Contractor Liability For Defects Expands

Contractor Liability For Defects Expands

Two recent California appellate court cases have increased a contractor's exposure for defective workmanship. In one case the construction company's president was held personally liable for the cost of correcting the defective work. In a second unrelated case the homeowners who filed a lawsuit to recover the cost of correcting the defective work also received a sum of money to compensate them for their emotional distress damages.

Company President Has Personal Liability (Michaelis v Benavides)

In the first case, the homeowners contracted with a general contractor to construct their home. The general contractor in turn subcontracted with a concrete construction company to install a driveway and a pool deck. The concrete company president supervised the company's employees and made the construction method decisions while they installed a driveway that was narrower than shown on the plans and failed to properly drain. As a result of the improper drainage, water flowed down the driveway and collected in front of the house. In addition, the company president also supervised the installation of the concrete pool deck that cracked and slid down a hill behind the property. The homeowners alleged that the concrete company used cheaper materials than specified.

Typically, a corporate officer is shielded from liability for the corporation's unintentional civil wrongdoings when there is only an economic loss. Generally, directors or officers of a corporation do not incur personal liability for torts of the corporation (e.g. negligence) merely by reason of their official corporate position. However, in (Michaelis v Benavides (1998) 61 Cal. App. 4th 681), the California Appellate court stated: "The corporate fiction was never intended to insulate officers from liability for their own tortious conduct."

As a result of the decision, if the corporate officers are sued for negligence, it will be necessary to determine if the officer made mere corporate policy decisions which were carried out by someone else or acted in a manner that should require the officer to be personally liable for his own negligence. It is now clear that a defendant corporate officer will be held personally liable for a project's construction defects if he actively participates and directs the construction to the extent that he has made the decisions that fell below the standard of care and caused the defects.

Since most small corporate contractors rely on the corporate officers to direct and participate in the company's projects, this decision will have a greater impact on the smaller corporate contractor. Obviously, liability can be avoided by performing the construction in a good workmanlike manner. However, in this age of expanding and in many cases unsubstantiated claims of defective workmanship, the officers and directors of corporations should use even greater care in documenting their instructions to corporate employees. If it can be proved that the defective workmanship was due to employees failing to follow the instructions from the corporate officers and corporate policy, the corporate officers and directors will avoid personal liability.

Homeowner Awarded Emotional Distress Damages (Erlich v Menezes)

In the second case, the homeowners hired a general contractor to construct their new "dream‑come‑true house." The contractor assured the prospective homeowners that " he would build (the owners) just the most beautiful home, everything would be totally a turnkey operation . . . [that] he would hand (them) the keys and (they) would walk into a beautiful home and experience all the jubilation associated therewith." Two months after moving into the house, the homeowners discovered that the "house leaked from every conceivable location." During the next five months the homeowners hired other contractors to tear the building apart to find the source of the leaks and repair the leaks. However, their efforts were unsuccessful. A year after the house was built, the homeowners discovered that the building had major structural defects that could cause the house to collapse. Summing up the defects, the homeowner's expert witness testified: "Well, there were so many of these problems that it would almost be easier to list what wasn't wrong with the house..." Both homeowners testified that they sustained emotional distress as a result of their fear that their home would collapse in an earthquake. The husband testified that the stress caused a heart condition.

As a general rule, the plaintiff has to prove that there was a threat of physical injury, not just the threat of property damage, before the courts will allow the plaintiff to prevail on a claim for emotional distress. In (Erlich v Menezes (1998) 60 Cal. App. 4th 1357) the California Appellate court held that the threat of the structure collasping on the homeowners was tantamount to a threat of physical injury. The Erlich court also found that the unique attachment homeowners form for their homes made the possibility of an emotional distress claim foreseeable to the contractor.

What The Future Holds After Michaelis and Erlich

It should be noted that the California Supreme Court has agreed to review the decision in Erlich. The Supreme Court may overturn or limit the application of the appellate court's decision. If the Supreme Court upholds the decision, it will be due in part to the substantial evidence that supported the homeowners' claim that the defects were so egregious that their fear of physical harm was reasonable. Contractors should be concerned that, if the California Supreme Court upholds the case, a precedent will be set that can be the basis for the application of the case to less pervasive defects. While it is doubtful that the trial courts will allow emotional distress damages when there are "the inevitable delays and mistakes involved in most construction projects," it will be difficult to determine when the facts will be sufficient enough to allow the homeowner to receive emotional distress damages. It is not difficult to predict that many defect lawsuits will now include claims for emotional distress.

These two cases have increased the remedies available to dissatisfied homeowners who claim that the construction work was defective. Clearly, there is no simple answer to the ever expanding construction defect litigation. New legislation has slowed some defect cases filed by condominium homeowner associations, but claims continue to grow for single family and small commercial projects.

Obviously, to decrease the likelihood of your next project resulting in a defect claim, it is necessary to monitor every aspect of the project to ensure that the work is defect free. Generally, the earlier a defect is discovered and corrected, the less likely a homeowner will commence litigation. Contracts with homeowners should, in addition to those clauses required by the CSLB, include clauses that attempt to limit the contractor's liability for emotional distress damages. The contracts should also include alternative dispute resolution clauses that require immediate arbitration or mediation of construction defect claims.

This article, © 1998, was written by William C. Last, Jr. of Last, Harrelson & Faoro. Mr. Last is an attorney who has been specializing in Construction Law for over eighteen years. Mr. Last also holds a California A&B contractors license. If you have any questions Mr. Last can be contacted at 415‑764‑1990. This bulletin is published periodically to provide general information about current legal issues. If you have a specific legal question or need legal advice, you should contact an attorney.