American Bar Association Forum on Construction Law

Broken Sticks and Bricks: An Overview of Common Causes of Design Flaws and Construction Defect Claims

By: Deborah Cazan and Breana Ware Alston & Bird LLP Atlanta, Georgia

Presented at the 2016 Annual Meeting April 28-30, 2016 Omni, Nashville, TN

©2016 American Bar Association

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TABLE OF CONTENTS I.

INTRODUCTION................................................................................................. 1

II.

DISCOVERY, INVESTIGATION AND REPAIR OF THE DEFECT ........... 1 A. Notice Obligations. ..................................................................................... 1 B. The Investigation and Repair Process ........................................................ 4 i. Selecting a Testing Firm ................................................................. 4 ii. Privilege Issues ............................................................................... 4 C. Spoliation .................................................................................................... 7

III.

CONTRACTUAL PROVISIONS ALLOCATING RISK AND RESPONSIBILITY............................................................................................... 8 A. Common Contract Provisions ..................................................................... 8 i. Architect .......................................................................................... 8 ii. Contractor. ...................................................................................... 9 iii. Discussion of Common Contractual Provisions ............................. 9 B. Specifications ............................................................................................ 11

IV.

POTENTIALLY AVAILABLE CLAIMS........................................................ 12 A. Common Counts ........................................................................................ 12 B. Statutes of Limitations............................................................................... 13

V.

STRATEGIC CONSIDERATIONS.................................................................. 15 A. Potential Recovery .................................................................................... 15 B. Party Alignment ........................................................................................ 15 C. Insurance Considerations ......................................................................... 16

VI.

CONCLUSION ................................................................................................... 18

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I.

INTRODUCTION

No two construction defect claims are ever the same. The purpose of this paper is to provide the reader with practical tips and strategies for approaching and resolving these disputes. We will walk through some of the stages and steps involved in the resolution of these matters, including: (1) discovery, investigation and repair of the defect; (2) contract provisions allocating risk and responsibility; (3) potentially available claims against responsible parties; and (4) the strategy involved in filing claims. II.

DISCOVERY, INVESTIGATION AND REPAIR OF THE DEFECT

Very rarely is the full extent of a design or construction defect apparent when evidence of the defect initially appears. Often, a small problem – like a water leak – is reported, but the assumption may be that the leak is an isolated and easily resolvable issue. Once initial repairs fail, or other instances of a defect appear, the property owner may determine that a wider investigation into the issue is warranted. If counsel has the opportunity to manage the investigation and testing process early on, several legal battles can potentially be avoided on the back end.

Prior to the

undertaking of costly and time consuming testing, counsel should consider and advise the client regarding (1) notice obligations, (2) testifying/non-testifying expert issues, and (3) spoliation issues. A. Notice Obligations. Many factors weigh into the determination of when and to whom notice of a defect or a potential defect should be given. Clearly, consideration should be made of any contractual requirements regarding notice.

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For example, the AIA A201-2007 General Conditions for the Contract for Construction contains several potentially applicable notice provisions: § 10.2.8 INJURY OR DAMAGE TO PERSON OR PROPERTY

If either party suffers injury or damage to person or property because of an act or omission of the other party, or of others for whose acts such party is legally responsible, written notice of such injury or damage, whether or not insured, shall be given to the other party within a reasonable time not exceeding 21 days after discovery. The notice shall provide sufficient detail to enable the other party to investigate the matter. § 12.2.2 AFTER SUBSTANTIAL COMPLETION § 12.2.2.1

In addition to the Contractor’s obligations under Section 3.5, if, within one year after the date of Substantial Completion of the Work or designated portion thereof or after the date for commencement of warranties established under Section 9.9.1, or by terms of an applicable special warranty required by the Contract Documents, any of the Work is found to be not in accordance with the requirements of the Contract Documents, the Contractor shall correct it promptly after receipt of written notice from the Owner to do so unless the Owner has previously given the Contractor a written acceptance of such condition. The Owner shall give such notice promptly after discovery of the condition. During the one-year period for correction of Work, if the Owner fails to notify the Contractor and give the Contractor an opportunity to make the correction, the Owner waives the rights to require correction by the Contractor and to make a claim for breach of warranty …

§ 15.1.2 NOTICE OF CLAIMS

Claims by either the Owner or Contractor must be initiated by written notice to the other party and to the Initial Decision Maker with a copy sent to the Architect, if the Architect is not serving as the Initial Decision Maker. Claims by either party must be initiated within 21 days after occurrence of the event giving rise to such Claim or within 21 days after the claimant first recognizes the condition giving rise to the Claim, whichever is later. The AIA B101-2007 Standard Form of Agreement Between Owner and Architect also contains notice provisions applicable to the discovery of defects in Section 5.9: The Owner shall provide prompt written notice to the Architect if the Owner becomes aware of any fault or defect in the Project, including

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errors, omissions or inconsistencies in the Architect’s Instruments of Service. If a breach of contract claim is available to the damaged party, the failure to provide notice pursuant to the terms of the contract could potentially affect the enforceability of a defect claim.

For example, a trial court in New York recently

dismissed a claim for defective work against a plumbing contractor because it was not the subject of a previous notice of claim. i The contractor had performed work on a municipal pier, including the installation of a fire suppression system. The specifications required the system to be tested at a certain pressure point. The contract required claims by either party be brought within 21 days after the claimant first recognized the condition giving rise to the claim (pursuant to the terms of the AIA A201-1997). The contractor notified the municipality that the system failed, and the municipality commenced an action against the contractor. The court found that there was no evidence of a written notice of claim from the municipality to the contractor, and the municipality never submitted the claim to the architect, despite the existence of a clause requiring notice to the architect/initial decision maker. The court determined the contract included these requirements as conditions precedent to suit or recovery, and dismissed the case. As this case demonstrates, conformance with notice requirements is integral to successfully making a defect claim. For this reason, notices to contractors and architects should be thoughtfully and carefully worded, since the information conveyed in these notices impact which claims can be brought and even the ability to bring such claims. If a forensic investigation of the defect has not already occurred, or if the property owner is considering additional investigation and testing, the notice should provide the recipient an 3 ADMIN/21448041v5

opportunity to participate in that investigation and/or testing, which can help avoid a potential spoliation claim later. B. The Investigation and Repair Process Forensic testing and investigation of a design or construction defect can be very costly and time consuming, so parties should plan this process with an eye toward litigation in the event the responsible parties are unable or unwilling to repair the defect. i. Selecting a Testing Firm Selecting the right testing firm and determining exactly what role that testing firm will take in the investigatory process, repair process, and in the litigation is crucial. Many testing firms have engineers qualified to investigate the causes of defects, but no one qualified or experienced in serving as an expert witness should that be necessary. Often clients retain consultants prior to retaining counsel and may not have vetted the consultants’ qualifications with regard to expert testimony and experience dealing with the legal process.

If a firm with little or no litigation experience is engaged, it is

important to educate that firm regarding your preferred methods of communication and privilege issues. For this reason, before engaging such a firm, it is prudent to consider whether additional – and possibly duplicative – testing will have to be performed if and when an experienced expert witness is engaged. The use of multiple testing firms can lead to increased costs and potentially conflicting results. The careful selection of a testing firm that can meet your client’s needs in a cost effective way thus sets the groundwork for future success. ii. Privilege Issues

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In defect cases, the question often comes up whether a testing firm can act in a capacity as a non-testifying expert and as a fact witness. Owners will often engage a testing firm to investigate suspected design and construction defects, and because of the firm’s working knowledge of the issues, the owner may also ask the firm to oversee or manage the repair process. However, this “two hat” approach invariably raises questions about where the work product privilege begins with the non-testifying expert and where it ends with a fact witness. While the identity of non-testifying experts is likely not privileged, ii the Federal Rules of Civil Procedure and related case law protect information and opinions held by these experts. The discovery of information from non-testifying experts is governed by Federal Rule of Civil Procedure 26(b)(4)(d), which prohibits discovery, via interrogatories or depositions, of facts known or opinions held by a non-testifying expert who was retained in anticipation of litigation or to prepare for trial unless it would be impracticable for the party seeking the discovery to obtain the facts or opinions by other means. iii In practice, this often means that the party seeking discovery of such facts from a non-testifying expert has to pursue a court order regarding that information, and make a showing that it would be impracticable, or financially prohibitive, for it to obtain the facts or opinions elsewhere. States typically parallel the federal rule on this matter, though attorneys should always review the relevant state’s Civil Practice Act to see how the courts in the relevant jurisdiction deal with a claim that a party needs to discover a non-testifying expert’s knowledge or opinions due to undue hardship or substantial prejudice.

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For example, in Georgia, the Supreme Court has interpreted the law to limit discovery of “documents and tangible things” prepared by non-testifying experts in anticipation of litigation or for trial to carefully limited circumstances where the party seeking the trial preparation material has affirmatively shown, to the satisfaction of the court, a substantial need for the evidence and that undue hardship will result should the seeking party be required to develop the evidence by other means. iv

Even if the

discovering party can meet the high burden of demonstrating the need to discover the materials of a non-testifying expert, the trial court may order the production of material following an “in-camera examination to ensure against the disclosure of “mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation” v before ordering production of those materials. The prohibition against discovery of the facts known or opinions held by nontestifying experts will not extend, however, to a consulting expert who is involved in a project for ordinary business purposes. For example, if a consultant expert is in charge of repairs or other work on the project prior to his retention as an expert, then that personal knowledge is subject to discovery like any other fact witness because the knowledge was not gained in anticipation of litigation. vi Similarly, if a non-testifying expert is hired to manage repairs or was otherwise directly involved with the project after his retention as a non-testifying expert, any facts gathered or documents created for the purpose are not considered in “anticipation of litigation” and are not protected. vii Where work is done both to assist litigation and for ordinary business purposes, such as when an expert directs remediation efforts, the privilege is only available when the “primary motivating purpose behind the creation of

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[the materials] was to assist in pending or impending litigation.”

viii

“The relevant

distinction is not between fact and opinion testimony, but between those witnesses whose information was obtained in the normal course of business and those who were hired to make an evaluation in connection with expected litigation.” ix C. Spoliation During the testing, investigation, and repair process it is also important, to the extent possible, to help protect your client from spoliation claims that could handicap litigation strategy. In many cases, this may not be possible – especially if repairs need to be made on an expedited basis. Spoliation is the “destruction or failure to preserve evidence that is necessary to contemplated or pending litigation,” x and involves “the intentional destruction, mutilation, alteration, or concealment of evidence.” xi While it is important to preserve evidence to allow other parties the opportunity to observe it, several jurisdictions have recognized that a reading of the rules against spoliation as forbidding a custodial party from making necessary repairs or remediation of damage would be both unfair and impractical. xii As a general rule, parties only have the duty to preserve evidence for inspection or testing when litigation is pending or reasonably foreseeable. xiii For this reason, a party seeking sanctions or an adverse inference on the basis of a spoliation claim must first “show that the party having control over the evidence had an obligation to preserve it at the time it was destroyed.” xiv Such an obligation typically does not arise simply because the party contemplates the potential of liability, rather than litigation. xv Courts will also consider a party’s motivations in the destruction of evidence. In many jurisdictions, a failure to preserve evidence is sanctionable “only when the absence

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of that evidence is predicated on bad faith.” xvi Where possible, to avoid the appearance of bad faith or spoliation when making repairs to defects, it is prudent to notify the opposing party of the intention to make repairs in writing, and to provide that party the opportunity to observe the defect prior to repair. Doing so can protect a party from future sanctions or negative inferences, and minimize the issue of spoliation when defending defect cases.

xvii

As soon as they are retained, prudent counsel should advise clients of

their duty to preserve evidence, including possibly storing defective building components for later inspection or photographing and videotaping of the components. III.

CONTRACTUAL PROVISIONS ALLOCATING RISK AND RESPONSIBILITY

During the contract negotiation phase, one goal of the contracting parties is to clearly allocate the risk and responsibility for all aspects of the project. Ideally, the finished contract will explicitly address major risks, and will assign those risks to the parties who are most able to manage and minimize those risks. However, as discussed below, even when the parties use seemingly straightforward, standard contractual terms to allocate risks, there are numerous and nuanced issues that arise to create a gray area regarding responsibility. A. Common Contract Provisions i. Architect The following are common obligations imposed upon and risks undertaken by architects: •

Architect liable for negligent errors or omissions;

•

Contract Documents (“CDs”) construction;

•

Architect to design to requirements imposed by governmental authorities; 8

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to set forth in detail requirements for

•

Architect to specify appropriate performance and design criteria ;

•

Architect to report known deviations from the CDs

•

Architect to have authority to reject Work

•

Architect’s Certification to constitute a representation that quality of work in accordance with the CDs

•

Architect to conduct inspections indicating Work complies with the requirements of the CDs; and

•

Sufficient number of visits to determine if constructed in accordance with CDs. ii. Contractor.

The following are common obligations imposed upon and risks undertaken by architects: •

Provide all necessary Work reasonably inferable from CDs;

•

Provide the better quality / quantity in the event of a conflict between CDs;

•

Carefully study Contract Documents and report errors and omissions;

•

Perform / Supervise with best skill and attention;

•

Responsible for acts and omissions of Subcontractors ;

•

Warrants work free from defects and in conformance with CDs;

•

Promptly correct defects and bear costs of same; and

•

Cost of work shall not include negligence or correction of defects. iii. Discussion of Common Contractual Provisions

In the midst of a defect claim where the architect and contractor are both pointing fingers at one another, the contractor often argues that the plans were not adequately detailed, resulting in missing or incorrectly constructed building elements for which the contractor cannot be blamed. These claims are often made in accordance with the Spearin

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doctrine, which states that if a contractor is required to build according to plans and specifications prepared by the owner or architect, the contractor is not responsible for the consequences of defects in the plans or specifications. xviii While these claims may be true, the requirement for adequate details will not relive the contractor from liability in many instances. xix Owners and Architects will argue that when faced with missing or incomplete details, a contractor is required to provide work that is “reasonably inferable” from the contract documents, xx and if there are questions about details, the contractor is required to submit a request for information rather than push forward with questionable construction. xxi In this way, even seemingly clear contract provisions, such as those that require the contractor to seek clarification for missing details, can leave parties standing in muddy waters. Even if an architect’s plans and specifications are sufficient, it may not escape a construction defect claim unscathed. For example, owner may argue that an architect has liability for damages caused by construction defects due to the architect’s failure in the contract administration phase of its services since contract administration services often involve the architect’s review, at varying levels, of the contractor’s work. Very rarely, however, will an architect undertake detailed inspections or reviews of a contractor’s work. Instead, architects may commit to become “generally familiar” with a contractor’s work, and “in general” to determine whether work is being performed in conformance with contract documents. Architect agreements also typically clarify that (1) the architect is not required to perform continuous or detailed inspections of the contractor’s work, and (2) the architect does not have control of or responsibility for the

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contractor’s acts or omissions. These types of caveats provide architects with a defense for failing to discovery and report construction defects. B. Specifications When analyzing each party’s potential responsibility, counsel has an obligation to look beyond the terms of the agreements and general conditions to the specifications, which also allocate risk and responsibility for design and construction defects. Construction contracts commonly include two kinds of specifications, design and performance. While owners and their design professionals are responsible for design specifications and typically provide an implied warranty of adequacy for the design documents, xxii contractors are responsible for performance specifications.

Design

specifications set forth the material that is to be used, as well as the manner in which the work should be executed.

Because contractors are required to follow design

specifications “as one would a road map,” xxiii the majority of jurisdictions adhere to the precedent set forth in U.S. v. Spearin, xxiv in which the Supreme Court held that a contractor who is “bound to build according to plans and specifications prepared by the owner” cannot be held accountable for “consequences of defects in the plans or specifications.” xxv Performance specifications, on the other hand, set the general standard or objective to be achieved, and a contractor is expected to “exercise his ingenuity in achieving that objective or standard of performance, selecting the means and assuming a corresponding responsibility for the selection.” xxvi A specification naming a specific product or manufacturer does not, however, constitute a performance specification. xxvii In agreeing to such specifications, the contractor warrants both that the construction will

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conform to the plans, and that it will perform as intended.

Some performance

specifications may even state that the design is delegated to the contractor and may explicitly require that the contractor perform an engineering analysis using the performance standards and design criteria. These types of provisions will be relied upon to shift the liability for design defects from the architect to the contractor. IV.

POTENTIALLY AVAILABLE CLAIMS A. Common Counts

The most common claims in construction defect cases are for breach of contract, breach of express and implied warranties, and negligence, meaning either negligent construction or negligent design. Generally, the elements of a breach of contract claim are (1) the existence of a valid and enforceable contract; (2) a defendant’s material nonperformance or breach of a contractual duty, and (3) resultant injury or damages to the plaintiff. xxviii Negligence claims arise in tort and provide an independent cause of action from breach of contract claims. Negligence actions are premised on the existence of a legal duty, the failure to exercise ordinary and reasonable care in connection with that duty, and resulting injury. xxix To be actionable, negligence must be a proximate cause of that injury. xxx These elements of negligence also apply to negligent construction claims, which focus on whether the construction work complies with general industry standards. A claimant asserting negligent construction alleges that there has been a breach of the duty to perform the work in accordance with accepted industry standards. xxxi Some jurisdictions prohibit recovery on the basis of a tort claim, like negligence, when there is solely economic loss, especially when there is no privity between the parties. xxxii

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There are often express warranties in construction contracts, including those that set forth the required quality of the construction materials being used, warranty of good workmanship, and warranties of good faith and fair dealing.

However, in some

jurisdictions, even if a contract does not contain robust express warranty provisions, contractors are presumed to possess the skill necessary to perform the contractual work, impliedly warrant the quality of their work, and have a duty to perform their work in a “fit and workmanlike manner.” xxxiii Some states also recognize a cause of action against an architect for the breach of an implied warranty of fitness for a particular purpose. xxxiv B. Statutes of Limitations Careful consideration should be given to the statutes of limitations for each of the above-referenced claims. In addition to knowing the statute of limitations for each claim, it is also important to have an understanding of when each of those statutes of limitations begins to run. Some jurisdictions have adopted, for example, the rule that the limitations period begins to run for a breach of contract or negligence claim when the contract is completed or substantially completed. xxxv In other jurisdictions, however, the so-called “discovery rule” applies, which states that for breach of contract and negligence claims arising out of the construction of a building, if the defect is latent and not readily obvious, the statute of limitations does not begin until the complaining party knows or reasonably should have known that it has been injured and that the injury was caused by the other party’s conduct. xxxvi Thus, the discovery rule can have a significant impact on the statute of limitations. For this reason, it is important to first consider the relevant state statute when confronting a construction defect claim.

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A statutory limitation on the discovery rule does not end the inquiry into accrual. Contractual terms can dictate that the limitations period begins at the point of substantial completion, even when there is a relevant statute that follows the discovery rule. For example, in Wood Park Terrace Apartments Ltd. Partnership v. Tri-Vest, LLC, xxxvii an apartment complex owner sued the GC for negligence and negligence per se. The apartment complex was substantially complete in 2000, but the plaintiff did not file suit until 2010. xxxviii The relevant Oregon statute set forth a six-year limitation period, subject to the discovery rule. The GC moved for summary judgment on the basis that the plaintiff’s claims were time barred based on an accrual clause in the party’s contract, which stated, xxxix As to acts or failures to act occurring prior to the relevant date of Substantial Completion, any applicable statute of limitations shall commence to run and any alleged cause of action shall be deemed to have accrued in any and all events not later than such date of Substantial Completion. The Oregon Court of Appeals affirmed the lower court’s grant of the defendant’s summary judgment motion on the basis that the contractual clause was applicable to the plaintiff’s claims, and consequently the claims were time barred. xl As this case shows, the inclusion of contractual language regarding accrual can limit the amount of time a party has to make a defect claim, and can save future costs arguing over accrual dates. Another doctrine that impacts when the breach occurred for statute of limitations purposes is the repair doctrine. Under the repair doctrine, the applicable statute of limitations is tolled where the “evidence reveals that repairs were attempted; representations were made that the repairs would cure the defects; and the complaining party relied upon such representations.” xli Like the discovery rule, whether the repair

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doctrine is available for tolling purposes depends on the jurisdiction. Some jurisdictions have approved it, xlii but many others have rejected it on the basis that only legislatures have the power to grant exceptions to specific statutes of limitation. xliii The repair doctrine can also be undermined by contractual warranties to repair. xliv For these reasons, careful attention to the relevant state statute of limitations, as well as any contractual provisions regarding time for discovery, is an important first step when making or defending a defect claim. V.

STRATEGIC CONSIDERATIONS A. Potential Recovery

A party’s decision on which claims to pursue should be guided not only by who the responsible parties are, but also by which parties are solvent, and whether insurance may be available to reimburse damaged parties. Such considerations help ensure that parties do not run afoul of the first rule of litigation - to avoid spending good money chasing bad money. B. Party Alignment Claimants and defendants may also make alliances to shore up their litigation strategy. For example many contractors will refrain (at least initially) from going to battle with potentially responsible subcontractors in order to avoid fighting a battle on two fronts. Similarly, owners may be hesitant to file claims against architects because they may need the architect to assist them in preparing their case against the contractor, who they may consider more responsible for defects and resultant damages. Potential claimants and defendants should also consider whether there are potential claims (and

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available insurance) against project managers, manufacturers, suppliers, or any other party who may have provided warranties. C. Insurance Considerations Recoverability, often in the form of insurance to pay for damages caused by defective design or construction often drives litigation strategy.

Without insurance

policies, potential awards are not recoverable against an insolvent defendant. In cases involving allegations of design flaws or defect claims, the most common types of insurance potentially available are professional liability policies and commercial general liability (“CGL”) policies. Professional liability policies provide coverage for claims of negligence for professional services, and they are typically declining balance policies where the cost of the architect’s experts and defense counsel reduce amount of available insurance proceeds. A CGL is an insuring agreement with three basic coverages, subject to exclusions and definitions. First, CGLs generally cover bodily injury and property damage liability. This coverage typically protects the insured against losses arising out of “property damage” caused by an “occurrence.”

Second, CGL policies cover personal and

advertising liability. Finally, CGL policies commonly provide coverage for personal injury liability. The differences in coverage between CGL policies and professional liability policies are important to remember, especially during contract negotiation because a CGL policy is unlikely to cover damages resulting from a contractor’s deficient design. If the contractor has any design responsibility, the owner/contractor agreement should include a requirement that the contractor, or at a minimum its subcontracted

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engineers, carry professional liability insurance indemnifying the owner and naming the owner as an additional insured. While in many cases contractors have more insurance available than architects, the owner’s ability to recover from a contractor’s CGL policy is not as simple as just proving the damages incurred. There are common exclusions within CGL policies that limit coverage. Many insurance policies contain a “your Work” exclusion, which states that insurance coverage for property damage does not extend to damage to the Work itself. In other words, while there may be insurance for damages that arise out of the defective work, there is no insurance for defective work itself. Further, there can be limitations on whether defective work constitutes an “occurrence” triggering coverage under the CGL policy. For example, in Pennsylvania, the law provides that defective work is not an “occurrence” under a CGL policy. xlv In Millers Capital Insurance Co. v. Gambone Bros. Development Co., xlvi an insured sought coverage for water damages to non-defective work inside the interior of residential properties caused by defective stucco on the exterior of the homes. The Court rejected the argument that this damage constituted an “occurrence,” and instead held, “natural and foreseeable acts, such as rainfall, which tend to exacerbate the damage, effect, or consequences caused ab initio by faulty workmanship also cannot be considered sufficiently fortuitous to constitute an ‘occurrence’ or ‘accident’ for the purposes of an occurrence based [commercial general liability policy].” xlvii Based on the above, when preparing to pursue or defend against a defect claim, parties should carefully consider the kinds of insurance policies available, as well as whether the claimed defect likely falls into an area coverage excludes. Parties should

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also always seek to obtain copies of policy endorsements since it is not uncommon for an endorsement to alter the application of standard insurance language or to render state common law inapplicable. xlviii For this reason, when reviewing the insurance options, parties should always seek to obtain copies of endorsements to policies. VI.

CONCLUSION

Every construction defect claim has unique characteristics that make it distinct from any other claim. However, parties entering into a construction contract can best prevent and defend against these claims by appropriately allocating risk and responsibility at the contract negotiation stage. Once a defect has been discovered, parties must take steps to determine who the responsible party is, what claims are possible, and the best strategy for proceeding. As with any case, it is important to look at the binding law in the jurisdiction where the claim is asserted when filing or defending against a construction or design defect claim, but the points outlined in this paper will be helpful in successfully negotiating through the various phases of those claims. i

Village of Greenport v. Manning Plumbing & Heating Corp., No. 26981-09, 2012 WL 1834263 (N.Y.Sup. Ct. May 9, 2012). ii See, e.g., Kaiser-Flores v. Lowe’s Home Ctrs., Inc., No. 5:08-cv-45, 2009 WL 4724243 (W.D.N.C. Dec. 2, 2009). iii See, e.g. Ludwig v. Pilkington North Am., Inc., No. 03 C 1086, 2993 WL 22242224 (N.D. Ill. Sep. 29, 2003) (“A party seeking [information protected under the rule] must demonstrate exceptional circumstances under which it is impracticable for the party seeking discovery to obtain facts or opinions on the same subject by other means”). iv McKinnon v. Smock, 445 S.E.2d 526, 527 (Ga. 1994). v Id. vi See, e.g., In Re Shell Oil Refinery, 134 F.R.D. 148 (E.D.La. 1990). vii See, e.g., U.S. v. Gulf Oil, 760 F.2d 292 (Temp.Emer.Ct. App. 1985). viii Id. ix See Chiquita v. M/V Bolero, No. 93 CIV 0167, 1994 WL 263603 (S.D.N.Y. June 7, 1994)(distinguishing between work product created in anticipation of litigation and work product created in the ordinary course of business).

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x

Bridgestone/Firestone N. Am. Tire, LLC v. Campbell, 574 S.E.2d 923, 926 (Ga. Ct. App. 2002). xi Point Blank Solutions, Inc. v. Toyobo Am., Inc., No. 09-61166-CIV, 2011 WL 1456029 (S.D. Fla. Apr. 5, 2011). xii See Miller v. Lankow, 801 N.W. 2d 120, 128 (Minn. 2011) (“In light of this unfairness, we conclude that the duty to preserve evidence must be tempered by allowing custodial parties to dispose of or remediate evidence when the situation reasonably requires it.”). See also Am. Family Mut. Ins. Co. v. Golke, 319 Wis.2d 397 (2009); Allstate Ins. Co. v. Hamilton Beach/Proctor Silex, Inc., 473 F.3d 450, 458 (2d Cir. 2007); (holding that, when the noncustodial party is offered an opportunity to inspect evidence and the opportunity was rejected, the district court abused its discretion when it imposed sanctions); Hirsch v. Gen. Motors Corp., 628 A.2d 1108, 1122 (N.J. Super. 1993) (holding “the scope of the duty to preserve evidence is not boundless. A ‘potential spoliator need do only what is reasonable under the circumstances.’”). xiii See Stanfill v. Talton, 851 F.Supp.2d 1346, 1362 (M.D. Ga. 2012). xiv Byrnie v. Town of Cromwell, Bd. Of Educ., 243 F.3d 93, 107 (2d Cir. 2001). xv See, e.g., Kitchens v. Brusman, 694 S.E.2d 667, 671 (Ga. Ct. App. 2010) (holding that “contemplation of potential liability is not notice of potential litigation,” and such contemplation is insufficient to “automatically trigger the rules of spoliation.”). xvi See, e.g., Bashir v. Amtrak, 119 F.3d 929, 931 (11th Cir. 1997). xvii See id. (“A party’s failure to preserve evidence arises to the level of sanctionable spoliation only when the absence of that evidence is predicated on bad faith.”). See also In re Delta/AirTran Baggage Fee Antitrust Litig., 770 F.Supp.2d 1299, 1305 (N.D. Ga. 2011) (“mere negligence in losing or destroying records is not enough for an adverse inference as it does not sustain an inference of consciousness of a weak case.”). xviii Martin K. Eby Constr. Co. v. Jacksonville Transp. Auth., 436 F.Supp.2d 1276 (M.D. Fla. 2005), citing U.S. v. Spearin, 248 U.S. 132 (1918); see also Frui-Colnon Corp, et al. v. Niagara Frontier Transp. Auth., 585 N.Y.S.2d 248, 253 (N.Y. Sup. Ct. 1992). Many states have adopted Spearin on the basis that owners and/or architects impliedly warrant the adequacy of their plans and specifications. See, e.g., Beard Family P’ship v. Comm. Indem. Ins. Co., 116 S.W.3d 839 (Tex. App. 2003); McCree Co. v. State, 91 N.W.2d 713 (Minn. 1958). xix A number of states do not follow the Spearin doctrine and reject the idea of an implied warranty of the adequacy of specifications. See, e.g., Alstom Power, Inc. v. RMF Indus. Contracting, Inc., 418 F.Supp.2d 766 (W.D. Pa. 2006) (holding that Pennsylvania law declines to recognize claims for breach of implied based on construction plans or specifications). xx See, e.g., Seaward Marine Servs., Inc. v. Grillot Constr., LLC, No. 1:08cv587, 2010 WL 3034667 (S.D. Miss. Aug. 3, 2010) (ruling that a contractor was not entitled to judgment as a matter of law regarding breach of contract until it addressed the issue of whether the additional work for which it was seeking compensation was reasonably inferable under the scope of the contract). xxi See, e.g., Otis Elevator Co. v. WG Yates & Sons Const. Co., 589 Fed. App’x. 953 (11th Cir. 2014) (declining a subcontractor's defective specifications claim, because “a subcontractor cannot recover based on its reasonable but unilateral resolution of an 19 ADMIN/21448041v5

ambiguity … if the subcontractor is subjectively aware of that ambiguity when bidding on the construction contract and fails to clarify that ambiguity by inquiring of the contractor”); L & L Painting Co., Inc. v. Contract Dispute Resolution Bd. of City of New York, 68 A.D.3d 594 (N.Y. Sup. Ct. 2009), aff'd, 926 N.E.2d 1228 (N.Y. 2010) (upholding finding that a contractor was not entitled to compensation for additional work performed because it failed to examine the contract documents and request interpretation or clarification of a patent ambiguity in the contract documents); H.B. Zachry Co. v. U.S., 28 Fed. Cl. 77 (Fed. Cir. 1994)(holding that a contractor has a duty to inquire regarding patent ambiguities or missing information in a contract regardless of whether the contractor can reasonably interpret the contract). xxii Blake Cons. Co. v. United States, 987 F.2d 743 (Fed. Cir. 1993) (Recognizing the implied warranty of adequacy of design documents and further finding contractors have no discretion to deviate from design specifications and are required to follow them as one would follow a map.) xxiii Id., quoting J.L. Simmons Co. v. United States, 412 F.2d 1360 (Ct. Cl. 1969). xxiv 248 U.S. 132, 136 (1918). xxv Id.; supra n. xviii. xxvi Blake Constr. Co., 987 F.2d at 745. xxvii See, e.g., Fla. Bd. Of Regents v. Mycon Corp., 651 So. 2d 149, 153 (Fla. Dist. Ct. App. 1995) (“A contract provision calling for the quality of the product to be the equivalent of a specific manufactured product is a performance specification involving no implied warranty, unlike a design specification, which sets forth in precise detail the materials to be employed and the manner in which the work is to be performed.”). xxviii See, e.g., Dingxi Longhi Dairy, ltd. v. Becwood Technology Grp., LLC, 635 F.3d 1106, 1108 (8th Cir. 2011) (“[C]ommon sense and common law dictate…the universal elements of a breach of contract action: formation, performance, breach, and damages.”); Moran Industries, Inc. v. Mr. Transmission of Chattanooga, Inc., 725 F.Supp.2d 712 (E.D. Tenn. 2010); (Henderson-Smith & Assocs., Inc. v. Nahamani Family Serv. Center, Inc., 752 N.E.2d 33 (Ill. Ct. App. 2001). xxix State-by-State Guide to Construction Contracts and Claims 556 (Michael Dodd, Esq. and J. Duncan Findlay, Esq., eds.), 1st ed. 2006. see Patillo v. Thompson, 128 S.E.2d 656, 660 (Ga. Ct. App. 1962). xxx Id. xxxi See, e.g., City of Atlanta v. Benator, 714 S.E.2d 109, 116 (Ga. Ct. App. 2011) (“In negligent construction cases, our courts have concluded that these claims arise not from a breach of contract claim, but from breach of a duty implied by law to perform the work in accordance with industry standards. This cause of action arises in tort and exists independently of any claim for breach of contract.”) (internal quotations omitted). xxxii See, e.g., St. Claire Townhome Ass’n, Inc. v. D.R. Horton, Inc., No. 1:07-cv-2712, 2009 WL 10183621, at *3 (N.D.Ga. Apr. 15, 2009)(“There can be no action in negligence to recover the loss of the economic value of a defective product, unless there is some personal injury or damage to other property.”); General Electric Co. v. Lowe’s Home Centers, Inc., 279 Ga. 77 (2005)(holding that the economic loss rule barred owner from recovering lost profits related to claim of environmental contamination); D.I.C. Commercial Constr. Corp. v. Broward County, 668 So.2d 697 (Fla. App. 1996) (holding 20 ADMIN/21448041v5

that the economic loss rule barred a contractor from making a professional negligence claim against an architect, though the architect had the authority to stop the construction work) McKinney Drilling Co. v. Nello Teer Co., 248 S.E.2d 444, 447 (N.C. Ct. App. 1978)(stating that under North Carolina law, “liability for negligent performance in the absence of privity of contract have been limited to actions for personal injury or property damages,” and consequently the defendant could not be held liable for negligence). xxxiii See, e.g., Hall v. Harris, 521 S.E.2d 638, 643 (Ga. Ct. App. 1999) (“[I]mplied in every contract by a builder-seller is the implied duty that construction was performed in a fit and workmanlike manner.”); Cantrell v. Woodhill Enterprises, Inc., 160 S.E.2d 476, 481 (N.C. 1968) xxxiv See, e.g., City of Allentown v. O’Brien & Gere Eng’rs, Inc., No. CIV. A. 94-2384, 1997 WL 256050 (E.D. Pa. May 8, 1997); Bloomsburg Mills, Inc. v. Sordoni Const. Co., 164 A.2d 201 (Pa. 1960). See also, Metropolitan Edison Co. v. United Engineers and Constructors, Inc., 4 Pa. D. & C.3d 473(Pa.Com.Pl. Phila. County 1977) (architects and engineers impliedly warrant that plans and specifications will yield a structure so designed as to be reasonably fit for its intended purpose. Cf. Bloomsburg Mills v. Sordoni Construction Co., 164 A. 2d 201 (Pa. 1960)); Berman v. Kornstein, No. 88-8245, 1992 WL 2227 (E.D. Pa. Jan. 3, 1992); and Cedarbrook Country Club v. Carroll, Grisdale & VanAlen, David M. Hunt Construction, No. 2051, 1980 WL 194200 (Pa.Com.Pl. Phila. County Apr. 8, 1980). xxxv See, e.g., Samuel Roberts Nobel Foundation, Inc. v. Vick, 840 P.2d 619, 622 (Okla. 1992) (“We prefer the general rule that the limitations period begins to run when the contract is completed.”) xxxvi See, e.g., Gustine Uniontown Assocs., Ltd. v. Anthony Crane Rental, Inc., 842 A.2d 334, 348 n. 8 (Pa. 2004) (“The discovery rule is a judicially created device that tolls the running of the applicable statute of limitations until the point where the complaining party knows or reasonably should know that he has been injured and that his injury has been caused by another party’s conduct. The complaining party must use reasonable diligence to discover the cause of an injury.”); Boghossian v. Ferland Corp., 600 A.2d 288, 290 (R.I. 1991) (acknowledging that the relevant statute of limitations regarding an alleged breach of the warranty of reasonable workmanship did not begin until there was “evidence of injury to the property… sufficiently significant to alert the injured party to the possibility of a defect.”); Ehrenhaft v. Malcolm Price, Inc., 483 A.2d 1192 (D.C. App. 1984); Georgetown Ltd. Partnership v. Geotechnical Serv. Inc., 430 N.W.2d 34 (Neb. 1988). xxxvii 297 P.3d 494 (Or. Ct. App. 2013). xxxviii Id. xxxix Id. at 496. xl Id. at 498. xli Amodeo v. Ryan Homes, Inc., 595 A.2d 1232, 1237 (Pa. Sup. Ct. 1991). xlii See, e.g., Keller v. Volkswagen of Am., Inc., 733 A.2d 642, 646 (Pa. Super. Ct. 1999); xliii See Holbrook, Inc. v. Link-Belt Const. Equip. Co., 12 P.3d 638, 643 (Wash. Ct. App. 2000) (“The apparent reason that the majority of jurisdictions reject the repair doctrine is that granting exceptions to specific statutes of limitation is the prerogative of the legislature.”); Triangle Underwriters, Inc. v. Honeywell, Inc., 604 F.2d 737, 743 (2nd Cir. 21 ADMIN/21448041v5

1979) (“New York and other jurisdictions hold that attempts by the seller to remedy defects giving rise to the cause of action do not toll” the relevant limitations period); Ontario Hydro v. Zallea Sys., Inc., 569 F.Supp. 1261, 1272 (D. Del. 1983); K/F Dev. & Inv. Corp. v. Williamson Crane & Dozer Corp, 367 So.2d 1078, 1079-80 (Fla. Dist. Ct. App. 1979). xliv See, e.g., Hersh Companies, Inc. v. Highline Village Assocs., 30 P.3d 221 (Colo. 2001) (holding that “where a contract contains an express warranty to repair or replace, the judicially imposed, equitable tolling characterized…as the ‘repair doctrine’ is not applicable.”) xlv See Kvaerner Metals. v. Commercial Union Ins. Co., 589 Pa. 317, 908 A.2d 888 (2006) (holding that an “occurrence” is an accident or unexpected event, and that this implies a degree of fortuity that is not present in a claim arising out of faulty workmanship xlvi 941 A.2d 706 (Pa.Super.Ct.2007) xlvii Id. at 713. xlviii For instance, an actual endorsement to a CGL policy of a large general contractor contains the following endorsement for projects in Pennsylvania to counteract the Kvaerner case described above: “Notwithstanding any applicable case law holding that a construction defect is not an “occurrence,” any “property damage” to “your work” shall be deemed to be caused by an “occurrence” as long as neither you nor the subcontractor who may have performed the work expected or intended the defect or damage.”

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