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ConstructionPro Week, Volume: 3 - Issue: 39 - 09/26/2014

Should Owners Be Allowed to Sue Subcontractors for Noncompliant Work?

By Bruce Jervis

 

Subcontractors are, of course, responsible for compliance with the project design. If a prime contractor incurs costs as a result of a sub’s noncompliant work, the prime may seek reimbursement through a contractual indemnification action. If an insurer pays out on a property loss caused by a sub’s noncompliant work, the insurer may seek reimbursement through a subrogation action. But, it has long been axiomatic in the construction industry that a project owner, with whom a subcontractor has no contractual relationship, may not sue a sub directly for noncompliant work.

 

The Texas Supreme Court just abandoned this rule. A subcontractor allegedly failed to properly connect hot water heaters to the water system, resulting in property damage. The court allowed the property owner to sue the subcontractor directly, reasoning that the sub not only breached its contract with the prime contractor but also violated a duty of due care owed to the owner, which arose independently from the sub’s contractual undertaking.

 

This ruling, based on the court’s interpretation of common law, will apply to all types of construction projects throughout Texas. Yet, the court did not address the practical and financial ramifications of this expansion of liability exposure. It is difficult to understand how a duty to not damage property arises independently of a subcontract when it is that subcontract that brought the sub onto the property and the performance of subcontract obligations that caused the damage. What is your opinion? I invite your comments.

 

COMMENTS

I don't see why the owner would want to sue the subcontractor directly unless there were issues with recovering from the prime. If the owner goes through the prime first at least the owner would have two layers of potential recovery.
Posted by: Brian DeBruin - Friday, September 26, 2014 10:44 AM


I would hope that the following clause inclusion in a GC Contract would provide sufficient protection and preclude the "OWNER" from having to sue:

SUBCONTRACTS: No portion of the work shall be subcontracted without prior written consent of the purchasing agency. In the event that the contractor desires to subcontract some part of the work specified herein, the contractor shall furnish the purchasing agency the names, qualifications and experience of their proposed subcontractors. The contractor shall, however, remain fully liable and responsible for the work to be done by its subcontractor(s) and shall assure compliance with all requirements of the contract.
Posted by: Rod McAllister - Friday, September 26, 2014 10:52 AM


Brian, I could see why they would go after the sub. What if the damage was way beyond the scope of the GC contract (i.e. contract was on 40th floor and damage continued way beyond the limits of the contract work). This would make sense, especially if the subcontractor had more assets for reimbursement than the GC, which for large scale mechanical contractors could easily be the case. Also, if the GC has a well established relationship with the owner, or if the GC has significantly more legal resources than the subcontractor. Its a complex array of issues and not as clear cut as your comment implies.
Posted by: Christian Clerc - Friday, September 26, 2014 10:52 AM


Absolutely - but first owners need to change the way they buy construction services. They need to use an integrated delivery approach, where the subcontractors are at the table from the beginning and the contract is based on performance. In essence, the subcontractor guarantee they can deliver the performance requirements for a certain price and schedule. If they don't they are libel because its their design and experience on the line and they said they could do it.

However, if owners would use this approach they would not need to sue their subs because their would be no problems. We need to do more projects like the DOE's National Renewable Energy laboratory in Golden Colorado. No plans and specs - 27 criteria of performance. The key explained by DOE's person in charge, when contractor design teams submitted bids they were told there would be no change orders, no time delays because by submitting a bid you are indicating you know what to do.
Posted by: Ted Garrison - Friday, September 26, 2014 10:56 AM


I am a subcontractor for other bigger companies in my industry. I have GL and Workers comp insurance plus bonds that cover any damage or issues that may arise from my being on any projects. I pay out the nose for this protection which is there to protect me and the companies I work for along with the facilities I work in and my employees. With that being said I have worked in this industry since 1985 and I have to say that the construction industry is a joke these days. I try my best to be protect myself, my company, others on the job and the companies I work for etc. Customers along with others that hire subs try to get the lowest price possible no matter what the cost then they treat them like dirt on the jobsites then something happens or goes wrong then they sue the piss out of someone just trying to make a living and feed their families. The old saying holds true to this day " you get what you pay for" and maybe one day these customers and other companies that hire subs will learn that. I suggest that whoever hires subs do their homework, make sure they are hiring good workers with insurance and treat them fair and with respect and QUIT QUIT QUIT taking the lowest bid from any sub or Tom Dick or Harry that walks through their door.

Maybe One Day People Will Learn " YOU GET WHAT YOU PAY FOR "
Posted by: Mark Stewart - Friday, September 26, 2014 11:00 AM


I work for a large Construction firm as a PM. We do hire only contractors with good background and experience. I do agree with Mark Stewart that Owners now a days look only for the low bidders and we as contractors lose our time and money. Subs believe the GC's make all the money. Actually the GC's take all the risk and less money. I do believe if the Owners chose better Contractors/Subs than low bid Subs/Contractors, The quality and even question of sueing the sub or contractor does not come in play. At the end the person who makes the mistake is liable for all the losses.
Posted by: Sathya - Friday, September 26, 2014 11:12 AM


Owners are not shielded from the lien rights of subcontractors. Why should subcontractors be shielded from claims by the owner? Also under many general contracts there will be requirements for certain subcontractor warranties to flow directly to the owner.

In many projects, there will be subcontractors who have a greater portion of risk/reward than the GC. Construction subcontractors have fought long and hard to put owners on the line if the GC does not pay them. It is wrong to think that any general contract is a firewall between owner and subcontractor.
Posted by: Eden Milroy - Pilot Development Partners Inc.. - Friday, September 26, 2014 11:15 AM


I totally agree with :

Absolutely - but first owners need to change the way they buy construction services. They need to use an integrated delivery approach, where the subcontractors are at the table from the beginning and the contract is based on performance. In essence, the subcontractor guarantee they can deliver the performance requirements for a certain price and schedule. If they don't they are libel because its their design and experience on the line and they said they could do it.

However, if owners would use this approach they would not need to sue their subs because their would be no problems. We need to do more projects like the DOE's National Renewable Energy laboratory in Golden Colorado. No plans and specs - 27 criteria of performance. The key explained by DOE's person in charge, when contractor design teams submitted bids they were told there would be no change orders, no time delays because by submitting a bid you are indicating you know what to do.

Posted by: Ted Garrison - Friday, September 26, 2014 10:56 AM
Posted by: Miranda Moore - ASKI Services Company US LLC - Friday, September 26, 2014 11:18 AM


This case seems to be in conflict with the "logic" of the recent texas case styled: LAN/STV v Eby Constr.Co, 2014 Tex. Lexis 509. Sure, one could rationalize based upon the facts and the different "flow" of responsibilities, but the logic should be consistent (and the "economic loss rule" aplied as a bar in a commerical setting, as opposed to the products liability setting in which the rule was born, is ludicrous).

Hey, I have practiced long enough to know that judges are people too, and if they "know" something, then sometimes they can't be dissuaded from applying that knowledge.
Posted by: Dave Hazlett - Friday, September 26, 2014 11:57 AM


With this ruling, the court has now opened the door for the GC's counsel to say "Don't look at my client, look at the one that did the work." The entire GENERAL construction industry is based on the premise (and legal structure) that the GC is the one responsible to the Owner, not the ones they hire. As a GC myself, I must agree with Mark's comments regarding the state of our industry. If we now have a new legal defense to extricate ourselves from responsibility, I can only see things getting worse. While I do not know the specifics of the case that this ruling applied to, I will assume that it had something, if not everything, to do with the "deepest pockets" approach to litigation. However, the court has at a minimum set a very disruptive precedent and, at worst, has changed the very nature of the construction business and it's relationship with their consumers.
Posted by: David Bandy - Friday, September 26, 2014 11:58 AM


Bruce, can you provide us with the name of the case so we can look up the ruling and determine the circumstances and context that we are all speculating about?
Posted by: Jeff Landefeld - Friday, September 26, 2014 1:12 PM


As a perfect example cited by David Bandy - We were hired by a GC as a Subcontractor to perform the excavation, backfill and compaction for a foundation for a new custom home. Just under 1 year after the Owners took possession and moved in, we found ourselves defending a construction claim against us for what was termed as "garage floor settled due to improper compaction." The garage floor (3car oversized garage) was designed flat - at the Owner's request and did not have a drain, much against our recommendations to the GC and the Owner. The garage, when backfilled and compacted, was tested to ensure density and moisture compliance. We as the sub did everything we could do to deliver a quality product. However, to add to the mix, upon inspection by both ourselves, and a licensed structural engineer, it was found that the garage floor did not settle, but in fact, the concrete slab had heaved. Although required in the contract between the GC and the Owner, the homeowner did not properly maintain the expansion joints in the garage, and after driving in and out with ice and snow on their vehicles during the winter and spring months, the melt off/run off from their vehicles found its way to the joints and under the slab, froze and heaved. Nonetheless, the GC stepped aside and "allowed" the Owners to come after the subs directly and we ended up paying out over $10,000 in settlement to the Owners as did the concrete subcontractor. So while the argument can be said that the subcontractors should be held to the standard of quality and professional work - how, as a subcontractor, do we protect ourselves from having to defend against bogus claims when the GC won't even stand behind their contract with the Owners? and the Owners can collect on bogus claims whatever, even though the claim was disproved? I agree with Mark Stewart's comment - the construction industry is a joke. There is always that one company, be it a GC or Sub, that pulls a stupid stunt and burns the Owner, and then new laws pop up everywhere that do nothing but force those of us who do and have done quality work for the better part of 25 years to overinsure for every little thing, and still without any guarantee that we are protected
Posted by: Debra Lopez - Friday, September 26, 2014 4:08 PM










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