Claims involving Chinese drywall typically are product defect claims. The claims allege that drywall was defectively manufactured as opposed to improperly installed. Initially, claims focused on the drywall manufacturers with homebuilders getting a pass. This trend has changed and suits against homebuilders have become common. Builders therefore must be prepared for the possibility of litigation and should take measures to reduce their exposure.

How successfully builders will be in quickly recovering repair costs, among other costs, from insurance carriers will depend in part on the law of the state in which the insurance policy is construed. Insurers in some jurisdictions are relying on their policies' pollution exclusion in refusing to extend coverage for losses incurred as a result of Chinese drywall. The pollution exclusion, contained in most commercial general liability policies, typically provides that bodily injury or property damage caused by the discharge, dispersal, seepage, migration, release or escape" of a "pollutant" is not covered. The term "pollutant" is generally defined as "any solid, liquid, gaseous or thermal irritant or contaminate, including smoke, vapor, suit, fumes, acids, alkaloids, chemicals and wastes."

The primary issue in obtaining coverage in face of such an exclusion is whether the alleged contaminate constitutes a "pollutant" as contemplated by the policy.

On June 15, 2009 a special panel on multi-district litigation issued an order consolidating all Chinese drywall lawsuits currently pending in the federal courts (more than 600) in the Eastern District of Louisiana, to be heard by Judge Eldon F. Fallon. Multi-district litigation is a federal court system procedure that allows the consolidation of cases that share common questions of fact. Such a consolidation authorizes one judge to oversee all pretrial discovery matters, hearings and motions and to get the cases ready for trial and ripe for settlement. If after all pretrial matters have been resolved, there remain issues to be tried, each case is then remanded to its home district where the trials are conducted independently.

Judge Fallon, with the help of plaintiff and defense steering committees, is selecting five (5) test cases to be tried by year end. This accelerated time table undoubtedly will encourage settlement, as the outcome of these five cases will in large measure define the results of all others.

This case has far reaching implications for commercial contractors (and their insurers), involved in construction defect disputes. Since most "construction defects" involve some violation of some provision of the building code, an owner now has two (2) years from the date of discovery of the defect (irrespective whether the contract statute of limitations has expired) to bring a cause of action against builders and their insurance companies.

Abraham v. T. Henry Construction, Inc., Or. App. __, WL 2766868 (2009)

After the stucco system failed and the owners' sued ChemRex, ChemRex argued that the territory manager did not have authority to issue the warranty and that none existed. The Supreme Court of Oregon disagreed and held the branch manager had "apparent authority" to bind ChemRex based on his position as territory manager, his ability to process warranties and communicate with customers regarding warranties on ChemRex letterhead.

The Court first addressed the homeowners' claim for breach of the implied warranty of habitability. In Washington, the doctrine of the implied warranty of habitability protects the first occupants of residential property against the "risk of fundamental defects in the structure of a home." However, in this case, each of the ten plaintiffs were not the original purchasers of homes from Harbour. The homeowners argued their claims were nonetheless valid because each had been assigned the original homeowners' claim. The Court ruled in favor of Harbour and held that the assignment did not cure the fact that the homeowners were not original purchasers.

Harbour next argued that the homeowners' claims for fraud and misrepresentation were barred by the economic loss rule. The economic loss rule applies to hold parties to their contractual remedies when a loss potentially implicates both tort and contract relief. The Court held that the homeowners' fraud and misrepresentation claims were contract based claims and barred by the economic loss rule. [However, the Court recognized that prior case law held that claims for fraudulent concealment were not barred by the economic loss rule].

Harbour was not so successful as to the homeowners' claims for CPA violations. The homeowners' alleged that Harbour's plainly deficient construction of the homes, together with Harbour's affirmative representations of high quality and workmanship, constituted an unfair or deceptive act of practice. The Court held that the homeowners had shown genuine issues of material fact for trial on the CPA claims.

The homeowners also alleged that Harbour had breached it contracts with the owners by violating its duty of good faith and fair dealing. The Court recognized that the duty of good faith and fair dealing obligates the parties to cooperate with each other so each may obtain the full benefit of performance. But, the duty of good faith does not "inject substantive terms into the parties' contract." Rather, it "requires only that the parties perform in good faith the obligations imposed by their agreement." The duty exists only in relation to performance of a specific contract term. In this case, the Court held that Harbour did not breach a specific term of its agreement with the homeowners and therefore their claims for breach of the duty of good faith and fair dealing failed as a matter of law.

The implied warranty of habitability applies only to builder-vendors of new residential dwellings. Previous cases had held that the implied warranty of habitability only required that the home be "structurally safe for the buyer's intended purpose of living in it." In this case, the Court of Appeals recognized that "the implied warranty of habitability does not cover alleged defects that involve mere defects in workmanship or aesthetic concerns." However, the Court went on to say that "if the violations present a substantial risk of future danger, the implied warranty of habitability is a viable claim." In this case, the Court of Appeals held that the allegations of mold caused by water intrusion at window sills, water damage that caused decay to decks surfaces, and cracks in the foundation, which may have been indicative of structural problems, constitute sufficient evidence to make a claim for the breach of the implied warranty of habitability.

This case represents the increasing standard in which builders of new residential homes must adhere. It is worth noting that the claim is a breach of the implied warranty of habitability, but is only available to the first purchaser of a home against the seller if the seller is a "builder-vendor" (i.e. in the business of selling homes).

The case is the first published case to interpret when dissolution occurs under Washington's Limited Liability Act, RCW 25.15 et seq., which was enacted in June 2006.  The question before the court was when is the "effective date of dissolution" for an LLC that has been administratively dissolved.  Under the statute, the statute of limitations for claims against LLCs is three years after the "effective date of dissolution."

The subcontractor in this case argued that the effective date of dissolution occurred when the subcontractor's LLC was administratively dissolved.  The general contractor argued that the effective date for an LLC that has been administratively dissolved did not occur until two years after administrative dissolution when the LLC's affairs have been "wound up" under RCW 25.15.270 and its certificate of formation is cancelled by the Secretary of State under RCW 25.15.290(4).

The Court of Appeals sided with the subcontractor and ruled that the "effective date of dissolution" occurred when the LLC was administratively dissolved.  Therefore, the three year statute of limitations began to run on the date of administrative dissolution.

Serock argued that Ledcor's breach of contract claims were barred by the contract statute of limitations because Ledcor did not file suit against Serock until over 6 years after Serock's last day of work on the project.  Ledcor argued that the statute of limitations did not begin until substantial completion of the project or that the discovery rule applied and under both scenarios Ledcor's claims against Serock would not be barred by the 6 year statute of limitations.

The Court of Appeals held first that the 6 year contractual statute of limitations began to run (or accrued) no later than Serock's last day of work on the project.  Also, the Court of Appeals further held that the discovery rule did not apply to toll the statute of limitations because Ledcor had failed to allege in its complaint against Serock that the defects were latent (or not discoverable upon a reasonable inspection). 

At the end of the day, Ledcor did not lose entirely because the Court of Appeals held that Ledcor's indemnity claims against Serock were not barred by the statute of limitations. 

Shortly after purchasing the home from the first purchaser, Nguyen discovered that water damage on the interior of the home.  Nguyen alleged that the water damage was the result of defective construction performed by Doak on the exterior of the home.

However, the Court of Appeals dismissed Nguyen's claims against Doak because Nguyen had not purchased the home directly from Doak.  Doak had no affirmative duty to disclose any defective conditions to Nguyen because Nguyen was the second purchaser of the home. 

In this case, Lakemont Ridge Homeowner's Association v. Lakemont Ridge LP, No. 76850-1, ____ Wn.2d ____, ____ P.3d ____ (April 16, 2006), the Lakemont Ridge Homeowner's Association commenced a construction defect action against the project's developer without first providing the written notice required by RCW 64.50.020. The developer moved to dismiss its action. The Homeowner's Association argued it was not required to give notice because this project was begun and completed before RCW 64.50 had been enacted and that the developer had not included the notice in its contract required by the statute (RCW 64.50.050) to trigger the statute's applicability. The Homeowner's Association prevailed, and the developer and other defendants appealed.

On appeal, the Court of Appeals reversed, holding that pre-litigation written notice was required even though the developer had not included the statutorily-required language in its contracts with the condominium owners. The Court noted that the written notice requirement of RCW 64.50.020 applied to "every" construction defect action and not just to those involving projects begun after RCW 64.50 was enacted. The Court also stated that the Homeowner's Association's interpretation would delay the chapter's intended effect of reducing construction defect litigation. The Court rationalized that homeowners would not be prejudiced by its interpretation, because the failure to give notice would only result in a dismissal of the defect action "without prejudice" and that the homeowner could simply re-file after giving notice and following the procedures of RCW 64.50. The Court of Appeals held that the requirement of RCW 64.50.050 (notice to the homeowner in its contract) applied only to those projects which commenced after the statute was enacted.

The Washington Supreme Court reversed finding that the pre-litigation notice requirement and opportunity to cure only became operative when the construction professionals in question had given prior written notice to the homeowner of the requirement. The Supreme Court cured the situation created by the Court of Appeals' opinion that a homeowner was required to provide a notice which was not required at the time of the purchase and which the homeowner had never received written notice specified in the statute.