Fraud or Mistake? And How It Can Effect a Claim Against a Professional Designer.

Louisiana’s anti-indemnity statute applicable to construction contracts, R.S. 9:2780.1, became law in 2011. The statute renders unenforceable any provision in, or collateral to, a construction contract that purports to indemnify or hold harmless a person from liability for its own negligence, or has the effect of doing so. Since the law's passage, few court decisions have interpreted its seemingly broad language and many questions remain as to the law's full impact.

The obvious intent of the anti-indemnity law is to avoid shifting liability away from a party at fault to another person. To this end, the language in the statute nullifies any agreement that has "the effect of holding the person at fault harmless.” But what about "limit of liability" provisions? Arguably, such provisions have the effect of holding harmless the party at fault. Does a limit of liability provision, otherwise valid and enforceable under Louisiana law, run afoul of the anti-indemnity statute? After all, those parties with superior bargaining power in construction contracts will seek to insulate themselves from liability to the fullest extent allowed by law, and will look for alternatives to the indemnity provisions that now expressly violate public policy.

One court recently held that R.S. 9:2780.1 does not prohibit a limit of liability provision in a construction contract. In Patriot Contracting, LLC v. Star Insurance Company, (E.D. La. 3/01/2018), the construction contract contained a provision that excluded liability of the architect for good faith decisions made during contract administration. The plaintiff/contractor alleged that the architect was negligent in its contract administration duties and caused it to suffer economic loss. The court dismissed the claim, rejecting the contractor’s argument that the provision violated the anti-indemnity law.

The Patriot court explained that the statute prohibits an indemnity agreement, i.e., where one party agrees to reimburse a second party for damages for which the second party becomes liable to a third party. However, the anti-indemnity law did not impact the provision that excluded the contractor’s right to recover from the architect. Thus, at at least according to one court, parties in construction contracts are still free to include limit of liability provisions.

Mary Anne Wolf is an engineer/attorney with a construction background who represents design professionals, contractors, and others in construction litigation. She also gives seminars on the subject. She enjoys travel, yoga, and encouraging her husband in his gardening and cooking endeavors.

Clients frequently ask their attorneys whether they should arbitrate their commercial and construction disputes instead of litigating in the court system. This question arises either when drafting the contract or, if the contract contains an arbitration clause, once a claim occurs. Claims that require analysis of complex contracts, government regulations, and technical issues, such as those that arise in the construction, environmental, and energy industries, are well-suited to arbitration.

Parties typically want the quickest and least expensive means to a fair result. This is true even for highly sophisticated businesses where the amount in dispute is high. Arbitration gives parties a high level of control in the dispute resolution process. It is specifically designed to provide an alternative to the onerous and expensive discovery and trial procedures required in litigation. Parties can tailor the discovery and schedule to the needs of the case, which drastically reduces the overall time and cost of reaching resolution.

Arbitration also allows parties to select an arbitrator with specialized knowledge necessary to decide the case, which is especially beneficial in complex cases. Because parties agree to arbitration in their contract, they have control over the process in a way that is not available in litigation. For example, the parties may designate the administrative body and applicable rules, require a three-arbitrator panel for a complex case, name a particular arbitrator, require confidentiality, or dictate the timeframe for the hearing.

The following four factors are key considerations in assessing arbitration:

Expertise of decision-maker – One of the most important benefits of arbitration is the parties’ ability to select the arbitrator. This affords parties an opportunity to designate a decision-maker with specific qualifications and expertise needed to understand the contracts, legal issues, engineering and technical facts, and expert evidence to be presented. The parties can also select someone with strong management skills to handle complex matters or difficult decisions. The benefit is two-fold: Fewer resources are needed to educate the decision-maker in the critical industry background information, and the risk of an unreasonable ruling is reduced.

Timeframe for resolution – The median time to resolution in commercial arbitrations is less than one year, whereas the time to trial in federal court is two to three years.* Because appeal rights in arbitration are limited, the award typically terminates the dispute and the expense. However, after a trial, the case could linger through the appeal process for several more years, thus increasing the expense.

In addition to direct cost saving, decreasing the resolution time creates an indirect cost benefit to industry. Because “time is money,” shaving years off the process results in significant savings that likely can be better used advancing the business than litigating a case. Businesses lose billions of dollars every year because of the inherent delays in the litigation process.^ These losses stem from uncertainty in the outcome, capital set aside as reserves for potential losses, open claims reported to insurers, investors, potential clients and auditors, and loss of employee hours and administrative costs expended in litigation. Arbitration offers an alternative to mitigate and control these costs.

Expense – Arbitration typically costs more upfront than litigation. The parties must pay the administrative costs and arbitrator fees, which vary depending on the time and complexity involved, but generally range from $20,000 for a $100,000 claim to $60,000 for a $1 million claim. The costs are shared among the parties, which decreases the per-party cost in multiparty claims.

However, parties can control the cost of arbitration. Discovery, depositions, and document production in complex cases can come with staggering costs. In arbitration, the rules governing discovery and evidence are less formal. Additionally, discovery is more limited, which encourages a streamlined process and reduces costs and time significantly.

Risks – An often-cited risk of arbitration is the lack of appeal right. An arbitration award can only be vacated on limited grounds of fraud, corruption, misconduct, or where an arbitrator exceeds their power.~ However, if the initial decision-maker has expertise in the industry and law involved, the expectation is that the decision will be a well-reasoned one that the parties can accept.

In contrast, a major risk of litigating a complex commercial dispute is the fact-finder’s lack of understanding of the issues, the escalating potential for nuclear verdicts, and the appellate court’s limited power to correct factual findings.

In sum, arbitration is a good choice for dispute resolution where parties want to control the risk of an unreasonable outcome, reduce the time and expense of the process, and select a decision-maker with special expertise in their industry.

About the author: Mary Anne Wolf is an engineer and attorney. She is on the panel of commercial and construction arbitrators for the American Arbitration Association. Her goal as an arbitrator is to assist parties in managing their case for efficient resolution, give a high level of attention to each party’s position, and achieve a fair result.

References:

* AAA, Measuring the Costs of Delays in Dispute Resolution [online]; Micronomics, (March 2017), Efficiency and Economic Benefits of Dispute Resolution through Arbitration Compared with U.S. District Court Proceedings.

^ Efficiency and Economic Benefits, pp. 4-5, 16-23.

~ La. R.S. 9:4210 (LA Binding Arbitration Act); 9 USCA §10 (FAA).

The Louisiana Supreme Court recently held that the New Home Warranty Act ("NHWA") is not the exclusive remedy for a purchaser of a new home where the builder fails to disclose known defects in the Residential Property Disclosure Act ("RPDA"). Stutts v. Melton, 2013-0557, -- So.2d. ----. The Court also upheld an award of damages and attorney fees for fraud victims who elect not to seek rescission of a sales contract despite no Civil Code article expressly allowing for attorney fees in such instances.

Builder Chad Melton completed a home in Walker, Louisiana in 2004. He and his wife lived in the home for approximately nine months prior to selling the home to James and Lisa Stutts. The Residential Property Disclosure Act, La. R.S. 9:3196, et seq., requires disclosures of known problems with a home prior to sale. Melton provided the Stutts with a disclosure form, but failed to mention that color had previously been observed bleeding onto the walls of the home from the roof.

In Stutts, it was factually established that Melton was aware of the roof defect because he had entered into a $13,600 settlement with the roof manufacturer to fund the replacement of the roof. Nevertheless, Melton cleaned the walls and installed gutters instead of the more expensive roof replacement.

Melton's gutter solution was ill-advised and unsuccessful. After discovering the problem in the summer of 2006, the Stutts filed suit seeking as damages: the repair costs for the roof; costs for additional repairs; and attorney fees.

The Stutts filed a motion for summary judgment on their fraud claim citing La. C.C. art. 1953. The Meltons opposed the motion, arguing that the NHWA provides the "exclusive remedy" available to the Stutts. The motion was granted and, after a bench trial on damages, the trial judge awarded damages to include attorney fees.

The court of appeal reversed both the summary judgment and the money judgment, holding that the Stutts' claims were untimely under the NHWA.The NHWA provides a one year warranty period for new home construction and an additional thirty day period in which to file suit under the Act. By its terms, the NHWA provides the "exclusive remedies" between a builder and an owner relative to home construction.

The Louisiana Supreme Court reversed and reinstated that lower court's judgment. The Court held that the RPDA applied in this case because the home had been occupied by the Meltons after construction was completed. Even though the NHWA claims were prescribed, the Stutts possessed a timely claim that Melton had provided a fraudulent disclosure in violation of the RPDA.

The Court next addressed the Stutts' claim for attorney fees. The Court observed that no statute specifically authorized attorney fees where the plaintiff does not seek rescission of the sale. However, the Court reasoned, citing principles of equity found in Louisiana Civil Code article 4, that the legislature surely did not intend for victims of fraud to go uncompensated if they elect not to seek full rescission of the sale. Accordingly, attorney fees were held appropriate where fraud is committed but the victim elects not to seek rescission of the contract.

The Court's holding in Stutts may have a limited impact on the NHWA because of the peculiar facts of the case, i.e. the builder of the new construction living in the completed home before selling it to plaintiffs. However, the Court's award of attorney fees is an interesting development in the law. Time will tell whether the Court may be inclined to create further exceptions to the established rule that attorney fees cannot be awarded in the absence of statutory or contractual language awarding attorney fees.