Almost any construction project carries the potential for disputes, which all too often lead to litigation and associated costs. As litigation costs increase, they eat into potential recovery or limit defense strategies. Finding ways to lower litigation expenses helps eliminate cost as a barrier to a favorable outcome. One area ripe for such measures is e-discovery—the process in any litigation where, as court rules require, the parties collect and exchange electronically stored documents and data. That process necessarily is affected by the way those documents and files are stored and managed. Even before litigation begins, construction companies can take simple steps to reduce their e-discovery costs.
John A. Greenhall is the Secretary of Cohen Seglias Pallas Greenhall & Furman PC as well as a Shareholder and member of the Board of Directors. In addition, he is a Partner in the Firm’s Construction Group. His clients hail from all areas of the construction industry and include general contractors, subcontractors, architects, engineers, sureties and owners.
As members of the construction industry know, to describe the relationship between a surety and the party to whom it issues a surety bond (the principal) as confusing would be an understatement. In fact, many believe that the surety-principal relationship is similar, if not identical, to the insurer-insured relationship. In a recent federal court opinion – Reginella Construction Company, Ltd. v. Travelers Casualty and Surety Company of America – a contractor learned the hard way that the principal in a surety-principal relationship is not nearly as protected as the insured in an insurer-insured relationship.
In Reginella, the United States District Court for the Western District of Pennsylvania granted a surety’s motion to dismiss the claims brought against it by the surety’s principal, Reginella, finding, among other things, that a surety does not owe the kind of heightened duty to its principal that an insurance carrier owes to its insured (this heightened obligation is called a fiduciary duty, and we tend to see it in the insurer-insured, attorney-client, trustee-beneficiary, and guardian-ward contexts). In Reginella, the surety, Travelers, issued performance and payment bonds on behalf of its principal, Reginella, for a school district project in Pennsylvania and a turnpike project in Ohio.
On the school district project, Reginella’s relationship with the owner broke down, and the project shutdown. On the turnpike project, Reginella’s relationship with Travelers soured over a disagreement surrounding a lien filed by one of Reginella’s subcontractors. Reginella alleges that Travelers failed to, among other things, (i) pay Reginella’s subcontractors in accordance with the payment bonds that Travelers issued, (ii) issue a bond to address a subcontractor lien, and (iii) generally act in the best interests of Reginella in a way that would facilitate payment from the project owners to Reginella.
Ultimately, Reginella sued Travelers for damages in excess of $15 million for lost business, goodwill, future earnings and residual value of its enterprise against Travelers for, among other claims, Travelers’ alleged breach of its fiduciary duty owed to Reginella in relation to the bonds issued on the two projects. Travelers moved to dismiss the entirety of Reginella’s claims. In applying Pennsylvania law, the Court granted Travelers’ motion and dismissed Reginella’s claims against Travelers, concluding that a Pennsylvania court would not impose fiduciary duties on a surety because a surety is a guarantor issuing a commercial guaranty, not an insurance carrier issuing an insurance policy.
What Does It All Mean?
The Court’s decision makes it clear that in Pennsylvania, a surety’s obligations to its principal are not the same as the heightened obligations that exist in fiduciary relationships. In a fiduciary relationship, the fiduciary (e.g., an insurer) must act with the utmost fairness and refrain from using his position to the other’s detriment and his own advantage. As the Court determined, however, surety relationships are ordinary arm’s-length commercial relationships where each party owes the other a less protected duty of good faith and fair dealing. When entering into surety relationships, contractors need to be mindful of this distinction, especially when a surety begins communicating with project owners on its principal’s behalf.
Principals like Reginella should carefully monitor the surety’s activity and insist on being copied on all communications to and from the surety.
It is important to note that a couple of weeks ago, Reginella asked the Court to reconsider and alter its decision. Therefore, the Court’s decision is not yet final, and we will continue to monitor the result.
Lori Wisniewski Azzara is an Associate at Cohen Seglias Pallas Greenhall & Furman PC. Lori practices in the areas of construction and commercial litigation and has experience in contract negotiation, claims for delay and inefficiency, mechanics’ liens, and all types of contractual disputes.
Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law. Dan counsels clients at all tiers of the construction industry, including general contractors, subcontractors, owners, developers, and design professionals.
By John A. Greenhall and Jennifer R. Budd
For decades, Pennsylvania Courts have limited the scope of the implied warranty of habitability to the first user of the home. For the first time, in Conway v. Cutler Group, Inc., the Pennsylvania Superior Court permitted a homeowner, who was not the initial purchaser of the home, to maintain a claim against the home builder for breach of the implied warranty of habitability.
What is the Implied Warranty of Habitability?
The implied warranty of habitability (the “Warranty”) is a guarantee made by a homebuilder that (i) the home was built in a workmanlike manner and (ii) the home is suitable for living. If a homebuilder fails to satisfy these two basic requirements, then it can be held liable to the purchaser for breaching the Warranty. For instance, courts have held homebuilders liable to buyers for breach of the Warranty where the home does not have drinkable water.
It All Comes Down to Policy
In enacting this change, the Court examined the history of the Warranty and the policy behind its development, noting that the Courts developed the Warranty to shift the risk of latent defects in new homes from the buyer to the builder. The Court explained that shifting the risk to the builder is appropriate because (i) many defects go undetected even after a thorough inspection and (ii) the builder is in the best position to repair the defects and spread the cost of the repair.
With these policies in mind, the Court expressed several reasons why the Warranty should be expanded to future buyers. First, the Court noted that the Warranty was intended to even the playing field for a home purchaser lacking the expertise of a builder. The Court reasoned that in the case of a second purchaser, neither party possesses the expertise of a builder. Second, the Court explained that the Warranty targets defects that are impossible for an ordinary home purchaser and its inspector to detect. Therefore, the Court concluded that ownership of the home is irrelevant to the applicability of the Warranty because the consequences of a latent defect may not manifest for several years, at a time when title of the home has changed hands.
The Court provided two examples to show that the Warranty should apply to a subsequent purchaser. In one case, if a defect materialized five years after the builder or developer sold the home and the first buyer discovered the defect, that buyer could have successfully brought a claim for a breach of the Warranty. In the second scenario, if the first buyer sold the home after three years, and the second buyer discovered the defect, the builder would not have been liable for a breach of the Warranty. Using these illustrations, the Court concluded that the number of times a home changes hands should not limit the Warranty because it is immaterial to the discoverability of a latent defect. Therefore, the Court held that the sale of a home may not limit the applicability of the Warranty.
A Builder’s Liability under the Warranty Still Has Limits
Although the Conway decision could extend a builder’s liability under the Warranty, that liability is not limitless. First, the Court explicitly stated that all homeowners must file claims for breach of the Warranty within the twelve-year statute of repose. Second, the homeowner must still prove in litigation that (i) the builder’s design or construction caused the defect and (ii) that the defect affects the habitability of the home.