The Texas Supreme Court has finally put to rest the question of whether the implied warranty to repair or modify tangible goods or property in a good and workmanlike manner can only be brought by a consumer under the Texas Deceptive Trade Practices Act (DTPA) or whether it can be brought under the common law as well. The Court held it could in fact be brought under both, in Nghiem v. Sajib, 2019 WL 406123 (Tex.), 1 (Tex., 2019). This is significant because a consumer must bring an action under the DTPA for the breach of this implied warranty within two years or the action will be barred by the DTPA two-year statute of limitations. On the other hand, it appears that a consumer has up to four years to bring an action for breach of this implied warranty under the common law before being barred by the applicable statute of limitations. Further, there are additional criteria that must be met to bring a claim under the DTPA that do not have to be met under the common law.

In the Ngheiem case, the consumer’s airplane was damaged in a crash-landing when the airplane engine failed. The consumer made a claim against the company that had serviced the airplane for years and made repairs to it immediately before the crash. The consumer alleged that the defendant company breached the common law implied warranty to make repairs in a good and workmanlike manner. The defendant company alleged that the consumer’s claim could only be brought under the DTPA and not under common law.  Therefore, the claim was barred by the DTPA two-year statute of limitations because the consumer waited too long to file the lawsuit.  The trial court agreed and rendered judgment for the defendant and court of appeals affirmed.

The Texas Supreme Court granted the consumer’s petition for review and held that this implied warranty could be brought both under the common law and the DTPA. Since the consumer brought the action under the common law, the claims were not barred by the DTPA two-year statute of limitations.

The result of this opinion is that it will give consumers including large corporations who may not qualify for consumer status under the DTPA the right to bring an action for breach of this implied warranty. Further, it should also give consumers up to four years from the date of the breach to bring this action.

Introduction. In Lyda Swinerton Builders, Inc. v. Oklahoma Sur. Co., 16-20195, 2018 WL 4113795 (5th Cir. Aug. 29, 2018), the United States Firth Circuit Court of Appeals had to decide whether a subcontractor’s commercial general liability (“CGL”) insurance policy covered the defense of the general contractor named as an additional insured under the policy.

Background. Lyda Swinerton Builders, Inc. (“Lyda”) was hired as the general contractor to build a 10 story building in College Station, Texas. Lyda hired numerous subcontractors including roofer, A. D. Wills Company, Inc. (“Willis”). The subcontract agreement between Lyda and Willis contained a broad indemnity clause requiring Willis to indemnify and hold harmless Lyda and the owner of the project including against property claims, arising out of Willis’s work.

Willis obtained a CGL insurance policy that identified Willis as the named insured, provided contractual liability coverage, and contained an endorsement naming Lyda as an additional insured.

The project owner later sued Lyda for allegedly failing to properly perform its work resulting in damages to the owner. The allegations included that the roof was affected by the deficient work and that Lyda’s negligence caused loss of use of the building and property damage separate and apart from Lyda’s scope of work under the contract documents.

Issue. Lyda requested that the CGL insurance carrier cover its defense against the lawsuit by the project owner, since Lyda was an additional insured under the CGL insurance policy. The carrier denied the request and another lawsuit ensued including between Lyda and the carrier.

Court’s holding. The United States 5th Circuit Court of Appeals held in the lawsuit between Lyda and the CGL insurance carrier that:

  1. The CGL insurance policy obligated the carrier to defend Lyda as an additional insured against the underlying lawsuit filed by the owner of the project.
  2. The carrier’s failure to tender a defense and pay for defense costs also would entitle Lyda to recover an 18% penalty against the carrier under the Texas Prompt Payment of Claims Act.
  3. If Lyda establishes that the carrier’s misrepresentations caused it to be deprived of a defense, Lyda can recover the defense costs under Chapter 541 of the Texas Insurance Code–without limitation from the independent-injury rule–which may also entitle Lyda to recover treble damages if the carrier knowingly violated the statute.

Is contractual privity required for an owner to sue a builder for defective workmanship?

Construction defect lawsuits often involve claims against multiple defendants since the typical construction project involves work performed for the owner by a general contractor who in turn hires multiple subcontractors to perform the work.  But what happens when the original owner of the property with the improvements subsequently sells the property?  Can the subsequent owner sue the original builder for defective workmanship?

Austin Court of Appeals–no privity required

Background. The Austin Court of Appeals recently addressed this question involving the construction of a home. Plaintiffs purchased the home at issue from a third-party relocation company that had purchased the home from its original owners.  After purchasing the home, the Plaintiffs allegedly discovered various construction defects.  The Plaintiffs sued the builder even though they did not have a contract with the builder to build the home.  Their claims against the builder included those for breach of implied warranty to perform in a workmanlike manner. The builder contended that the Plaintiffs did not have the legal capacity to sue the builder for breach of warranty because the builder did not have a contract with the Plaintiffs.  Rather, the builder’s contract was with former owners of the property.

Holding. The court held that the Plaintiffs had the right to sue the builder for breach of implied warranty even though the Plaintiffs did not have a contract with the builder. “The supreme court has held that a subsequent purchaser of a home may maintain a cause of action for breach of the implied warranties of habitability and good workmanship, which are implied by every contract for the construction of a home. See Gupta, 646 S.W.2d at 169 (“We hold that [the implied warranty of habitability and good workmanship] does cover latent defects not discoverable by a reasonably prudent inspection of the building at the time of [a subsequent] sale…. As between the builder and owner, it matters not whether there has been an intervening owner.”).”Maroney v. Chip Buerger Custom Homes, Inc., 03-17-00355-CV, 2018 WL 3041087, at *8 (Tex. App.—Austin June 20, 2018, pet. filed).

 

Owners often require general contractors they hire to perform construction services to agree to waive their rights to recover delay damages.  General contractors in turn require their subcontractors to agree to the same.  When a contractor’s work is significantly delayed by others, this can result in catastrophic financial losses to the contractor.

Fortunately, the Texas Supreme Court recently held that there are exceptions to the enforceability of these no delay damages clauses.  The court held that the exceptions to their enforceability include when the opposing party causes the delay or hindrance by engaging in arbitrary and capricious conduct, active interference, bad faith or fraud. (See Zachry Const. Corp. v. Port of Houston Auth. of Harris County, 449 S.W.3d 98, 104 (Tex. 2014), reh’g denied (Dec. 19, 2014)).

Lessons learned are that if you are a contractor, you should avoid signing a contract that contains a blanket waiver of the right to recover delay damages.  However, even if you have agreed to this type of clause, all may not be lost if you sustain delay damages.  You will just have to submit proof that one of the common law exceptions applies to the enforceability of the clause.