after sale of the residence to the purchasers.  Mr. Vincent was a builder and developer and his wife was a realtor. Mr. Vincent was the developer of the neighborshood and he constructed the home in question, moving into the house after it was completed. Mrs. Vincent signed the Tennessee Residential Property Condition Disclosure Statement in her dual capacity as owner of the property and as realtor for the property.

After the purchasers moved into the home, they began to notice odorous fluid seeping from around the septic tank. After investigation, the purchasers filed suit against the builder and the realtor for various claims including negligent misrepresentation, fraud, deceit, and violation of the Tennessee Consumer Protection Act.

Following a two-day jury trial in the trial court, an appeal to the Court of Appeals, a remand back to the trial court, and a subsequent appeal, the Supreme Court held that the sale of the home was covered by the Tennessee Consumer Protection Act (TCPA). Specifically, the Court recognized that the TCPA does not apply to sellers who are “not in the business of selling property as owners or brokers” and therefore that “persons making an isolated sale of their home [is] not covered.” The Court reasoned:

We adhere to the holding ... that homeowners participating in the casual and isolated sale of their personal residence and not in the conduct of trade or commerce cannot be sued for damages under the TCPA. This principle applies to developers, contractors and realtors who are selling their personal residence in a casual or isolated sale and who are not performing or providing professional services to facilitate or finalize the sale. However, we have also concluded that developers, contractors, and realtors cannot insulate themselves from liability under the TCPA simply by owning and briefly residing in a house before they offer it for sale as their personal residence.

Accordingly, the Supreme Court held that the TCPA applied to the facts of this case.

The Fayne case is a good reminder to developers, contractors, and realtors, as well as to purchasers of residential property, to know and understand the full breadth of your state’s consumer protection laws.  Imagine the case of where verbal abuse by the builder against a purchasing couple gives rise to a claim for intentional infliction of emotional distress and consumer protection act violations.  It happens.

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What is the scope of coverage under a commercial general liability (CGL) insurance policy on a construction project?  As most attorneys will tell you, "It depends."  It truly depends on the express terms or language of the policy, the cause of the damage, and notably the jurisdiction of the dispute.

The Mississippi Supreme Court heard oral arguments on October 5, 2009 in the case of Architex Association Inc. v. Scottsdale Insurance Co. to determine what exactly is covered under the terms of a CGL policy.  The general contractor (Architex) filed suit against its insurance carrier after the owner the project sought damages from the general contractor for alleged defective work.  The insurer claimed that the defective work was performed by a subcontractor, which was not covered by the CGL policy.  The general contractor contended that any negligent work of the subcontractor should be covered under the "your work" provisions of the policy.  

The trial court held that damages were not caused by an occurrence or accident since the work being performed by the subcontractor was an "intentional act."  The oral arguments on appeal can be found at the Mississippi Appellate Court Video Archive. (The appellate court has some great questions between 1:50pm-1:55pm and 2:01pm). 

In a prepared statement published in the Mobile Bay Business Journal, Architex's counsel, Dorsey Carson, indicated that a finding for the insurance carrier would render a contractor's CGL policy practically useless:

"It would exclude coverage for any damages if the act that caused the damage is in any way related to the act of construction. It is a matter of whether the insurer is going to cover its insured for acts that it received premiums for, and for a policy that it marketed to contractors expressly for this type of damage.”

A decision from the Mississippi Supreme Court is expected by the end of the year.  Many in the construction industry are watching this case as it will have a significant impact on insurance coverage disputes:

• “The insurance industry made a very conscious decision to provide this coverage and charge these premiums. We are asking the insurance industry to stand behind the language of the policy it has today.” Mike Kennedy, general counsel for Associated General Contractors of America.
• "The premise has always been that if the work of your subcontractors is negligently performed and causes damage, it's covered." Chris Solop, Mississippi Associated General Contractors.

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Released in 1968, the lyrics from Steppenwolf's psychedelic rock song blare out: "I like to dream, right between my sound machine..."  Yep, you remember ... the Magic Carpet Ride!

The Maryland Court of Appeals recently decided a construction case based upon a set of pre-contract discussions that Judge Harrell described as a "complicated series of events from which this appellate 'magic carpet ride' springs..."  In Questar Builders v. CB Flooring, the court upheld the duty to act in good faith and deal fairly in construction contracts. The appellate court reversed and remanded the trial court's decision for a determination of whether the contractor (Questar) acted in bad faith when it terminated for convenience the flooring subcontractor (CB Flooring).

Questar received bids from three subcontractors to install the "magic carpet" in the luxury midrise apartment and townhome complex.  CB Flooring submitted a bid for $1.12 million and CTI submitted a bid for $1.24 million.  Interestingly, the third subcontractor's bid was so low that it left Questar with the impression that the subcontractor misunderstood the scope of the project.    (...I wonder if all the low estimates being submitted on public contracts these days fall into this category? Certainly not! ... Sarcasm ... )

Ultimately, disputes arose between Questar and CB Flooring about design changes in the selection of the carpet and the resulting increases in the cost of work.  Questar reportedly used CB Flooring's original bid to obtain CTI's agreement to perform the same work for $1,000 less than the original winning bid.  Meanwhile, Questar terminated CB Flooring, alleging breach of contract, as well as a contractual right to terminate for convenience.

The trial court held that CB Flooring did not breach the subcontract agreement with Questar.  The court also rejected Questar's claim that it had a right to terminate for any reason.  Based upon the evidence presented, the judge found that the subcontract was improperly terminated.

On appeal, the appellate court held that the termination for convenience clause "may" be enforceable, but that the trial court failed to determine whether the termination was made in good faith and in accordance with fair dealing.  Therefore, the case was remanded to the trial court for a determination of that issue.

The opinion is a long read (...50 pages...), but sheds some light on the limitations inherent in a contractual right to terminate:

"Questar's contention that it was entitled to terminate the Subcontract for any reason whatsoever goes too far and is inconsistent with the terms of the Subcontract. To be sure, a right to terminate in the absence of the other party's breach does not equate necessarily with the right to terminate based on a whim. We shall not read into the Subcontract such unfettered power."

This point was highlighed by the American Subcontractors Association, which filed an amicus brief in the appellate proceedings.  In its brief, ASA argued that an exception to the scope of the good faith and fair dealing covenant would "not only poison business relationships and eliminate business certainty, but also does great damage to the ability of subcontractors to rely on their signed contracts as a reliable indicator of future work and expected revenues" and would otherwise make subcontracts "illusory and meaningless."

This case provides a good warning to contractors: Beware of subcontractor shopping after you have already entered an agreement with another party.  While you may have the contractural right to terminate for cause, do not make a decision in haste without adequate basis for the termination.  These magic carpet ride cases often involve hotly disputed facts leading up to the termination and you may find yourself defending a lawsuit.

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 As I was watching the evening news this week, I learned that my new home may have some Chinese drywall within its four corners.  What does that mean?  Well, I am too late to the game to accurately capture what has been going on the world of Chinese drywall litigation.  Just check out the growing number of Google-News archives for "Chinese drywall."  Or check out the new legislative update from ENR on drywall issues.

Here is a round-up of a few my favorite posts:

• On Construction Law Monitor, Scott Wolfe discusses the difficult choices faced by builders, homeowners, and construction attorneys.  These posts contain thoughtful considerations and practical checklists when dealing with drywall claims.
• On his other blog called Chinese Drywall Blog, Scott highlights a chart of drywall shipments from China, which is easy to read and provides great information (prepared by the Harold Tribune).

I have not seen or heard of any claims in Tennessee, but there were reports on the news that new homes ( ... like mine ... ) being built in the 2005-2006 "may" have some of the tainted materials.  We know it made it to Charleston, South Carolina ... but did it make here? 

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