Understanding Claims That Are Frequently Alleged in Construction Defect Litigation

When a homeowners association suffers damages that it believes are a result of deficiencies in the design and/or construction of its property, or separate interests of its members that the association is responsible for maintaining, it may be necessary for the association to file a law suit against the developer of the property and other parties that were involved in the construction of the development. The claims alleged by a homeowners association in a construction defect lawsuit are typically alleged in multiple “causes of action” that require different factual and/or legal elements to establish a right to recover damages based on those claims. The claims that are commonly alleged in construction defect cases include:

• Strict liability;
• Negligence and professional negligence;
• Breach of implied warranty;
• Breach of express warranty;
• Breach of fiduciary duty;
• Fraud;
• Negligent misrepresentation and
• Breach of the statutory standards of construction.

Strict Liability.

Claims that are based on a theory of strict liability are a derivative of cases that originated in the context of mass-produced consumer products that caused injury to a consumer/user of the product. Because it is difficult for an injured party to establish necessary elements for traditional claims against the sellers of products that are based on breach of contract or negligence, court case decisions developed the principle for recovery based on the theory that those who sell a mass-produced product in a defective condition that is unreasonably dangerous to the consumer/user are subject to liability for the resulting physical harm caused to the ultimate consumer/user. Such liability is imposed even if the seller had no contractual relationship with the injured party and exercised care in the production and sale of the product (hence, “strict” liability). If applicable to a claim for construction defects, a claim of strict liability presents a substantial threat of liability exposure to the defendant developer because the plaintiff does not have to prove that the defendant’s conduct was unreasonable or intentional.

Negligence and Professional Negligence.

Claims that are based on the theories of negligence and/or professional negligence are predicated on the injured party having suffered damages as a result of the breach of a duty. Developers, general contractors, subcontractors, architects, engineers, and other design professionals who were involved in the construction of a project all owe a duty of due care to the homeowners and homeowners associations who are ultimately affected by their work or services. Thus, each of said parties is potentially liable for claims based on negligence which result from a breach of the duties that are owed. The liability that developers and general contractors are exposed to for negligence claims can also result from the negligent acts of the subcontractors and/or design professionals that they retain on the basis of “respondeat superior.” In certain situations, liability for claims based on negligence can also be presumed when there has been a violation of a statute or building code.

Breach of Implied Warranty.

Court decisions in various states have held that the doctrine of implied warranties of quality and fitness which are applicable to the sale of goods should apply to newly constructed real property. Such decisions have found that the builders and sellers of new construction should be held responsible for that which they impliedly represented—that the completed structure was designed and constructed in a reasonably workmanlike manner. This theory of recovery is often alleged by homeowners associations against developers.

Breach of Express Warranty.

Frequently material suppliers and/or contractors provide a written warranty in connection with their service or product that extends to the original purchasers and their successors. Claims that are based on the alleged breach of an express warranty necessitate the existence of such a written warranty that is alleged to have been breached.

Breach of Fiduciary Duty.

Court decisions have held that when a developer or its agents or employees control a homeowners association’s affairs, they owe a fiduciary duty to the association and its members. This duty includes a duty to refrain from making decisions that benefit the developer at the expense of the association and its members. Occasionally construction defect claims will be alleged based on a theory that the fiduciary duties owed by the developer or its agents or employees were breached thereby causing resulting damage to the association.

Fraud.

Most construction defect claims that involve claims of fraud arise from transactions in which property has been sold and the buyer is contending that the seller committed fraud in connection with the transaction. Claims based on fraud necessitate a showing of the following elements:

• A misrepresentation of material facts (either through an affirmative representation, concealment, or nondisclosure);
• Knowledge of the falsity;
• An intent to defraud (i.e., an intent to induce reliance on the misrepresentation of facts);
• Justifiable reliance; and
• Resulting economic damage.

A homeowners association that pursues a fraud claim in a construction defect case is typically pursuing the claims of its members pursuant to authority granted by state laws and/or the association’s governing documents. Such claims necessitate being able to prove actual reliance on the alleged misrepresentations. Because fraud claims have heightened pleading and proof requirements and liability insurance policies typically exclude coverage for claims resulting from fraud, there are pros and cons of alleging such claims that should be thoroughly evaluated with legal counsel before becoming involved in the litigation of such claims.

Negligent Misrepresentation.

Claims for construction defects that are based on an alleged negligent misrepresentation are another separate and distinct basis for recovery. When a party makes false statements which are honestly belied to be true, but they are made without a reasonable ground for such a belief, he or she may be liable for negligent misrepresentation. Negligent misrepresentation is a form of deceit. To prove negligent misrepresentation the following elements must be shown:

• A misrepresentation of a past or existing material fact;
• No reasonable grounds for believing it to be true;
• Intent to induce another’s reliance on the fact misrepresented;
• Ignorance of the truth and justifiable reliance thereon by the party to whom the misrepresentation was directed; and
• Damages.

Various state court decisions have held that homeowners associations have standing to assert claims based on negligent misrepresentation in their construction defect actions.

Breach of Statutory Standards of Construction.

Because of the ramifications of costly construction defect litigation, many states have adopted laws that impose requirements relative to the pursuit of such actions. Some states have adopted statutory standards of construction which include exclusive procedures and theories of liability that must be followed and which limit or prevent other types of actions and the damages that are recoverable for alleged construction defects. Such laws may also alter the length of the statutes of limitations that are applicable to construction defect claims.

Because of the different possible claims and the resulting statutes of limitations that would apply, homeowners associations that are confronted with issues relative to possible construction defects should promptly seek input from legal counsel in their jurisdiction that is experienced in construction defect litigation. As the success or failure of such claims frequently depends on when action is taken after first becoming aware of facts that give rise to the claims, it is extremely important that associations seek the appropriate advice and take necessary action so as to not prejudice their right to seek recovery for damages due to construction defects.