Building problems in new construction usually start becoming apparent to the property owners two to five years after construction completion. Most property owners ignore the problems initially or try to get them fixed by the builder, its subcontractors and suppliers, the architect or the seller. Often the developer, builder and/or design professional will make some effort to fix the problem. The property owner then waits to see if the fix has solved the problem.
Massachusetts has a six year "statute of repose." This prevents anyone from bringing tort-based claims against design professionals or builders more than six years after a project is substantially complete, occupied or put into use. M.G.L. Chapter 260, ยง. 2B. Property owners should decide whether to bring a lawsuit against potentially responsible builders, subcontractors, architects and/or engineers before that six year period runs out. If they don't bring suit within six years, they have no recourse in negligence against any builder or design professional whose negligence caused the defects. Their only recourse for the negligence, then, is against their seller/developer (or a material supplier).
In 2002, the Massachusetts Supreme Judicial Court shifted more responsibility for building defects to developers in the form of an implied warranty. They also limited a major defense used by design professionals and, builders. They did not, however, change the statute of repose.
I. Implied Warranties of Habitability — Developers Beware
Massachusetts residential landlords have known for a long time that their tenants have the benefit of an implied covenant of habitability. Hemingway vs. Boston Housing Authority. 363 Mass. 184 (1973)
Few developers of residential housing, though, are aware that when they sell residential properties to home buyers, they are including a warranty of habitability that cannot be contractually waived. Most condominium developers do not know that this warranty extends to condominium unit owners who purchase from the seller/builder — and their condominium association.
In May 2002, the Supreme Judicial Court decided, in Albrecht vs. Clifford, 436 Mass. 706 (2002), that an implied warranty of habitability attaches to residential property sold by builder/sellers. The implied warranty covers latent design and construction defects, which make a home unsafe or unable to keep out wind and water. The warranty runs for three years after the defect is or should be discovered by the buyer. It is implicit in every applicable sale, regardless of the sale terms. Sellers cannot get a waiver nor can they disclaim the implied warranty.
Builder/sellers have some available protection. The implied warranty does not cover defects which are obvious or which, in normal use of the property, the homeowner should discover. The SJC held that the plaintiffs in Albrecht, in fact, were not entitled to recover anything from their builder/seller for the defective fireplaces in their new home, because the defects could have been discovered by measuring the fireplace dimensions and/or using the fireplaces.
Shortly after its Albrecht decision, in Berish, et al vs. Bornstein et al, 437 Mass. 252 (2002)) the Court extended the builder/seller implied warranty to condominium unit owners and their unit owner associations. In essence, developers of new homes are strictly liable to homeowners for significant latent building deficiencies, regardless of fault, for three years after the deficiencies become apparent. The association controls and acts as owner of a condominium's common areas (which generally include the property's basic systems, structure and exterior), and consequently is the recipient of the implied warranty.
The SJC did not decide whether this implied warranty is limited to the initial buyer or whether it can be enforced by subsequent homeowners. It has yet to decide whether the warranty applies to renovations as well as new construction. In the context of condo conversions, this may be a very significant issue. For example, if a developer decides not to re-point masonry, replace roofs or windows, replace boilers with redundant systems, can it be held responsible for failures in those systems under an implied warranty of habitability?
The SJC has not further defined the term "builder/seller". In both the Albrecht and Beris cases, the defendant developer also acted as general contractor. Eventually the SJC will be asked to define what degree of control over and participation in project decisions and execution makes a developer a "builder/seller". However, it may be decades before such a case is decided - which doesn't help developers plan for today.
Because the six-year Statute of Repose protects architects and builders, but not sellers in building defects cases, when a defect is discovered the developer may well be the only available party for the property owner to sue, and the costs of defending the lawsuit will likely be substantial. Because the builder/seller has strict liability, regardless of fault, it may be held responsible for the defect, yet unable to collect reimbursement from the responsible contractor or design professional once the six-year period has run.
Developers should pay close attention to their contracts with builders and design professionals, particularly so long as the legal definition of "builder/seller" remains undefined. They should be sure that all their builders and/or subcontractors assume sufficient contractual liability to cover deficiencies arising from their scope(s) of work or that the price paid reflects allocation of this risk. A claim arising under an indemnification clause, for example, "arises out of" the indemnification clause (rather than the underlying defect) and is not barred by the Statute of Repose.
Developers and builders should speak with their insurance professionals about coverage for claims relating to the implied warranty of habitability. Because the implied warranty creates a strict liability, a builder/seller may be legally responsible for damages without being negligent. Such liability may not be covered by their comprehensive general liability policy. If an endorsement to the policy covering this risk can be obtained at a reasonable cost, it may present a cost effective solution.
II. The Economic Loss Rule — Architects and Builders Beware
Also in 2002, the SJC decided that property owners can sue design professionals for repair of building defects caused by the design professional's negligence, if the defects cause damage to other parts of the buildings they design. Such liability is not barred by the "economic loss rule". Aldrich et al vs. ADD, Inc., 437 Mass. 213 (2002). In Berish the SJC extended that decision to builders. Property owners can also sue contractors for repair of building defects resulting from their negligence in constructing buildings if the defects cause damage to other parts of the building (as well as property not part of the building). In both of these cases, the SJC inferred that such property damage was alleged.
The "economic loss rule" provides that, absent personal injury or physical damage to property, a tort claimant cannot recover for mere pecuniary loss. This doctrine was extended to limit product liability by excluding compensation for defective products themselves, on the theory that compensation for such losses can be covered contractually through warranty. In recent times, design professionals and contractors both have claimed the buildings they design or build as their "product", created pursuant to a contract with the property owner for price which at the time of negotiation may or may not include a warranty.
States around the country have been struggling with these claims, and have applied varied theories to these types of cases. Some states, such as Florida and New York, for example, have decided that the economic loss rule does not apply to professional negligence claims (design professionals) but does apply in a variety of ways to general contractors. Others, like Maryland, for example, have decided the economic loss rule on a case-by-case basis, trying to distinguish between defects which involve premature deterioration (substandard windows) and those which pose a threat of accidental harm (substandard windows which may fall out).
For years, Massachusetts architects have asserted the economic loss rule as a defense with mixed success against owner negligence claims. When the architects have been successful, the results were very costly for property owners. Similarly, contractors have asserted this rule as a defense against property owner claims in Massachusetts, asserting that the buildings they construct are their "products".
The SJC did not explain the theory underlying its 2002 economic loss decisions or how its decisions will apply in other factual contexts. It apparently rejected the notion that buildings are products for the purposes of the economic loss rule, since it found the rule did not apply where a building defect caused harm to another part of the building. It also apparently rejected the "threat of accidental harm" test, since it did not even discuss that test. However, its decisions were brief and unclear. In the Berish decision, the SJC neither mentioned nor distinguished its 1995 decision, Commerce Insurance Co. vs Betty Caplette Builders, Inc., 420 Mass. 87 (1995) in which it held that the "your own products" exclusion in a general contractor's comprehensive general liability insurance policy meant that damage to the building it constructed was not covered by its insurance. The building, for the insurance policy purposes, was the contractor's "product".
Still, under Aldrich, Massachusetts architects and engineers, can be held responsible for building defects arising from designs, specifications and services which fail to meet the standard of care - even where they are the consequence of developer choices or decisions. General contractors may find themselves liable for building defects which are not covered by their CGL insurance policies under the "your own products" exclusion, unless they obtain an endorsement changing that term (or otherwise deal with it contractually with the owner).
III. The Message Is Clear
One message is clear. The SJC is signaling Massachusetts building industry professionals to take more responsibility for building defects. Their reasoning: these are the parties best able to prevent defects or to discover and fix them during the design and construction process.
IV. What Should The Industry Do?
Developers:
- Consider placing each property you develop in a separate, limited liability entity. If you do, maintain the distinction between that entity and any other entity you own, according to legal standards, so liability is confined to that entity.
- Negotiate warranties in your Owner/Contractor Agreements for residential properties so that the builder warrants that the property, as constructed, will not only meet all applicable federal, state and local codes and regulations, but, in addition, will be safe and fit for its intended use (residential occupancy, multiple residential occupancy).
and
- Negotiate warranties in your Owner/Architect Agreements for residential properties that the architect warrants the design of the property will not only meet all applicable federal, state and local codes and regulations but, in addition, will be safe and fit for its intended use (residential occupancy, multi residential occupancy).
or
- Accept responsibility for design and/or construction defects, negotiating price or other concessions in exchange.
Include adequate funds for construction supervision in your project budget and clarify whether the owner or the architect will be responsible for this very important function.
Have your attorneys review these contracts.
General Contractors
- Negotiate an endorsement to your Comprehensive General Liability policy to cover liability for negligence resulting in property damage to buildings you construct.
- Include a warranty in all subcontracts identical to any you give the owner. Limit your warranty. At most, it should include negligence and building code violations, not habitability.
- If you are faced with a "performance specification", requiring you to meet a standard such as "weather tight" or "water tight" (or HVAC performance levels), without specifying what construction will meet that performance standard, be sure your bid price includes all necessary work. Ask for direction or clarification in writing from the architect.
- Staff your jobs with adequate project management and site supervision. Do not permit anyone to substitute materials, deviate from the drawings and specifications or make field changes without the architect's written approval and agreement that the building will still be safe and fit for use. Refuse to perform or accept work you believe does not meet the standard of care or negotiate protection from the owner or subcontractor who wants it performed that way.
Architects/Engineers
- Limit your warranty. At most it should cover code violations and negligent errors and omissions. Make sure you assume no contractual obligation which exceeds your errors and omissions coverage.
- Include a warranty in all subconsultant contracts identical to any you give the owner.
- Be clear and firm with owners who want to cut corners in the design process (or as construction proceeds). You should not agree to any design element which fails to meet the standard of care, code requirements, and acceptable practice must be the minimum threshold for program, design and construction.
- Be clear and firm with contractors whose work you review. You cannot accept work you believe falls below the appropriate standard unless you receive adequate protection from the owner and contractor.
- Clarify your responsibilities for "contract administration" while construction is in progress. Price site visits and review of the contractor's work as a separate item from the rest of your design services and allow enough time to catch significantly defective work in progress.
In a difficult economy, companies and people suffering harm tend to get contentious when problems arise. Developers, design professionals and contractors should take time now to review and tighten their contracts, insurance coverage and selected business practices. They should bear these legal considerations in mind for each new project, from start to finish.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
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