Construction Contracts
Contract is (Still) King
David Anderson
April 2, 2012
A year ago, Abraham v. T. Henry Construction, Inc., a construction defect case, completed its journey through Oregon’s appellate courts.
Some observers anticipated that Abraham would redefine and potentially increase contractor liability exposure in construction defect cases by permitting homeowners to sue for negligence, despite the existence of a contract defining contractors’ responsibilities. For some people, Abraham did not disappoint. The Oregon Supreme Court generally concluded that a contractor can be liable for negligently causing foreseeable harm to a homeowner’s property, despite the existence of a contract between the parties.
Yet even in the aftermath of Abraham, contract is still king. Although a contractor must beware of potentially increased obligations based on Abraham, it can manage those obligations by proactively defining, and thereby limiting, its obligations. Additionally, parties can define the remedies that a contractor owes in the event that the contractor breaches its contractual obligations.
Simply put, although Abraham means more uncertainty for the unwary, it proclaims predictability for those who plan.
In Abraham, the homeowners hired a contractor to build their house, and subsequently discovered extensive water damage. The homeowners did not discover the water damage until after expiration of the time to sue for breach of contract.
Undeterred, the homeowners sued for negligence, alleging that the contractor was liable for common-law negligence for causing “reasonably foreseeable” harm to their property. They alternatively made a narrower allegation that the contractor was liable for negligence based on the contractor’s alleged building code violations.
If allowed, the homeowners’ negligence claims would require them to prove either that it was reasonably foreseeable that a deficiency in the contractor’s work would cause the water damage, a standard that is difficult to limit, or that the contractor’s building code violations caused the water damages.
The Court of Appeals concluded that the homeowners should be allowed to pursue only claims based on the narrower theory that the contractor caused property damage by negligently violating the building code.
The Supreme Court affirmed that decision, but in doing so, it accepted the homeowners’ broader argument. It concluded that the homeowners only had to prove that the contractor negligently caused reasonably foreseeable harm to the homeowners’ property.
That is, the Supreme Court’s ruling not only accepted the Court of Appeals’ conclusion that a contractor could be liable for negligently violating the building code, but more expansively concluded that the contractor could also be liable if it caused foreseeable harm to the homeowners’ property.
Following Abraham, contractors face two risks. First, contractors can be held liable in tort for breaching building code standards; second, they can be held liable for violating the often-difficult-to-define “reasonable care” standard.
Indeed, the contractor in Abraham had contractually agreed to perform work “in a workmanship like manner and in compliance with all building codes and other applicable laws.” The Supreme Court pointed out that the agreement simply reiterated the negligence standard of care that would have applied to the contractor in the absence of a contract. The contractor gained nothing by way of the contract.
Abraham therefore should serve as a reminder that a carefully constructed contract can be king. The Supreme Court recognized in Abraham that the contractor could have avoided exposure to the general “reasonable care” standard by more carefully defining its obligations in the original construction contract it entered with the homeowners.
That is, Abraham states that contracting parties are permitted to limit liability for negligence by defining their responsibilities so as to define specifically the standard of care that they owe and prospectively agreeing how to resolve any breach of that standard.
Contractors can prospectively be excused by homeowners from tort liability for negligence in construction defect cases or have that liability limited. To be sure, an entire body of law exists to determine whether parties agreed to waive such tort remedies. At the least, such a waiver must be expressly stated. But that waiver can be accomplished, as the Supreme Court recognized in Abraham. The issue is contract drafting, not contract impossibility.
Although Abraham may expose an unwitting contractor to unanticipated liabilities or litigation, that exposure can be managed prospectively. That ultimately means that any change brought by Abraham to the way the law works need not drastically change the way contractors do business.
Following Abraham, contractors must still more carefully define their obligations – the scope of work, the standard for measuring that scope of work, and remedies for any failure to perform on those contractual terms – that a careful contractor already does. Having done that, Abraham provides protection to contractors by respecting contractual terms.
But by neglecting to contractually define their obligations, or by using generic definitions like those used in Abraham, contractors may be exposing themselves to a more vague scope of liability defined only as “foreseeable harm.” Contractors that desire more certain obligations should consider having an attorney review their contracts.
SOURCE: djcoregon.com/news/2012/04/02/contract-is-still-king/