Over the past several years, the proliferation of construction defect litigation has created an increasingly growing problem which appears to some to be burgeoning out of control. A phenomenon that was once unique to California has now spread to other rapidly growing residential areas in Arizona, Nevada and other states. Because many of our clients are being exposed to Construction Defect (“CD”) cases for the first time, we thought it prudent to briefly outline some of the issues these cases raise. The number of such cases is exploding in Southern Nevada, and more contractors are being exposed to new issues which are typically not manifested in "normal" civil litigation.
1. What is a “Defect?”
Chapter 40 of the Nevada Revised Statutes governs actions resulting from constructional defects. According to NRS Chapter 40, Section 40.615, a defect may be as little as anything not done pursuant to a local code, ordinance, or standard of care. While the statute includes language regarding the “physical damage” or “unreasonable risk of injury to person or property,” the use of the word “or” following subsection 3, below, does not require it. Thus a “defect” may be determined without respect to resultant damage or actual/potential harm caused thereby. In this regard, while the statute does not use this language, it is essentially a negligence per se standard.
NRS 40.615 defines “Constructional defect” as follows:
“Constructional defect” means a defect in the design, construction, manufacture, repair or landscaping of a new residence, of an alteration of or addition to an existing residence, or of an appurtenance and includes, without limitation, the design, construction, manufacture, repair or landscaping of a new residence, of an alteration of or addition to an existing residence, or of an appurtenance:
1. Which is done in violation of law, including, without limitation, in violation of local codes or ordinances;
2. Which proximately causes physical damage to the residence, an appurtenance or the real property to which the residence or appurtenance is affixed;
3. Which is not completed in a good and workmanlike manner in accordance with the generally accepted standard of care in the industry for that type of design, construction, manufacture, repair or landscaping; or
4. Which presents an unreasonable risk of injury to a person or property.
Even a minor infraction can automatically equate to “damages” (see below), which includes fees and costs. Thus, the statute is written in language that is clearly pro-plaintiff.
2. Statutorily Mandated Opportunity to Repair Defects
Under Chapter 40, NRS 40.646, before a contractor commences an action for a constructional defect against a subcontractor, the contractor must follow specific procedures. First, within thirty days of receipt of such notice, the contractor must provide written notice to the subcontractor of the specific construction defects alleged. Upon receipt of such notice, the subcontractor has an opportunity to inspect the alleged construction defects. Finally the subcontractor must be afforded an opportunity to repair the alleged construction defects. Only after this process is completed may a complaint be filed. This provides an opportunity for the entity who performed the work to fix its own mistakes.
In certain circumstances (i.e., where the defect allegations are minor or repairable at a minimal expense), a subcontractor should give strong consideration to effectuating repairs of the defects alleged, even over and above its own mistakes. The subcontractor is encouraged to view this decision strictly as a business decision, as a measure of minimizing the cost of defending against construction defect allegations. The decision to repair minor defects, such as a small area of cracked asphalt, may be the best financial decision, even if valid defenses exist. Such repairs may deter the filing of a lawsuit against you after the Chapter 40 process is complete.
While there is a statutory right of repair for subcontractors, there is no corresponding right to a release from the CD allegations following the performance of the repairs. This means that even if the subcontractor has valid defenses against performance of the repairs and decides to perform the repairs as a business decision to reduce costs, there is no guarantee that the subcontractor will not later be sued for the same issues.
When crafting the recent amendments to Chapter 40 of the NRS, the Legislature took care to protect the homeowner against subcontractors who would potentially employ a defective repair method that left the homeowner in the same or worse situation than before filing the original complaint. Once again, Nevada law sides strongly with the protection of the homeowner.
Despite the potential that repair work may not equate to a release of the defect allegations against a subcontractor, the repair cost of a minor issue may be as little as $1,000.00. Considering the high cost of defending a CD claim, performance of such repairs is often the best business decision from a financial standpoint. Showing of a willingness to repair is also strong evidence to present to a jury of a subcontractor’s efforts toward successfully resolving a problem without resorting to litigation.
3. Complex Nature of Construction Defect Matters
A typical CD matter is complex in nature, and is generally governed by the Nevada Rules of Civil Procedure for complex litigation (NRCP 16.1(f)) for being a “potentially difficult or protracted action that may involve complex issues, multiple parties, difficult legal questions, or unusual proof problems.” CD matters are more complex than any other type of civil litigation, excepting class action matters. Due to the inherent complexity, CD matters require specially-trained judges and mediators, and expert witnesses who have an acute understanding of the process. Such complexity naturally drives up the cost of CD litigation.
There are many parties involved in CD cases, including the Claimants, Developer(s), General Contractor(s), and numerous Subcontractors, each with their own attorneys and experts. These matters require extensive discovery, mediation conferences, Case Management Order requirements, Special Master Hearings, and Court proceedings. Each of these events often requires substantial preparation and the attendance of all parties, including attorneys and experts.
The unusual proof problems inherent in a construction defect matter generally require visual inspections and destructive testing of the subject property. The results of such inspections and testing are open to the analysis and interpretation of experts, and rarely will all experts agree as to causation. The Claimants’ experts will generally have at least one expert opinion, as will the developers’ experts and the subcontractors’ experts. In general, each of the various experts is highly qualified to render opinions, so these issues are matters open for compromise during settlement negotiations or for a finder of fact to determine in a trial.
Even if a defendant were to proceed through trial, it is highly unlikely that a jury would not find liability of even 1%, because the issues are so intertwined and complicated.
While not explicitly stated in the statute, it is generally understood that damages are incurred on a joint and several basis. This means that if liability is found in whole or in part for a constructional defect, (even 1% liability) then each party may be responsible jointly or severally (i.e., individually) for a percentage of the damages that may equal 100%, particularly if one subcontractor, for example, is the last one left in the case. Thus, even if a party “wins” by only being allocated 1% of the damages, that party may still be liable for 100% of the damages, which includes costs and attorneys fees of the owner and developer.
Additionally, even if a party gains a 100% win and is found to be without liability for the construction defects alleged, that party may still be liable for defense fees and costs pursuant to a written contract (see the discussion of Indemnity below). Studies have found that typically the defense costs and fees far exceed the actual cost of repair. Some surveys suggest that the average fees and costs exceed repair costs by five times.