Erosion of the Economic Loss Rule in Washington

A recent Washington Court of Appeals case expanded the right of homeowners to recover damages from contractors whose negligence causes damage to their homes and property. At the same time, the opinion expanded the potential liability of contractors. In Jackson v. Trenchless Construction Services, the homeowner sued a contractor who was under contract with the prior owner to install a waterline on the property. The homeowner alleged that the work was performed negligently and sued in tort.

For years, the mantra in construction law in Washington has been there is no tort of negligent construction. The only remedy had been breach of contract based on the economic loss rule: An economic loss is a defect of quality as evidenced by internal deterioration. But when a loss stems from defects that cause accidents involving violence or collision with external objects, that is a physical injury and tort remedies apply.

This rule has allowed negligence cases to proceed when a contractor’s negligence caused bodily harm. In this recent case, no one was injured. The water pipe did not rupture or explode, rather the homeowner alleged that the manner in which the work was performed caused instability in the slope that in turn caused the landslide. The court found this distinction sufficient to allow the case to proceed in tort.

What ramifications does this have? For homeowners whose property is injured by contractors who worked on the property in years past, this expands the right to recover damages. This is especially critical in light of the fact that homeowners insurance policies typically exclude coverage for land movement. For contractors, not only does it suggest they must exercise due care, but also suggests they need to be properly insured.

Seattle Biotech at a Turning Point

A recent article in the Puget Sound Business Journal (“Biotechs on the Brink” by Clay Houtzman) suggests that 2011 is a turning point for Seattle’s growing biotech and life sciences industries. More optimistically, from my perspective 2010 was the turning point for the positive, and 2011 will put Seattle on the map for this growing industry.

Bristol Myers Squibb’s purchase of Zymogenetics in 2010 led not to the closing of Zymo’s iconic offices in South Lake Union, but instead to a commitment to keep the 280 jobs in Seattle. Dendreon’s continued success as well as that of Seattle Genetics spurs the growth of other companies that support clinical drug trials, including clinical research organizations, biostatistical consultants, data management companies, and independent medical consultants.

Perhaps fostering the growth of the biotech and life science industries in the Puget Sound area is Washington State’s comparatively favorable tort law. Punitive damages are unavailable in Washington, unlike in many other states. Thus, lawsuits seeking damages for adverse drug reactions are relatively rare in this state.

Professional Services and Construction Liens

Can a construction professional file a construction lien for professional services when the services do not actually result in a physical improvement to real property? A recent opinion from the Washington Court of Appeals suggests the answer is “no.”

In Colorado Structures, Inc. v. Blue Mountain Plaza, a contractor drilled core samples at a construction site to determine the feasibility and cost of developing the property. The development did not go forward because of lack of financing, and the contractor filed a construction lien, including a lien for professional services involved in drilling and evaluating the core samples.

The Court first noted there are four key elements to a valid construction lien:

(1) Furnishing services or equipment;
(2) For the improvement of real property;
(3) At a contracted price; and
(4) At the request of the owner.

The court accepted that the drilling of core samples was professional services, but because the core samples did not result in an actual improvement to real property, the court rejected the claim that a valid lien was created.

This would seem to be at odds with the definition of “professional services”, which includes services rendered “in anticipation of providing improvements to real property.” But the lesson is clear: For a construction lien to be valid in Washington, the improvements must be made. This puts contractors at risk when they perform professional services prior to finalization of funding for a project.

Admissibility of Expert Witness Testimony

In Washington, the admissibility of expert opinions at trial is governed by a legal standard known as the Frye test. As relates to Life Sciences, this may arise when a patient claims to have suffered serious side effects from a drug under study. Expert medical testimony is required under Washington law in these types of cases to prove causation. Not all expert opinion testimony is admissible under Frye. While courts will go a long way in admitting expert testimony deduced from a well-recognized scientific principle or discovery, the thing from which the deduction is made must be sufficiently established to have gained general acceptance in the particular field in which it belongs. If the theory underlying a proffered opinion has not gained general acceptance in the medical community, it will not be admissible.

For instance, in February of this year the Washington Court of Appeals rejected a novel theory that insertion of a stainless steel stent could cause a severe and long lasting allergic reaction in a patient allergic to nickel. Eakins v. Huber, 154 Wash. App. 592 (2010).

Enforceability of Limited Warranties by Contractor

Home Buyers Warranty / New Home Warranty
2-10 HBW Warranty found unconscionable

A recent Washington Court of Appeals case invalidated a Home Buyers Warranty offered by a home builder to a customer in Pierce County. The homeowners had purchased a 5 acre plot of land in Roy, Washington and hired Palmer Ridge Homes, LLC to build them a home. Palmer Ridge Homes had enrolled with a third party company called “Home Buyers Warranty” that basically provides limited insurance for the builder for construction defects if the contractor uses a standard “2-10 Home Buyers Warranty. This warranty requires arbitration and that claims be brought within one year of substantial completion.

The court observed that the homeowners

-did not receive the booklet to review before signing an enrollment application;
-they believed the 2-10 HBW warranty would afford them greater protection than offered by the construction contract (it was in fact less protection)
-there was no indication that the 2-10 HBW was explained to them;
-did not receive a copy of the booklet containing the warranty terms until after they had moved into their home;
-the provision waiving implied and express warranties was on page 7 of a 32 page booklet

The court found this to be patently unfair the homeowner, even though typically any party to a contract has a duty to read the contracts they sign.

What lessons can be construed from this? If you are a contractor, take the time to explain the terms of your warranty. It may be wise to have your customer initial the pages. Use larger font or bold text for important provisions such as warranties, indemnification obligations, and time limitations for bring claims.

If you are a homeowner, be sure you read what you sign before you sign it. If you feel like you have been wronged by your contractor, contact an attorney.

The case can be found at http://www.courts.wa.gov/opinions/index.cfm?fa=opinions.showOpinion&filename=389819MAJ

Business Formation -- Choice of Entity

The entrepreneur has a choice of several different choices in which to run a business.

1) Sole proprietorships. On the plus side, these are the least expensive form, but on the minus side, they expose the proprietor with personal liability.

2) Divisions of an existing corporation, LLC, partnership, etc.;

3) general partnerships, that is, two or more people working together. Again, although inexpensive, these face the partners to unlimited personal liability;

4) Limited Liabilty Partnerships;

5) General partnerships in which all of the partners are limited liability
entities;

6) Simple limited partnerships—that is, limited partnerships that have
not registered as limited liability limited partnerships (“LLLPs”) and
whose general partners are not limited liability entities;

7) Limited partnership that have registered as LLLPs;

8) Limited partnerships whose general partners are limited liability entities;

9) Corporations;

10) "S" Corporations that allow certain tax benefits to the owners;

11) Limited Liability Companies, or LLCs. This includes Professional Limited Liability Companies, referred to as PLLCs.

The choice of which entity to select to run your business depends on a variety of factors, which coalesce into to basic steps: First, non-tax considerations. That is, what is the most efficient way to run the company and limit the owners' personal liability. Second is the implication of federal income tax and social security taxes on the entity. In nearly all situations involving small to medium sized businesses, the LLC is the preferred entity selection.

An LLC's operating agreement can be tailor drafted to fit the needs of the LLC's members to address nearly any situation. The LLC is by far the most versatile and protective form of business entity.

For more detaile information, contact me or refer to this very informative website:

http://www.cunninghamonoperatingagreements.com/

Stigma Damages in Construction Defect Litigation

A recent Division III Court of Appeals upheld "stigma damages" in a lawsuit by a homeowner against the contractor that built his home. Although not reported (and therefore cannot be used as binding authority in legal briefs), it reinforces my observation over the last fifteen years that (a) homeowners will get what they ask for from judge or jury, and (b) contractors face an uphill battle in construction defect litigation.

Mr. Khalighi purchased a home built by Mr. Harvey, and problems arise with several aspects of the construction. Trial was a bench trial, meaning no jury. The Court of Appeals affirmed a rather substantial judgment including:


-$106,000 cost to repair improper drainage, adding slope to a garage, and improperly poured footings;
-a 25% contingency ($26K) for unforeseen problems that might be uncovered (rejecting the defense argument that this was speculative);
-stigma damages of $148,000; and
-attorneys’ fees of $135,000.


The trial court judge apparently disregarded entirely the defense expert’s opinion that repair costs were $13,000 and stigma damages no more than $38,000. There was no middle ground; the homeowner got everything he wanted.

I was also surprised to see the Court disregarded the homeowners’ obligation to provide notice of defect under RCW 64.50. It was undisputed that the homeowner failed to give any notice of defect or opportunity to cure. But because the contractor did not point out the homeowners’ obligation, the Court determined he had waived that defense.

http://www.courts.wa.gov/opinions/index.cfm?fa=opinions.showOpinion&filename=280772MAJ