August 2006

Construction Law Bulletin

The Construction Law Bulletin is published by the Construction Practice Group at Arthur, Chapman, Kettering, Smetak & Pikala, P.A. to keep our clients informed of the ever-changing complexities of construction law.  Significant changes have occurred in the area of construction in Minnesota through both the courts and legislature of which you should be aware; this Bulletin will discuss the Weston v. Top Value Homes and the 2005-2006 Legislative Changes.

Weston v. Top Value Homes
by Michael P. North

Introduction

The Minnesota Supreme Court’s recent decision (filed June 29, 2006) in Weston v. Top Value Homes is an important decision, because it places concrete limits on when contribution claims must be commenced in construction cases. During the short time since the decision was filed, we have analyzed the effects of the decision and learned some things about the impact the decision is likely to have.

Facts/History

This case presented the Court with the situation where the general contractor had the opportunity to commence timely contribution claims after being sued by the homeowner, but failed to do so. (Compare the decision of the Minnesota Court of Appeals in Brink v. Smith Cos., where the general contractor had no time to commence contribution claims in a timely manner; i.e., when the general contractor was sued by the homeowner, it was already too late. There, the Minnesota Court of Appeals decided that the application of Minn. Stat. 541.051 to preclude contribution was unconstitutional.)

In Weston, the home was completed on July 20, 1993 (the date on the Certificate of Occupancy). The homeowners commenced an action against the builder, Top Value, in May, 2003. Top Value, however, did not commence contribution claims until March 2004.

The third parties, against whom the builder asserted contribution claims, brought motions seeking dismissal of those claims, arguing that they were untimely because they were commenced more than ten years after construction was completed. Top Value could have commenced timely contribution claims between the time it was sued in May 2003 and July 20, 2003. This argument relied on the statute of repose in Section 541.051 of the Minnesota Statutes, which provides that in no event "shall a cause of action accrue more than ten years after substantial completion of the construction." The trial court agreed and dismissed the contribution claims.

The Court of Appeals disagreed and overturned the decision of the trial court. Such claims, this court concluded, are "deemed to have accrued" at the end of year ten, and the parties then have two years from that time to commence contribution claims.

The Minnesota Supreme Court sided with the trial court and overturned the decision of the Court of Appeals. First, the Court concluded that "the repose provisions of section 541.051, subd. 1(a), bar a contribution and indemnity claim that has not accrued * * * and has not been brought within the 10 years from the completion of the construction."

Second, the Court rejected as "without merit" Top Value’s argument that the repose provision applies only to underlying claims (the claims brought by a homeowner) and not to contribution claims.

Third, the Minnesota Supreme Court concluded that the statute of repose in 541.051 did not violate constitutional due process or remedies provisions. The Court concluded it was permissible for a statute of repose, which is a substantive limit that "limits the time within which a party can acquire a cause of action," to eliminate claims even before they accrue.

Finally, the court rejected the argument that application of the statute of repose to eliminate claims before they accrued is inequitable and unfair. "Without a doubt the consequences of the district court’s plain reading of the statute are prejudicial to Top Value, but that prejudice is the natural consequence of the statute of repose that the legislature has chosen to enact."

Practical Impacts

Thus, we read the decision to draw a bright line at ten years, meaning that contribution claims subject to 541.051 cannot be commenced more than ten years after substantial completion of construction. For general contractors, this decision has obviously resulted in requests, from third-parties, for dismissal of contribution claims commenced beyond the time limit. This decision will also have an impact on the ability to assert cross-claims. For example, the stucco contractor will not be able to assert a cross claim for contribution against the framer if more than 10 years has elapsed since the home was built. This would be true regardless of whether these two parties are third-parties or direct defendants.

The decision, however, does not guarantee that third-parties will be dismissed from these cases. In cases where it is still possible for building owners to assert direct claims against third-parties, the third-parties will remain in the case. As a result, since the decision was filed numerous motions have been filed by building owners seeking to amend complaints to assert direct claims against third parties. The argument supporting these motions is that amendments relate back to the date of the original complaint, and should therefore be timely. Depending upon the facts, there are two potential responses to this argument. First, if the facts fit, it could be argued that the amendment is barred by the statute of limitations in 541.051 because the homeowners discovered the problems more than two years before the proposed amendment. Second, it could be argued that the amendment is barred by the statute of repose, which provides that in no event can a homeowner commence an action more than 12 years after substantial completion of construction.

Regardless, one consequence of this decision will be for building owners to assert direct claims against those parties who are typically third-parties in cases.  These claims will now likely be made at the outset of a case. This will shift the burden of proof on those claims to owners, meaning they will no longer be able to sue builders and then sit back and watch while the builder pursues the subs.

Finally, a number of local attorneys who represent general contractors, appear to be of the view that even after the Weston decision, the statute of repose as applied to contribution claims is still unconstitutional. They are of the view that the statute is unconstitutional, not based on the due process and remedies clauses (as was the case in the Brink case mentioned above), but because it violates constitutional equal protection principles. We know of no cases currently in the appellate pipeline where this argument is being presented, but that may soon change.

2005-2006 Legislative Changes
by Kimberly L. Johnson

The 2005-2006 legislative session had a fairly significant impact upon the construction industry. The Minnesota Legislature not only addressed the problems raised as a result of the Court’s ruling in Camacho v. Todd & Leiser Homes, but through significant lobbying efforts on behalf of the Builders Association of the Twin Cities ("BATC") and the Builders Association of Minnesota ("BAM"), amended the 10 year warranty statute, Minn. Stat. 327A.02, to add an "opportunity to inspect and repair" provision. These legislative changes went into effect on August 1, 2006.

Legislation in Response to Camacho

Under the law established by  Camacho v. Todd & Leiser Homes, 706 N.W.2d 49 (Minn. 1995), a homeowner is barred from bringing a statutory warranty claim against an entity that has voluntarily dissolved under the Minnesota Corporate Dissolution statute, Minn. Stat. § 302A.7291. Recognizing that the construction of the Corporate Dissolution statute   leaves the homeowner without a remedy, the Court stated that it is the province of the legislature, not the Court, to provide for such a remedy.

The Minnesota legislature responded by amending various sections of the Corporate Dissolution statute to preserve homeowner claims for statutory warranty. Specifically, the Legislature amended the following statutes to include the preservation of statutory warranty claims: Minn. Stat. §§ 302A.781, Subd. 4, 322B.863, Subd. 4, and 327A.02, Subd. 2a. Given these amendments, homeowners may now maintain an action for breach of statutory warranty against corporations or limited liability companies that are "vendors," as defined under 327A.02, even though those entities have formally dissolved under Minnesota law.

Notice and Opportunity to Inspect and Repair Under Minn. Stat. 327A.02

The Legislature also made a very significant change by adding Subd. 4 to Minn. Stat. 327.02, which sets forth a "opportunity to inspect and repair" procedure. Specifically, the amendment reads as follows:

The "opportunity to inspect and repair" amendment went into effect on August 1, 2006. Although we have not yet seen the impact this amendment will have on moisture intrusion claims, changes in the landscape of such claims are anticipated. Based upon the clear language of the amendment, the intended purpose is to achieve resolution of claims earlier in the process. If the procedure works as intended, homeowners will be required to provide the general contractor with a period of time (following receipt of written notice of the claim) to inspect the home and extend a reasonable offer to repair the home, before they can commence an action. To aid the homeowners, the amendment also provides a procedure whereby they may seek an order from the Court to force the general contractor to inspect the home, rather than to simply ignore the claim.

The "opportunity to inspect and repair" amendment may have a number of effects upon the landscape of moisture intrusion cases. There may be an increase in the number of claims that are resolved with a homeowner prior to the commencement of litigation. Thus, rather than the homeowner commencing suit and incurring litigation costs, there may be an increase in subrogation litigation by general contractors against various subcontractors for contribution and indemnification. If the amendment works as it appears to be intended, the homeowner may procure a resolution of his claims earlier in the process, and be less likely to have to commence litigation to remedy the problem.

In light of the amendment and its anticipated effect upon moisture intrusion claims, the general contractor will be required to quickly identify its subcontractors before repairs begin in order to provide them with an opportunity to inspect the home, or will be faced with motions to dismiss due to spoliation of evidence. Thus, as soon as notice of a claim is received by a general contractor, it should immediately identify its subcontractors against whom it may seek contribution and indemnification, and provide notice of the claim, inspection and intent to repair. Failure to do so may well result in the inability to recover against those subcontractors for contribution and indemnification.

On the other hand, the amendment also places added pressure upon the homeowner to accept a reasonable offer to repair the home. The failure to accept a reasonable offer to repair early in the process, not only will result in the homeowner incurring litigation expenses by having to commence the action against the general contractor (and subcontractors, if the statutes of limitations/repose are about to expire), but will also create strong evidence in support of the homeowner’s failure to mitigate his damages, which could reduce any potential damages award at trial.

As set forth above, significant changes in the landscape of moisture intrusion cases are expected in response to the "opportunity to inspect and repair" amendment to Minn. Stat. 327A.02. The overall intended effect may reduce the number of litigated claims by homeowners, and shift the "fight" and litigation costs associated therewith to the general contractors and their respective insurers.

Changes to Construction Code Inspector Criteria

General contractors and subcontractors often argue that they "relied" upon the local building inspector to advise them if their work did not comply with the building code. Indeed, until the continuing education requirements went into effect for the issuance and maintenance of a contractor’s license, the majority of contractors and subcontractors were not familiar with the local building code requirements applicable to their particular trade or service. Despite the educational requirements now imposed upon contractors to maintain their license, there is no safeguard in place to ensure that the work performed was done in accordance with the applicable building codes.

In an effort to improve compliance with building codes, the Legislature has enacted a new statute, Minn. Stat. 16B.655, which enables the Commissioner of Labor and Industry to adopt rules to establish minimum competency criteria and continuing education requirements for building inspectors, mechanical inspectors, plumbing inspectors and combination inspectors under the supervision of the building official. The statute does provide an exemption for persons holding current certifications as building officials under section 16B.65, but it requires that effective January 1, 2008, all inspectors (hired after that date) must be in compliance with the competency criteria established by the Commissioner.

Insurer’s Obligations Upon Dissolution of Insured.

Although most general liability policies already state as much, the Minnesota Legislature also amended Minn. Stat. 60A.08, subd. 6 to state that dissolution of the insured shall not relieve the insurer of its obligations under the policy.

The above summaries are intended to help you to understand and prepare for the impending changes in the landscape of moisture intrusion cases. If you have any questions concerning these changes or any other matter, please do not hesitate to contact one of the members of the Arthur Chapman Construction Law Practice Group. 

If you are interested in a Construction Law Seminar at your office, our Practice Group is available for seminars at your convenience.  We also have our annual Law & Litigation Seminar in Itasca, IL on August 17, 2006 where we will have a Construction Breakout Session, for more information or to sign up please view our  Upcoming Events page on our web site.  Finally, we recently published the 2006 Construction Law & Related Desk Book (view the Table of Contents), if you would like a copy of this book, please contact our marketing director, Jenny Frost.