Chinese Drywall Verdict and the Economic Loss Rule
On April 8, 2010, seven Virginia families were awarded $2.6 million in damages by New Orleans federal Judge Eldon Fallon in the pending Chinese Drywall class action litigation. This significant verdict permitted recovery of extensive elements of the claimed damages and made some potentially damaging factual findings. Taking a deeper look at the case highlights the critical importance of understanding applicable law. Crossing a border from one state to a neighbor can have a tremendous potential impact on the legal landscape, rights and risks that attach to a construction project.
Findings, Reaction The judge�s opinion contains a number of interesting points and findings that are worth highlighting:
1. The case was tried by default against the defendants. A number of other parties initially intervened, then dropped out of the case.
2. The case issued extensive scientific findings regarding problems with Chinese drywall; time will tell how much portability this court�s factual findings have, particularly in light of the empty defense table.
3. The plaintiffs convinced the court that the drywall caused their home to be classified as a �severe industrial corrosive environment.�
With respect to the damage claims, the court ordered that all drywall needed to be removed even in homes with mixed Chinese and non-Chinese drywall. The court required complete removal and replacement of all electrical wire, copper piping, HVAC units and extensive numbers of electrical equipment and appliances. All carpet, hardwood flooring, counter-tops, bathroom fixtures, trim, insulation, and cabinets also needed to be replaced.
Remediation also should include post remediation, HEPA filtering and independent testing and certification. The court analyzed each homeowner�s situation and awarded damages for repair costs, loss of personal property, economic losses caused by the disruption (such as foreclosure and bankruptcies), alternative living arrangements, and loss of use of the homes and personal property. The court found that loss of value damages were speculative
Virginia�s Economic Loss Rule In Virginia, a contract is generally required to recover disappointed economic expectations, or �economic losses.� The homeowners purchased a single unitary home from various builders and that one part of the home (the drywall) damaged others (piping, wiring, HVAC, et c). There is a strong argument the homeowner property damage claims would be barred by the seminal Virginia economic loss rule case, Sensenbrenner v. Rust, Orling & Neale.
The other theories of recovery against remote manufacturers would be for breach of UCC warranties. The next layer of analysis would be to evaluate whether the repair costs claimed are direct damages or whether they are consequential damages requiring privity of contract that are thus barred. In product liability construction cases, this often means that plaintiffs are limited to recovering the statutory damages under the Uniform Commercial Code, which is the difference of the value of the product as warranted versus as delivered.
Reading the opinion, the court never discussed any of these issues. The court discusses Virginia law, property damage and recoverable measures of damages for property damages at length. The economic loss rule is never mentioned, nor is the Sensenbrenner case, nor is the UCC line of cases on direct versus consequential damages. This case may have turned out differently if tried in Virginia.
Virginia�s neighbors might look at the Chinese drywall litigation very differently.
For example, while Maryland generally applies a restrictive view on suing people without contracts, there is an exception where the case involves allegations of a threat of serious personal injury or death. While the personal injury elements of the Chinese drywall situation have been debated, there is an argument that the various corrosive chemicals released pose a risk of personal injuries which might permit such a claim to survive under Maryland law.
Conclusion All players in the construction industry need to understand the laws that apply to their projects, and in particular who can sue whom for what. A failure to understand this basic question can be a recipe for disaster when entering into contracts relating to construction projects.