Residential and commerical construction disputes - sm

Hope For New Home Builders 

In this article, we look at the difficulties that home builders have faced over the years, and a fairly recent decision that provides a ray of hope for builders in Pennsylvania.    

The past few years have been rough for small to medium-sized residential builder/developers in Pennsylvania. For one, the financial crash of 2008 was too much for many builders and mid-sized contractors and subcontractors.   Since then, there has been a generally weakened economy and a slow rebound of new-build projects. There has also been a glut of "stucco failure" claims.  What are those? The material, originally developed in Europe, became common with American builders in the 80's, in part because stucco adjusts readily to the particular design of the building, but property owners began experiencing problems with moisture entering the structure. A wave of litigation resulted in which Plaintiffs said that installers of EIFS failed to install a base coat at the termination of the EIFS system, and/or failed to install sealant and failed to install flashing.

If the above were not enough, mid-sized builders also faced a denial of insurance coverage for certain negligence claims typically covered by insurance.  In several appellate decisions over the last few years, courts in PA have taken a restricted view of commercial general liability (“CGL”) coverage for liabilities resulting from construction and product defect claims.  See Indalex Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2013 Pa. Super 311 (2013).  This has been referred to as the Kvaerner/Gambone litany of cases, which essentially eliminated insurance coverage against negligent-construction claims by their customers.  The lack of coverage did not deter all plaintiff-home-owners in going forward.  Many Plaintiffs proceeded against to attempt to pierce the corporate veil and force business owners to pay for repairs to the plaintiffs' homes.

Unfortunately for mid-sized builders in Pennsylvania, the appellate courts in Pennsylvania were not finished.  In Conway v. Cutler Group, the superior court addressed this issue:  let's say, for example, a person purchases a "used" house ("Used House Purchaser") from the original purchaser of said home; and let's also say that the Used House Purchaser find a defect or problem that likely existed when the home was built: can said purchaser bring a successful action against the home builder for breach of "warranty," even though the purchaser never even met, much less negotiated a contract with, the builder? According to basic contract law, a party cannot benefit from a contract unless he is a party to it, or if he's an express third party beneficiary of the contract.  That said, the state Superior Court in Conway v. Cutler Group, No. 803 EDA 2012, extended breach of implied warranty claims beyond original purchasers to secondary and subsequent home buyers, even though said
parties lacked contractual privity (a direct contractual relationship with the builder). This dramatically increased a builder's exposure to liability to those purchasing a "used" home, where the purchaser had never met, much less had an agreement with, the contractor who had built the home.

After Conway, builders were left to wonder:  how much worse is this going to get?  Courts in Pennsylvania seemed to be hellbent on imposing new liability on the part of builders out-of-the blue, leaving builders to wonder:  how do I purchase insurance for forms of new liability that the courts in PA might dream up in the future?  Then, on August 18, a break came.

 

Conway - Reversed.  

The Pennsylvania Supreme Court reversed the Superior Court's holding in Conway, ruling that "an action for breach of implied warranty requires contractual privity between the parties." This decision likely has builders/developers who are already suffocating from attorney fees to defend existing claims to relax, slightly.

Moreover, while the Supreme Court's decision in Conway left open the suggestion that the PA legislature may address these issue of whether privity between the home  purchaser and builder before the purchaser can sue for breach of warranty, builders have hope.  First, they can lobby the legislature to prevent the extension of breach of implied warranty claim to subsequent buyers.  Secondly, for what it's worth, the Pennsylvania legislature has, in the past, resisted opportunities to saddle new home builders with claims for shoddy construction.  The PA legislature passed the Home Improvement and Consumer Protection Act ("HICPA"), which governed construction-type work on homes from July 1, 2009 onward, but only in regard to home improvement, not new construction.

Further, in 2014, the law in Pennsylvania changed with regard to mechanic's liens in Pennsylvania (sometimes misspelled as "mechanics' liens").  Said legislation changed the Mechanics’ Lien Law of 1963 to limit the extent to which the owners of residential property are subject to mechanics’ liens. The amendment is such that a lien claim filed with respect to a residential property may be discharged when the owner or a tenant has paid the full contract price to the contractor. A subcontractor may file a lien, but only for the difference between the contract price and what the owner paid.  The amendment provides that a subcontractor does not have a right to a lien when the owner or tenant paid the full contract price to the contractor if the property is a one-or two unit residential property or townhouse intended to be used as a residence of the owner, or used as the residence of a tenant subsequent to occupation by the owner.

 

Our Pittsburgh law firm handles all aspects of residential and commercial construction litigation, for both plaintiffs (claiming improper construction or breach of warranty) and defendants (builders, general contractors, and subs). Contact our Pittsburgh lawyers for further updates!