Spring 2008Last month the Oregon Supreme Court allowed a building owner to bring a lawsuit against the builder even though there was no contract between them. The decision confirms that builders in Oregon can actually be liable to strangers who happen to purchase a building that they built for damages resulting from faulty construction.
In Harris v. Suniga, a contractor built an apartment building in Salem for a California investment company. The investment company sold the building to the Harris Family Trust (the Harris Family), which later discovered dry rot. The Harris Family also found that the contractor had not installed flashings that allegedly would have prevented the leaks that led to the dry rot. The Harris Family then filed a lawsuit against the contractor seeking to recover $376,000 to repair the dry rot.
Faulty construction is usually a breach of a construction contract. The Harris Family could not sue the builder for breach of the construction contract, however, because it did not have a contract with the builder. Instead, the Harris Family sued for negligence. Generally, a person is negligent if he fails to act as a reasonable person would act. If a person is negligent, he is responsible for any resulting physical harm to others and damage to property, but, in most cases, not for causing purely financial losses.
The law distinguishes between purely financial losses and physical injury or property damage. Someone who has lost money in the stock market because his stockbroker gave him bad advice would generally not be able to sue his broker for negligence because he had suffered a purely financial loss. But if his broker had negligently failed to stop at a stop sign and slammed into him, he would be able to recover from his broker for any resulting physical injury or damage to his car.
In Harris, the builder's attorneys argued that the cost to repair the dry rot was a purely financial loss that could not be recovered under the Harris Family's negligence claim. They argued that the purchase of the building was an investment that lost value because of the presence of dry rot. In other words, if the Harris Family had known about the dry rot when it purchased the building it would have paid less for the building, and the difference between the price it would have paid had it known of the dry rot and the price it did pay was an investment loss.
Court Says: No Contract? No Problem.
The court rejected the contractor's argument because it found that damage to a building is inherently different than losing money in the stock market. The court compared the rotted building to a damaged car or home. It noted that the law ordinarily allows the owner of a damaged car or home to recover from the person who caused the damage by suing for negligence. As a result, the court characterized the dry rot as "property damage" and allowed the Harris Family to pursue its negligence claim against the builder.
Several interested organizations filed briefs with the court, pointing out that a builder should be able to rely on its contract to define its obligations and the scope of its liability. Other groups focused on the interplay of the court's decision with another rule that the Oregon courts have adopted — under that rule, a person who executes a contract with a builder may not, in most cases, sue the builder for negligence. The groups argued that future owners should not have more rights against the builder than the person with whom the builder originally contracted, which would be the result if the court allowed the Harris Family's negligence claim because negligence claims allow for the recovery of more damages than breach of contract claims. The court found the arguments "important and interesting" but declined to specifically address them.
As a result, Oregon contractors have ongoing negligence liability to subsequent owners of the buildings they build. It is more important than ever for contractors to maintain their completed operations insurance (which is now required by the Construction Contractors Board) to protect themselves against claims from future owners.
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