Western District of Virginia Confronts Several Legal Issues That Frequently Impact Multi-Party Construction Disputes – Economic Loss, Damage to Other Property, Third Party Beneficiary Status, Warranties, Subrogation, and Third-Party Joinder

by Pepper Hamilton LLP
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Allstate Insurance Company v. Structures Design/Build, LLC, 2016 U.S. Dist. LEXIS 34349 (WD VA March 17, 2016)

This construction dispute case arises from a failed pipe connector that caused water damage to a facility and insured personal property, which Hillel at Virginia Tech, Inc. (“Hillel”) owned in Blacksburg, Virginia. Hillel contracted Structures Design/Build, LLC (“Structures”) to design and construct the facility. Structures, in turn, subcontracted PJ Little Plumbing, Inc. (“PJ”) for plumbing and mechanical installation. PJ purchased the failed pipe connector from CMC Supply, Inc. (“CMC”). Allstate Insurance Company (“Allstate”) insured Hillel for the damage to the facility and the personal property.

As Hillel’s subrogee, Allstate filed a complaint against Structures and PJ. Allstate sued Structures for various state law claims. It sued PJ for negligence and breach of express and implied warranties. PJ filed a third-party complaint to join CMC on a breach of implied warranty theory. PJ and CMC moved to dismiss the claims against them.

The court granted in part and denied in part PJ’s motion. It dismissed the negligence claim against PJ with respect to damages arising from harm to the facility, because the facility was the subject of Hillel’s construction contract. The court denied the motion with respect to damages to personal property stored within the facility, because it represented damage to other property. The court denied PJ’s motion to dismiss Allstate’s implied warranty claim because it found Hillel to be a third party beneficiary to PJ’s subcontract with Structures, and all such construction contracts in Virginia contain an implied warranty to perform services in a good, safe, and workmanlike manner, free of defects. The court dismissed Allstate’s express warranty claim because it failed to plead sufficient facts to support the existence of any express warranty between PJ and Hillel.

The court granted CMC’s motion in its entirety. The court held that PJ’s third-party complaint failed to state a claim for derivative liability under Rule 14 of the Federal Rules of Civil procedure because it alleged facts that were factually distinct from those alleged in the original complaint. PJ alleged that CMC was liable to Hillel because it manufactured a defective connector, whereas Allstate alleged that PJ was liable on the basis that it improperly installed or selected an unsuitable connector. The court noted that if Allstate succeeded in proving that PJ failed to properly install or select the connector it would do little to support PJ’s claim against CMC that the connector was defective.

The following summarizes the court’s reasoning for its conclusions:

Allstate’s Negligence Claim Against PJ

PJ argued that the economic loss doctrine barred Allstate’s negligence claim. The court considered two factors: (i) whether the alleged breach involved duties outside of those assumed under contract, and (ii) whether the property damage included property that was not subject to the agreement between the parties. The court first found that the complaint failed to allege that PJ breached any duty imposed by law, as opposed to the parties’ contract.

The court next found that damage to the facility could not be recovered in tort because it represented only economic loss. According to the court, Hillel had purchased a “package” for the construction of its facility and one component of that package – the pluming work – damaged other parts of the construction package. The court found the case of Sensenbrenner v. Rust, Orling & Neale, Architect, Inc., to be instructive. 374 S.E.2d 55 (Va. 1988). In Sensenbrenner, the owner contracted a building company to design and construct a house with a pool. When a defect in the pool caused damage to the house’s foundation, the owner sued in tort to recover for damages to the pool and the house. The Virginia Supreme Court found that the owner alleged nothing more than “disappointed economic expectations,” because the owner contracted for the purchase of a package, which was “alleged to have been defective” as “one or more of its component parts was sufficiently substandard as to cause damage to the other parts.”

The court, however, held that Allstate could recover for damage to the personal property stored at the facility because that property was not part of Hillel’s contractual package for the construction of the facility. The court noted that PJ had appeared to concede that this part of Allstate’s claim could go forward. The court did not allow the mere existence of this other property damage to open the door for recovery for damages that related to property within the construction package. So the court permitted Allstate to proceed on its negligence claim against PJ for only damages to the personal property stored at the facility.

Allstate’s Breach Of Warranty Claim Against PJ

Allstate alleged that PJ breached express and implied warranties. PJ argued that Allstate could not support its claims because neither Hillel nor Allstate had a contract with it. The court found that while PJ did not contract directly with Hillel, it was the third party beneficiary to PJ’s subcontract with Structures, because the subcontract contained several provisions whereby PJ agreed to provide indemnity to Hillel. Although the court found one of the indemnity provisions void under Virginia’s anti-indemnity laws, it believed that the remaining provisions were sufficient to show that Hillel was an intended beneficiary of the subcontract.

Notwithstanding Hillel’s status as a third party beneficiary to the subcontract, the court dismissed Allstate’s express warranty claim because Allstate failed to allege sufficient facts to support the existence of any express warranty between PJ and Hillel. The court concluded that Allstate had sufficiently stated a claim for breach of the implied warranty found in all construction contracts in Virginia, which require contractors to perform its services in a “good, safe, and workmanlike manner free from defects and in accordance with all applicable codes and standards.”

PJ’s Third-Party Complaint To Join CMC

CMC moved to dismiss the third-party complaint on the basis that it failed to state a claim for derivative liability under Rule 14 of the Federal Rules of Civil Procedure. Under Rule 14, a party may not implead a third-party merely because he may be liable to plaintiff. In other words, a third-party complaint that alleges “it’s him, not me” is improper under Rule 14. CMC argued that PJ’s third-party complaint simply contended that CMC was liable directly to Hillel because it manufactured a defective part, which if true wholly, or partly, excused PJ from liability.

According to the court, Rule 14 cannot be used to bring in matters that merely have some relationship to the original action. The court found that the original complaint’s allegations were factually distinct from those in the third-party complaint. PJ alleged that CMC was liable to Hillel for its damages because it manufactured a defective part, whereas Allstate alleged that PJ was liable for installing a connector that was not equipped to handle the high temperatures in the facility’s hot water system.

The court concluded that Allstate’s dispositive question was whether the connector was properly installed or selected, not whether it was properly manufactured. So if Allstate succeeded in proving that PJ failed to properly install the connector in the hot water system, such a claim would do little to support PJ’s claim against CMC that the connector was defective. The court also noted that PJ failed to allege that the parties were joint tortfeasors or that it had a right to indemnity or contribution from CMC if it were held liable to Allstate. The court ultimately dismissed PJ’s third-party complaint against CMC because it violated Rule 14 and because CMC’s dismissal promoted judicial economy and fairness.

To view the full text of the court’s decision, courtesy of Lexis ®, click here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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