The Critical Path - June 2006

Friday, June 9, 2006 The Critcial Path, June 2006   VOLUME 1 ISSUE 1  
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Texas Court Construes Presuit Notice Provision of Residential Construction Liability Act (RCLA)
by Julie S. Elmer

Texas Court Construes Presuit Notice Provision of Residential Construction Liability Act (RCLA)

Hernandez v. Lautensack, --S.W.3d--, 2006 WL 949989 (Tex. App. April 13, 2006)


In 1999, homeowner Philip Lautensack hired contractor Roy Hernandez d/b/a Hernandez Roofing to replace the slate tile roof on Lautensack’s residence for a cost of $20,000.  After the new roof was installed, it leaked continuously, and Hernandez was unable to repair it after several attempts.  In 2002, Hernandez told Lautensack that the leaks were the result of a hailstorm, and he offered to replace the roof for $9,100 labor if lautensack purchased the new slate tiles at a cost of $25,000.  Lautensack rejected this offer and hired another roofer in September 2002 to replace the roof for $32,300.  The new roofer found several defects in Hernandez’s roofing job, including lack of proper underlayment, lack of metal flashing, and improper tile spacing.


Lautensack sent Hernendez a claim notice letter on February 12, 2003 by both certified and regular mail.  The letter described the problems with the roof, alleged breaches of warranty, and threatened litigation unless Hernandez paid Lautensack $41,880.  Hernandez did not claim the certified letter and did not reply to the regular letter.


Lautensack filed suit on April 17, 2003.  The case was tried to a jury, which awarded Lautensack $24,750 in actual damages and $10,680 in attorney’s fees.  The jury also found that Lautensack’s RCLA notice was untimely because it did not give Hernandez the opportunity to inspect the roof defects and make an offer to repair them.  Both parties appealed.


The court of appeals found that the judgment in favor of the homeowner was supported by the evidence and that the homeowner’s failure to send his RCLA presuit notice before the roof was replaced in September 2002 did not warrant dismissal of the action.


Section 27.004 of the Texas RCLA provides that a claimant seeking damages for a construction defect must provide the contractor written notice of the alleged defect at least sixty days before initiating a lawsuit.  The contractor then has thirty-five days to inspect the property and forty-five days to proffer a settlement in writing.  As amended in 2003, RCLA provides that a claimant’s failure to provide proper presuit notice to the defendant results in dismissal of the action.  Hernandez argued that Lautensack’s claims should have been dismissed because, by sending his presuit notice letter after the roof had already been replaced, he deprived Hernandez of the opportunity to inspect the property and offer to repair alleged defects under the RCLA.


The Texas Court of Appeals rejected Hernandez’s argument.  The Court found that the RCLA’s intent to provide contractors reasonable opportunity to inspect the property had already been fulfilled.  Hernandez had already inspected the roof many times before Lautensack sent the presuit notice letter.  The evidence also showed that Hernandez had attempted to repair leaks and made a bid to replace the roof in September 2002, before Lautensack sent the letter.  Thus the policy underlying the RCLA was fulfilled in this case, and there was no legitimate basis for dismissing Lautensack’s claims based on defective presuit notice.




Duties of Surety Defined in Louisiana Roadway Defect Action

Scott v. Red River Waterway Commission, __ So.2d--, 2006 WL 932060 (La. App. April 12, 2006)


This case arises out of a fatal one-car accident that took place on August 24, 2002 in Bossier City, Louisiana (“City”).  Jason Scott lost control of his vehicle at a curve in the roadway and hit a road sign.  His parents sued the City.  The City filed a third party complaint against the performance bond company (“Surety”) for the original roadway contractor (“Contractor”).  The City alleged that by assuming the responsibility for completing the roadway after the Contractor’s default, the Surety took over the Contractor’s role and subjected itself to liability to injured third parties for defective roadway conditions.


The Contractor had defaulted in its work on its original contract for construction of the roadway with the City.  The Surety then entered into a “Completion Agreement” with the City and offered a joint venture (“Joint Venture) as the completion contractor.  The City agreed to work directly with the Joint Venture.  The Joint Venture and the Surety entered into a Completion Construction Contract which provided that the Joint Venture would be bound in the same manner as the Surety would be bound to the City had the Joint Venture been the Contractor under the original roadway construction contract  


The Louisiana Public Works Act governs projects such as the construction and repair of the roadway at issue.  The Act requires that a contractor for such a project obtain a performance bond for the protection of the public authority from loss and expense arising out of the failure of the contractor to perform the contract.  With the issuance of a bond, the bonding company (surety) binds itself to pay up to the amount of the bond in the event of nonperformance of the contractor’s obligations for the public works contract. 


It is well settled that if a surety pays off its obligation in money and acts in no other manner concerning a public works project, its liability is limited to the amount paid.  Thus, a surety is generally not liable to a third party for personal injuries arising from defects in the way the project was built.  A surety cannot be expected to perform in the project’s actual construction.


Under Louisiana law, however, if a surety assumes the role of the contractor and acts directly in actually completing the project (rather than simply funding its completion), its liability can expand.  In this case, the City did not demonstrate that the Surety performed any act of construction, directed the Joint Venture’s construction work decisions, or caused an alteration of the original design or specifications for the roadway project.  It merely paid out a little less than $1 million to place the construction project back on track after the Contractor’s default.  As a result, the Surety did not perform beyond its role as surety and assume additional duties for the roadway construction project.  Thus, the Surety was entitled to a dismissal of the City’s claims against it.




Alabama Appeals Court Addresses Timing of Contractor Indemnity Claims

Choice Builders, Inc. v. Complete Landscape Service, Inc., --So.2d--, 2006 WL 845512 (Ala. Civ. App. March 31, 2006)


In this case, homeowners sued a general contractor (“Contractor”) and other defendants in 2001, alleging that the exterior cladding on their house had been improperly installed.  While the litigation was pending, a large wooden cross-tie retaining wall behind the house collapsed.  In January 2003, plaintiffs amended their complaint to allege that the Contractor had negligently overseen the construction of the retaining wall.  A month later, the Contractor brought a third party indemnity claim against the Landscaping Subcontractor which built the retaining wall, asserting that if the Contractor were found liable to the homeowners for the retaining wall, then the landscaping Subcontractor would be liable to the Contractor for those damages.


The Landscaping Subcontractor moved for summary judgment in part based on the two-year statute of limitations for negligence claims.  As grounds for the motion, the Landscaping Subcontractor cited the homeowners’ deposition testimony that in 2000 they noticed the retaining wall bulging outward and contacted the Contractor, who looked at the wall and determined that it should have been constructed of concrete instead of wooden cross-ties.  The trial court granted the Landscape Subcontractor’s motion for summary judgment, and the Contractor appealed.


The appeals court noted that an indemnity claim against a third party does not accrue until the defendant’s liability for the original plaintiff’s damages has become fixed.  Thus, although the homeowners might have suffered actual injury or loss at the time they noticed the bulging wall in 2000, the Contractor had not, because its liability to the homeowners was not fixed.  In fact, the homeowners did not even sue the Contractor for the retaining wall until January 2003.  Thus, the Contractor’s indemnity claim against the Landscaping Subcontractor, filed a month after plaintiffs amended their complaint, was timely.   




“As Is” Clause Does not Protect Seller from Mold Concealment Claim
Larson v. Safeguard Properties, Inc. et al., 379 F.Supp.2d 1149 (D. Kan. July 13, 2005)

 Plaintiffs entered into a contract to purchase a house from Chase Manhattan Mortgage Corp. (Seller).  On the same day, Plaintiffs signed two addendums to the contract.  In one addendum, Plaintiffs agreed that they were accepting the house "as is" and acknowledged that the Seller made no warranties.  In the second addendum, Plaintiffs acknowledged that they were being put on notice that there may be mold on the property, acknowledged that they should use due diligence with experts, and agreed to release Seller from any liability that resulted from any mold. Chase hired a contractor to conduct repairs prior to closing.  Unbeknownst to Plaintiffs, a significant leak occurred in the basement prior to closing.  Contractors informed the Seller about the leak but the Seller did not share the information with Plaintiffs.  After closing, Plaintiffs found water and mold in the basement.  The mold allegedly rendered the house uninhabitable and caused medical problems to one of the Plaintiffs and her son.


Seller filed a motion to dismiss, alleging that Plaintiffs could not show that Defendants had a duty to disclose the water leak and mold or that Plaintiffs relied on Seller’s alleged silence.  Seller argued that the notice given to Plaintiffs in the second contract addendum was sufficient to relieve it of a duty to reveal any subsequently discovered mold.  The second addendum stated in pertinent part:


Buyer is hereby advised that mold ... may exist at the property ... and may cause physical injuries ... Buyer acknowledges and agrees to accept full responsibility/risk for any matters that may result from ... mold and hold harmless, release and indemnify seller, Chase Manhattan Mortgage Corporation, listing broker, Selling Broker/Agent, their officers, employees, agents, heirs, executors, administrators, and successors from any liability/resource/damages (financial or otherwise) ... Chase Manhattan Mortgage Corporation real estate brokers and agents are not qualified to inspect property for mold ... The purpose of this disclaimer is to put buyers on notice to conduct their own due diligence regarding this matter using appropriate qualified experts.

The court held that the existence of a duty to disclose depended on whether the defect could have been discovered by reasonable inspection. The reasonableness of Plaintiffs' inspections was a question of fact, and Seller had not shown that Plaintiffs could not prove any set of facts entitling them to relief.  Seller further alleged that the second addendum demonstrated that Plaintiffs had the ability to discover the mold because they had notice that it might exist.  The court rejected that argument, holding that notice of a possible defect is a factor to consider when evaluating the reasonableness of Plaintiffs' inspection but it does not, standing alone, justify dismissal. Plaintiffs alleged that they carefully inspected the home upon signing the contract and that they visited the residence prior to closing.  Therefore, more discovery was needed and Plaintiffs’ claim survived the motion to dismiss. 


The court further held that an "as is" clause in a sale contract does not preclude claims for intentional fraud or misrepresentation.  Liability for fraudulent concealment depends in large part on the buyer's inability to discover a defect with a reasonable inspection.  Notice of a possible defect is a factor to consider when deciding whether a home buyer’s inspection was reasonable, but it is not by itself dispositive.


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