July 27, 2018
This paper is not intended as legal advice or opinion regarding the specifics of any particular set of events. The facts and issues of a given case significantly affect the legal rights and remedies of the parties involved. Any person seeking a legal determination of their rights or liabilities should consult their personal attorney.
The costs to fix water intrusion and mold problems can be substantial. It is not unusual for disputes and disagreements to arise about who should bear those costs. When several different parties have contributed to causing the problems, the level of disagreement is compounded. If the parties involved are not able to work out a resolution among themselves, then seeking a legally binding decision through litigation or arbitration may be the only course available.
This paper provides an overview of the legal theories under North Carolina law on which claims to recover for water intrusion and mold problems, and defenses to those claims, may be based. It reviews issues that may arise in proving a legal claim, in measuring the amount that may be recovered as legal damages, and in resolving a claim through negotiation or mediation, as well as through legally binding litigation or arbitration.
I. Pursuing Legal Claims for Water Intrusion and Mold Problems in North Carolina.
A building owner who believes that other parties, such as the general contractor, subcontractors, product suppliers, and/or design professionals, should bear all or part of the responsibility to correct water intrusion or mold problems may have a variety of legal grounds for bringing a claim. The particular legal basis for recovering on a claim, however, will depend on the particular facts of a given situation. The evidence required to sustain a claim is different for each legal theory. In pursuing a claim, the claimant has the burden of proof – that is the claimant must convince the jury or arbitrators that the legal and factual grounds for the claim are present and that the remedy sought should be granted based on the greater weight of the evidence. N.C. Pattern Jury Instructions –Civil 101.10 (2012).
In a broad sense, legal claims arise when another person or entity has breached some duty and caused damage or injury to the claimant. Legal claims can arise under common law – the principles and rules embodied in the case law of state and federal courts. They also can arise under statutory law - the legislative enactments of state legislatures or Congress. Common law claims fall into two broad categories. Contract law is the law of agreements or promises. Tort law is the law of wrongful acts, such as negligence and fraud.
A. Common Law Claims.
1. Breach of Contract/Express Warranties.
From a legal perspective, a contract is an exchange or promises for which the law allows a legal remedy in the event of a breach. The essence of any contract is the mutual assent of both parties to the terms of the agreement. Snyder v. Freeman, 300 N.C. 204, 266 S.E.2d 593 (1980). The promises expressed or stated in an enforceable contract give rise to contractual duties and the contracting parties are said to be in “privity of contract.” A breach of contract occurs when a party to the contract unjustifiably fails to do or repudiates what that party had a contractual duty to perform. N.C. Pattern Jury Instructions– Civil 502.00, 502.05 (2012).
Contract law dominates in the construction industry. Construction contracts, even relatively straightforward contracts for building a house, usually contain multiple promises by the parties. Construction contracts for commercial buildings can contain extensive sets of promises and contract duties. Although construction contracts do not have to be in writing to be legally enforceable, a prudent owner or general contractor (or general contractor and subcontractor) will want to memorialize their mutual agreement and promises in written form so there is no question about what was promised. Among other things, construction contracts contain promises about the construction work to be performed. The contractor typically promises to build the project in accordance with the project drawing or specifications furnished by the owner, to use good quality materials free from defects, and to perform the work in keeping with applicable building codes and industry standards. A construction contract also may contain express promises or stated assurances of fact given for the other party to rely on.
For instance, a construction contract may state that a completed project will be free from defects in materials and workmanship for a period of time, such as one year, after substantial completion. Such a promise or assurance is an express warranty. When the contractor breaches these contractual promises to an owner and the breach results in water intrusion or mold problems in a building, the owner may have a claim for breach of contract or breach of express warranty.
2. Breach of Implied Warranties.
Even when express assurances in the form of express warranties are not stated in a construction contract, the law may incorporate or imply that certain unstated promises nevertheless are part of the agreement. The unstated promises are implied warranties. Implied warranties are part of a contract unless they are expressly excluded or disclaimed.
In North Carolina, in every construction contract or subcontract there is an implied warranty that the contractor or subcontractor will perform his work in a proper and workmanlike manner – that is, in an ordinary, skillful manner the way a skilled workman would do it. There is an implied agreement that such skill as is customary will be used. Hartley v. Ballou, 286 N.C. 51, 209 S.E.2d 776 (1974). There also is an implied warranty that the contractor or subcontractor will use good and suitable materials in the work. Langley v. Helms, 12 N.C. App. 620, 184 S.E. 2d 393 (1971).
Finally, if the project is a house or other non-commercial dwelling, there is an implied warranty of habitability which extends not only to the original purchaser and owner, but to subsequent owners as well. Griffin v. Wheeler-Leonard & Co., Inc., 290 N.C. 185, 225 S.E.2d 557 (1976). The implied warranty of habitability provides that a new dwelling will be free from major structural defects and constructed to meet the standard of workmanlike quality then prevailing at the time and place of construction. In North Carolina, the failure to construct a house so as to keep moisture out of it is a structural defect and breach of the implied warranty of habitability. Medlin v. FYCO, 139 N.C.App. 534, 534 S.E.2d 622 (2000).
Contracts for the sale of goods, including construction materials, in North Carolina are governed by the North Carolina Uniform Commercial Code (“UCC”). N.C. Gen. Stat. §25-1-101, et seq. The UCC incorporates many common law contract principles, and it provides two implied warranties in contracts for the sale of goods, although it allows the implied warranties to be expressly disclaimed or excluded. First, the UCC provides a warranty of merchantability, which is implied in a contract for the sale of goods when the seller is a merchant in goods of the kind. To be “merchantable,” the goods must be fit for the ordinary purposes for which they are used, be of even kind and quality among all units, and be adequately packaged and labeled. N.C. Gen. Stat.§25-2-314. Second, the UCC provides an implied warranty of fitness for a particular purpose, which arises when the seller knows the particular purpose for which the goods will be used and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods. N.C. Gen. Stat. §25-2-315.
Another North Carolina statute, the North Carolina Products Liability Act, allows buyers of defectively manufactured, designed, or assembled goods to bring a claim directly against the product manufacturer even when the buyer is not in privity of contract with the manufacturer. N.C. Gen. Stat. §99B-2. For example, a project owner who buys defectively manufactured, leaky windows directly from a building supplier may have a breach of implied warranty claim against the seller (the building supplier) and also against the manufacturer although the owner does not have a contract with the manufacturer.
Negligence is the failure to exercise reasonable care in performing a legal duty owed to another. A legal duty may arise under common law or by statute. For example, a person engaging in any activity has a legal duty to act as an ordinary, prudent, reasonable person and to use the degree of care that such a person would use under the circumstances. If one's failure to use such care causes injury or damage to another's person or property, then he may be liable in negligence for that damage. Dunning v. Forsyth Warehouse Co., 272 N.C. 723, 158 S.E.2d 893 (1968).
Under North Carolina law, a contractual obligation is not in and of itself a legal duty on which a negligence claim may be based and the failure to perform a construction contract in accordance with its terms generally will not give rise to a negligence claim. North Carolina State Ports Authority v. Lloyd A. Fry Roofing Co., 294 N.C. 73, 240 S.E.2d 345 (1978). There are exceptions when the negligent act damages the property of someone other than the party to the contract, such as a neighboring lot or building; when the negligent act damages property that was not the subject of the contract or causes bodily injury; when the negligent act involves a party charged by law with safeguarding the property, such as an innkeeper or common carrier; or when the damage or injury was caused willfully. Thus, a contractor who fails to install flashing in accordance with the project drawings and specifications or in accordance with standard industry practice may be liable under North Carolina law for breach of contract, but not for negligence.
A claim for professional negligence (i.e. malpractice), a particular type of negligence claim, involves the legal duties owed by licensed professionals, such as architects or engineers. In North Carolina, a design professional has a common law duty to exercise the degree of care which a designer of ordinary skill and prudence would exercise under similar circumstances. The claimant has the burden of proving the professional standard of care that should have been observed but was breached. A claimant must show the nature of the defendant's profession, the defendant's duty to conform to a certain standard of conduct or care, and a breach of the duty causing damage or injury to the claimant. Michael v. Huffman Oil Co., 190 N.C. App. 256, 661 S.E.2d 1 (2008). Proving professional negligence claims can be difficult because evidence of the degree or standard of professional care involved often must come from another professional in the field.
To establish a legal claim for fraud in North Carolina, a claimant must show that:
• The defendant made a specific false representation of material past or existing facts;
• The defendant knew the statement or representation was wrong at the time it was made;
• The defendant made the false statement intending for the claimant to rely on it and be deceived; and
• The claimant relied on the false representation and suffered injury as a result.
The key factor in a fraud claim is the defendant’s intent to deceive the claimant. Fraudulent statements can be surprisingly hard to prove - guesses, statements of opinion, or promises to do something in the future are not sufficient grounds for a fraud claim. Ragsdale v. Kennedy, 286 N.C. 130, 209 S.E.2d 494 (1974),
Bringing and proving a fraud claim in connection with a water intrusion or mold problem is difficult. Typically, such problems occur because of construction deficiencies when a contractor or subcontractor breaches contractual promises or because of a negligent design error or because of defectively manufactured building components. The “misrepresentations,” at issue most often turn out to be failed promises to do something in the future rather than material misrepresentations of fact. Nevertheless, fraud may occur when a party misrepresents the existing condition of a building in order to deceive another into buying it.
B. Statutory Theories.
1. Unfair or Deceptive Acts or Practices – N.C. General Stat §75-1.1. In North Carolina, unfair or deceptive act or practices in or affecting commerce are unlawful under N.C. Gen. Stat. §75-1.1. An act or practice is unfair if it is unethical, immoral, unscrupulous, oppressive, or injurious to consumers. An act or practice is deceptive if it has the capacity to deceive and was relied upon by the claimant. Phelps- Dickson Builders, L.L.C. v. Amerimann Partners, 172 N.C.App. 427, 617 S.E.2d 664 (2005). Thus, while a fraudulent act is a deceptive act in violation of the statute, the statute also covers other misrepresentations that may not rise to the level of fraud. However, a breach of contract alone and unaccompanied by any aggravating factors is not an unfair or deceptive act or practice in violation of N.C. Gen. Stat. §75-1.1, even when the breach is intentional. Eastover Ridge, L.L.C. v. Metric Constructors, Inc., 139 N.C.App. 360, 533 S.E.2d 827 (2000). Significantly, a party whose conduct is found to be unfair or deceptive is liable for
treble damages under N.C. Gen. Stat. §75-16 and may be liable for the claimant’s reasonable attorney’s fees under N.C. Gen. Stat. §75-16. Because the stakes are so high,
it is not unusual for claimants pursuing claims for water intrusion or mold contamination
to contend that they are the victims of unfair or deceptive acts in violation of N.C. Gen.
Although often litigated, claims for unfair or deceptive acts or practices seldom have been successful in construction related cases. While it is for a jury to decide whether the acts or practices complained of actually occurred, it is up to the judge to decide whether those acts or practices were unfair or deceptive in violation of the statute. In construction cases, it is not unusual for a judge to conclude that while a defendant may have breached a contract or warranty, the defendant’s actions did not rise to the level of immoral or unethical conduct in violation of N.C. Gen. Stat. §75-1.1.
2. Punitive Damages – N.C. Gen. Stat. §1D-1, et seq.
Punitive damages are intended to punish serious and egregious wrongdoing in order to deter similar wrongdoing in the future. Punitive damages originated under common law, but in 1995 the North Carolina General Assembly codified the legal grounds for punitive damages awards in North Carolina. N.C. Gen. Stat. §1D-1, et seq. To recover punitive damages, a claimant must prove by clear and convincing evidence, which is a more stringent standard of proof than the usual “greater weight of the evidence” standard, that the defendant engaged in fraudulent, malicious, or willful or wanton conduct. Punitive damages, however, are not to be awarded solely for breach of contract. N.C. Gen. Stat. §1D-15. The statute limits the amount that may be awarded as punitive damages. Punitive damages may not exceed three times the amount of compensatory damages or $250,000, whichever is greater. N.C. Gen. Stat §1D-25. To recover punitive damages for willful and wanton negligence, a claimant must meet a high standard. The claimant must prove the defendant intentionally failed to carry out a legal duty imposed for the protection of the claimant’s person or property or that the defendant intentionally acted in conscious or reckless disregard for the rights and safety of others. Because the burden of proving a punitive damages claim is quite high, such claims are not likely to succeed in cases involving water intrusion or mold problems. Nevertheless, in a particularly egregious case, punitive damages claims for water intrusion or mold contamination could be successful.
C. Factual Basis – Causation, Experts, Witnesses.
In pursuing legal claims for water intrusion and mold problems in North Carolina, the claimant has the burden of proving the claim by the greater weight of the evidence. A key part of the legal claim concerns proof of causation. Under any legal theory, the claimant must prove that the breach of a contractual or legal duty caused or contributed to causing the injury or damage at issue. While showing that water intrusion and mold have caused damage to a building is usually straightforward, proving that the presence of mold has caused a personal injury is more difficult. The difficulty arises because a personal injury claimant will need to prove that:
• Mold was present in concentrations or varieties different from those naturally occurring in the surrounding environment;
• The mold was a type harmful to people;
• The claimant was exposed to a higher than normal concentration and/or harmful variety of mold;
• The claimant suffered an illness more likely than not caused by exposure to mold; and
• The presence and/or growth of mold more likely than not was caused by the defendant’s breach of a legal or contractual duty.
Proving these points typically requires the use of scientific testing, data, analysis, and theories beyond the general knowledge and experience of most juror or arbitrators. The legal rules of evidence allow witnesses qualified as experts by their experience, training, education, or knowledge to offer opinion testimony about such technical or specialized matters. N.C. Rules of Evid., Rule 702. Thus, personal injury claimants often must rely on expert witnesses who can present and explain technical, scientific evidence establishing that the claimant’s illness or injury was caused by exposure to mold. The testimony and expert opinions of physicians and toxicologists usually will be required to prove the causal link between a personal injury claimant’s illness and exposure to the presence of a particular concentration or variety of mold. To prove any claim for water intrusion or mold contamination, even property damage claims, expert opinion testimony from construction or design experts may be needed to establish the applicable industry standards or the standard of professional care that a defendant has breached in building or designing a project that has experienced water intrusion and mold problems. Such construction experts also may be called on to prove that a particular construction or design defect was the cause of the problem. To prevail on a legal claim for personal injury or property damage caused by water intrusion or mold, claimants should expect to engage experts who can prove the essential legal element of causation.
As noted above, a claimant has the burden of proving a legal claim. For this reason, gathering and analyzing relevant construction documents concerning water intrusion or mold problems is vital. The construction contract and the particular contractual promises at issue must be established. Photos showing a construction deficiency resulting in water intrusion or mold are invaluable. The design documents for the project are essential. Key correspondence evidencing the time that a water intrusion problem became apparent is important.
Not only are documents important, but the testimony of the people involved about what they did, saw, and heard is vital. Locating and interviewing or deposing witnesses, such as project managers, superintendents, job foremen, design professionals, and owner’s representatives to learn what they recall and will testify about is crucial. As noted above, engaging experts qualified to perform and interpret the results of scientific tests and investigations of the cause and effects of water intrusion and mold problems is part of the claimant’s burden. The time, expense, and inconvenience of marshalling the documents and witnesses to prove any legal claim can be considerable. Claimants seeking a legal resolution of claims for water intrusion and mold problems should not underestimate the challenges.
D. Remedies – Legal Damages; Repairs.
In addition to proving the legal liability of an opposing party for breaching a contractual or legal duty and that the breach has caused damage or injury, a claimant must also prove the amount of the claimant’s legal damages. Legal damages are money awarded as a judgment to remedy a legal wrong. The general principles regarding legal damages, such as the measure of damages, differ depending on whether the legal wrong arises in contract or in tort. A claimant is not required to prove the amount of legal damages with mathematical accuracy, but only with a reasonable degree of certainty.
N.C. Pattern Jury Instructions – Civil 503.79 (2012). Recovering the cost of repair or remediation is the legal remedy in contract for most water intrusion and/or mold contamination problems. The law does not force a general contractor or subcontractor to actually perform, as opposed to pay for, the cost of repair work. Nevertheless, as a compromise, a contractor may be willing to perform repairs on a leaking building as one way to resolve a water intrusion claim. In theory, such an approach can be mutually beneficial – the claimant should receive the value of the repair work while the contractor’s cost to perform that repair work should be less than paying some other contractor to perform it. However, in considering a compromise involving in-kind repair work by a contractor, building owners should consider hiring their own construction manager, architect, or engineer who can help assure that the technical construction issues involved in the repair work are fully considered and that the repairs will truly fix the problem. An architect, engineer, or separate contractor paid by the owner can offer a more objective assessment of the steps needed to fix a water intrusion or mold problem. The owner’s technical advisor also can independently confirm that the remedial work is performed properly.
For breach of contract and breach of warranty claims, the basic rule is that the legal damages recovered should put the claimant in the same position the claimant would have been in if the contract or warranty had been fully performed. Mears v. Nixon Construction Co., 7 N.C. App. 614, 173 S.E.2d 593 (1970). The measure of direct legal damages to compensate an owner for breach of a construction contract is typically the cost to repair defective work or to complete unfinished work. The cost of labor and materials to bring a project into conformance with the requirements of the construction contract and warranties will be the amount of the owner’s legal damages. Leggatra v. Pittman, 268 N.C. 292, 150 S.E.2d 420 (1966). Thus, the costs of repairing leaks caused by defective construction work or a defective design and the costs of remediating mold contamination would be recoverable compensatory damages for breach of contract in North Carolina.
Consequential or indirect damages are losses that do not flow directly from a breach of contract or warranty but are a consequence of it. Such losses may be recoverable if the claimant proves the consequential damages were within the contemplation of the parties at the time they formed the contract – that the loss resulted from the plaintiff's particular circumstances which the defendant knew or should have known about at the time the parties entered into the contract. N.C. Pattern Jury Instructions – Civil 503.73 (2012). Consequential damages on the part of an owner may include amounts for loss of use of a building, for the cost of reasonable remediation efforts in the past, or for lost profits if the project was an income generating property such as a retail store or rental property.
In contrast to damages for breach of contract, the goal of tort damages is to place the claimant in the position the claimant would have been in had the legal wrong not occurred. Damages that were reasonably foreseeable at the time of the wrong are recoverable. In this regard, tort damages are broader than contract damages.
However, in North Carolina, the general principles of tort law do not allow one to sue in negligence to recover purely economic damages. Instead, to recover in negligence, the claimant normally must show a physical injury to their person or to property other than that which was the subject of the contract. An owner, for example, cannot sue a subcontractor in negligence for merely installing the wrong style of window in a house. Nor can the owner sue the manufacturer in negligence merely because the window leaks. This principle is known as the economic loss doctrine.
Personal injury claimants who suffer illness or health problems due to mold contamination can recover for a wide range of losses. The items recoverable as economic damages in tort for personal injury caused by a wrongful act include expenses for medical treatment, care, and lost earnings. Non-economic losses, such as permanent or partial physical disability and compensation for pain and suffering, also are recoverable. N.C. Pattern Jury Instructions – Civil 810.02 (2012). As discussed above, proving the causal link between an illness or poor health on one hand and exposure to mold on the other can be difficult. However, once a causal link is proved, the amount of legal damages recoverable in tort can be significant.
E. Forum for Bringing a Claim – Negotiation, Mediation, Arbitration, and Litigation.
Disputes in the construction industry are an unfortunate reality. Resolving construction disputes through litigation in the court system is a time consuming and expensive process. Construction disputes involving claims for water intrusion and/or mold contamination typically involve multiple parties and are factually and legally complicated. Discovery in a construction lawsuit can take months or years. Trials involving construction disputes can last weeks or months. Recognizing the need for more efficient ways of resolving disputes, the construction industry for many decades has sought innovative and alternative methods of resolving disputes to avoid the expense and inconvenience of litigation.
There are three commonly used approaches to resolving construction disputes outside the courts – direct negotiation, mediation, and arbitration. Direct negotiation and mediation are not binding on the parties – the parties retain control over the outcome and both must agree to the terms of a settlement in order to resolve their dispute. Arbitration and litigation, in contrast, are binding – an outside neutral party receives evidence relevant to the dispute and makes a legally enforceable decision resolving the dispute.
Probably the most commonly used method of dispute resolution in the construction industry is direct negotiation. Often the parties are able to negotiate a resolution by dealing directly with each other. One advantage of negotiating is that the parties involved retain control to resolve the dispute – no outside party such as a jury or arbitration panel imposes a resolution.
Settlement agreements, like construction agreements, are governed by principles of contract law. When a settlement agreement is reached, it is important to memorialize the terms in written form. There is no legal requirement to do so because oral settlement agreements are enforceable. However, putting the terms of a settlement in writing avoids problems of proof and reduces the risk of further disputes involving the terms of the settlement itself. The terms of the settlement of a construction dispute may be memorialized in a change order, in a separate settlement agreement, or in correspondence. If one party fails to perform the settlement agreement, the other party will be entitled to bring a claim for breach of the settlement agreement to obtain a remedy. The circumstances that may lead to the negotiated resolution of a water intrusion or mold contamination problem, the negotiation process, and the negotiating leverage and styles of the parties vary widely from one situation to another. There are few useful “rules of thumb” to follow in negotiating such disputes. However, both parties must want to resolve the problem, some level of direct communication must exist, and each party must have some amount of confidence in the good faith of the opposing side in order for settlement negotiations to lead to a mutually acceptable result. If communication breaks down, then the chances of reaching a negotiated resolution will be minimal.
The source of construction disputes often can be a misunderstanding of facts bearing on the matter in dispute. There may be some level of misunderstanding on the part of all involved. Exchanging information and points of view about the key facts can be a good negotiating technique. A clear and factually well-founded statement of a defective construction or defective design claim makes a good starting point for negotiation. The willingness of the parties to take the time to investigate the circumstances, to share information about key items, and to make reasonable compromises can increase the likelihood of a negotiated resolution. An effort to investigate a claim is not wasted even if the negotiations are unsuccessful because the same effort will be required if the dispute leads to arbitration or litigation. To encourage settlements, the legal rules of evidence do not allow statements or conduct in compromise negotiations to be used to prove liability for a claim. N.C. Rules of Evid. – Rule 408. Negotiating tactics such as bluffing, exaggerating a position, overreaching, or refusing to consider any compromise can undermine negotiations. Engaging in such tactics will raise questions about a party's good faith and will destroy an opponent's confidence in the negotiation process. Even when such tactics succeed, they can lead to the loss of long term business relationships – one can win the battle but lose the war in negotiating the settlement of a particular construction dispute. Parties that remain openminded and pragmatic in negotiating possible solutions to construction disputes have the best chance of finding a “win-win” solution. In summary, negotiating the settlement of a construction dispute is always a possibility available to the parties. It is a commonly used method of dispute resolution in the construction industry. Engaging in settlement talks in good faith, investigating and sharing information relevant to the dispute, and taking time to listen to and consider the views of the opposing side will increase the chances of negotiating a reasonable compromise to a dispute arising from water intrusion or mold contamination.
Mediation, like negotiation, is a non-binding method of dispute resolution. Mediation is a process that brings the disputing parties together with a neutral outsider, the mediator, who works to help the parties find a compromise resolution of their disagreement. The mediator helps the parties consider alternatives and develop options for resolving their dispute, but has no power to impose a decision. The parties themselves retain the power to settle their disagreement. Mediation is useful for resolving many different types of disputes, and is often used to resolve construction disputes. In the construction industry, mediation has become such a popular and accepted method of dispute resolution that it has been incorporated in commonly used construction industry contract forms such as those produced by the American Institute of Architects (AIA). The AIA contract forms provide that mediation is a condition precedent to binding dispute resolution through arbitration or litigation.
Because the AIA contract documents make mediation a condition precedent and because the failure to fulfill a condition precedent may be a legal defense to a claim, any party to an AIA construction contract should take care to seek the mediation of disputes before turning to arbitration or litigation.
The American Arbitration Association (AAA), a leading organization providing dispute resolution services to the construction industry, has expanded its services to include mediation. The AAA has issued a set of short, non-technical rules for mediations of construction disputes. To make these rules applicable, the parties need only include a simple clause in their contract providing that they will seek to resolve disputes by mediation under the Construction Industry Mediation Rules of the American Arbitration Association.
Mediation also has become part of litigating civil actions in court in North Carolina. In the early 1990's, the North Carolina General Assembly recognized the effectiveness of mediation as an economical and efficient method of resolving disputes. Legislation and rules implementing a state-wide system of court-ordered mediated settlement conferences was enacted. Rules Implementing Statewide Mediated Settlement Conferences in Superior Court Civil Actions (1991). Thus, in North Carolina, even water intrusion and mold contamination claims litigated in the state court system will be submitted to mediation in advance of trial. Like the state courts, the federal courts in North Carolina also have adopted local rules providing for the mediation of claims in civil litigation in federal court.
The particular process for conducting a mediation is informal and can vary somewhat. Mediators usually are lawyers or former judges who have received training in mediation techniques. Typically, the mediator begins by gathering representatives of the parties together in a conference room. Representatives of the parties having authority to settle the dispute are required to attend in person under the rules for court-ordered mediation and their failure to do so without good cause will subject them to sanctions. The mediator makes a few opening remarks about the mediation process and gives each side a chance to summarize their positions in the presence of the other side. After the opening session, the mediator will then meet with each of the parties separately outside the presence of the other. In the private meetings, the mediator may question and test the positions of the parties. The mediator may offer a reaction to or evaluation of the substantive points raised by a party. The purpose of the mediator's efforts is to learn whether there is room for compromise. The mediator may shuttle back and forth between the parties for an indefinite period as long as progress toward a settlement is being made or appears likely. Negotiations regarding a settlement are not admissible in any subsequent proceedings.
Not every mediation leads to a settlement. When it becomes apparent to the mediator that there is no possibility of a settlement, the mediator will declare the mediation at an impasse. The parties then can proceed with other forms of binding dispute resolution, such as arbitration or trial. If a settlement agreement is reached, a short settlement memorandum is prepared and signed. A more formal and detailed settlement agreement may be prepared and executed at a later date.
Mediated settlement agreements, like settlement agreements generally, are governed by principles of contract law in North Carolina. If a party fails to perform the settlement agreement reached in a court ordered mediation or if a dispute later arises regarding the terms of the settlement, the aggrieved party is entitled to move for an order enforcing the settlement agreement. Courts are likely to resolve issues in favor of preserving and enforcing the settlement.
Surveys reveal that over half of the matters submitted to mediation are settled. Construction disputes, including water intrusion and mold claims, lend themselves to resolution through mediation. Although construction disputes can be heated, bringing the decision makers of the disputing parties together, requiring them to listen to the opposing party, and allowing them to focus on solving the dispute often leads to a settlement. Like negotiations, mediation provides a means for the parties themselves to explore creative business solutions that may resolve a dispute before an outside decision maker imposes a resolution.
Arbitration has been used as a method of resolving construction disputes for many years and remains a frequent alternative to litigation. Using arbitration to resolve disputes is a matter of contract - the parties involved must have mutually agreed to arbitrate. Construction industry contract forms, such as the AIA contract documents, provide for arbitration rather than requiring litigation as a form of binding dispute resolution. Like litigation, arbitration is binding. One or more arbitrators conduct an arbitration hearing and receive evidence presented by the parties. The arbitrator or arbitration panel then renders a decision in the form of a written arbitration award. The arbitration award, when confirmed by a court, has the same legal effect as a judgment at law.
Arbitration is somewhat quicker than litigation and is less formal in that arbitrators are not bound by the rules of evidence or legal procedure. Arbitrators usually have some background and familiarity with the construction industry, and they may be engineers, architects, or contractors themselves. Thus, decisions in an arbitration are made by those who have some expertise in the industry instead of laypersons on a jury.
However, arbitration is not significantly less costly than litigation in most instances and a complex arbitration can last for months or even years. Both federal law and North Carolina state law provide for the enforcement of agreements to arbitrate disputes. The Federal Arbitration Act (“FAA”), 9 U.S.C. §1, et. seq., applies to agreements to arbitrate disputes arising out of contracts involving “interstate commerce.” The concept of interstate commerce has been given an expansive meaning, and it is difficult to envision a construction project to which the FAA would not apply. On the state level, the North Carolina Revised Uniform Arbitration Act, N.C. Gen. Stat. §1-567.1, et seq., provides the statutory legal framework for enforcing arbitration agreements. Whether a construction dispute arises out of a contract involving interstate commerce or not, applicable legislation will provide for the enforcement of an agreement to arbitrate disputes. The FAA and the Revised Uniform Arbitration Act are substantially similar.
Whether a party may be compelled to arbitrate a dispute is a matter for the courts to decide based on the wording of the arbitration provision in their contract. LSB Financial Services, Inc. v. Harrison, 548 S.E.2d 574 (N.C. App. 2001). Where a valid arbitration agreement exists, the party seeking arbitration is entitled to an order compelling the opposing party to do so. In North Carolina, a court considering a motion to compel arbitration must determine (1) whether the parties have a valid agreement to arbitrate, and (2) whether the subject in dispute is covered by the arbitration agreement. Brevorka v. Wolfe Construction, Inc., 573 S.E.2d 656 (N.C. App. 2002). If the parties have agreed to submit disputes to arbitration under the Construction Industry Arbitration Rules of the American Arbitration Association as the AIA contract documents provide, then they will be required to do so.
In determining whether a dispute or controversy is arbitrable, North Carolina courts are guided by the strong state and federal public policy favoring the resolution of disputes by arbitration. This public policy requires that the courts resolve any doubts concerning the scope of arbitrable issues in favor of arbitration. When the language of an arbitration clause is broad, even claims and disputes involving matters outside the contract, such as claims for fraud, negligent misrepresentation, or punitive damages, will be resolved by arbitration. Rodgers Builders v. McQueen, 76 N.C.App. 16, 331 S.E.2d 726, (1985).
An arbitration award is presumed valid. Judicial review is limited to whether one of the specific statutory grounds for vacating an arbitration award is present. Carteret County v. United Const. of Kinston, 120 N.C.App. 336, 462 S.E.2d 816 (1995). The grounds for vacating an arbitration award are narrow – fraud, corruption, bias, undue means, an absence of rationality, the refusal to hear evidence pertinent and material to the controversy, and noncompliance with the arbitration agreement are grounds to vacate an award under the FAA. Similarly, a court may modify an arbitration award only after finding that one of the exclusive statutory grounds exists, such as an evident material miscalculation of figures or mistake in the description of any person, thing, or property referred to in the award, or where the award is imperfect in matter of form not affecting the merits. Arbitration awards must be rendered in writing and signed by the arbitrator(s). Once an arbitration award is confirmed by a court, it has the same legal effect as a judgment and execution proceedings can be commenced.
Arbitration is a well-developed alternative to litigation as a method of resolving construction disputes, including water intrusion and mold claims. Arbitration has been widely used in the construction industry for many years and is the method of binding dispute resolution provided for in commonly used construction industry contract forms. Once an arbitration award is made, the grounds for a court to vacate it are extremely narrow. In most cases, the confirmation of an arbitration award will end a construction dispute.
Bringing a legal claim to remedy a water intrusion or mold contamination problem is not something to undertake lightly. The cost, expense and inconvenience of litigating or arbitrating such a claim can quickly become greater that the cost to repair the problem itself. Nevertheless, in some situations the severity of the problems and the unwillingness of those who caused it to help rectify the problems may leave a claimant with no other alternative.
II. Defending Legal Claims for Water Intrusion and Mold Problems in North Carolina.
A. Evaluating the Defense of a Claim.
Just as a claimant should take into consideration the strength of the factual and legal grounds for a claim for water intrusion or mold contamination, a party confronting such a claim should undertake a similar analysis. A frank, objective claim evaluation is essential to forming a plan for defending and resolving it. At an early stage, information about the facts may be incomplete. There may be uncertainty about the cause and source of a leak. Neither the claimant nor defendant may know the extent of a water intrusion or mold problem. No one may have an idea of what repairs or remediation work is needed or what responsibility they have for the situation.
As a first step, a party facing a water intrusion or mold claim should learn as much as possible about the factual background. The initial investigation and evaluation typically will involve interviewing employees who worked on constructing or designing the portion of a project in question. Relevant project documents such as drawings, specifications, site visit reports and photos, and key correspondence should be collected and checked. A site visit to view the problem condition might be pursued. Whether any warranties cover the problem and whether additional parties such as suppliers, subcontractors, and insurers should be notified of the situation can be assessed. If the initial evaluation reveals that a construction or design deficiency is the cause of the leak, the responsible party should take quick steps to correct the condition. Not only might there be a contractual or warranty obligation to fix the problem, but prompt remedial action will reduce the extent of the damage. Alternatively, an initial evaluation of a water intrusion or mold claim may reveal that determining the cause of the problem will require an outside expert or that there are affirmative legal defenses against the claim. The earlier a party defending a water intrusion or mold claim can complete an initial evaluation of it, the earlier a plan for either addressing the problem or contesting it can be developed.
B. Affirmative Defenses.
While a claimant has the burden of proving a claim by the greater weight of the evidence, in some situations a defendant may have grounds for an affirmative legal defense that will defeat it. Additionally, if the water intrusion or mold claim arises in connection with a contract, there may be contractual limitations of remedy affecting the amount or type of money that may be recovered. A defending party that raises an affirmative defense has the burden of proving the defense by the greater weight of the evidence.
1. Statutes of Limitations and Repose
The time within which a water intrusion or mold problem becomes apparent can give rise to an affirmative defense. In North Carolina, claims for property damage based on a breach of contract, breach of warranty, or negligence have a three year statute of limitations, which begins to run when the damage is or reasonably should have been discovered. N.C. Gen. Stat. §1-52. The claimant must bring an action (i.e. file a lawsuit) within the prescribed time period or the claim will be time barred. If the claimant is aware of the leaks causing damage to a building, the three-year period begins to run even if the claimant is not aware of the extent of the damage. Pembee Mfg. Corp. v. Cape Fear Const. Co., 313 N.C. 488, 329 S.E.2d 350 (1985).
Latent defects, such as "hidden" water intrusion or mold contamination due to construction or design deficiencies which do not become apparent for years, can raise potentially thorny issues. To address the risk of latent defects, North Carolina has adopted a six year statute of repose. N.C. Gen. Stat. §1-50. The statute of repose provides that no action for defective construction or design of a building may be brought after six years from substantial completion of the project or the last act giving rise to the claim, whichever is later. Substantial completion is the date that a Certificate of Occupancy is issued for a building. Nolan v. Paramount Homes, 135 N.C.App. 73, 518 S.E.2d 789 (1999). In a recent case, the North Carolina Court of Appeals held that the statute of repose is not extended by a long term or lifetime warranty. Christie v. Hartley Construction, Inc., ___N.C.App. ___, 745 S.E.2d 60 (2013). Thus, even if there is a 20 year warranty on a roof, a claim for breach of the warranty must be brought within the six year statute of repose.
Claims in connection with the sale of goods under the North Carolina UCC have a four year statute of limitations. N.C. Gen. Stat. §25-2-275. However, when the claim is for property damage or personal injury, as is typically the case for water intrusion or mold contamination, the shorter three year limitations period applies. Hanover Ins. Co. v. Amana Refrigeration, Inc., 106 N.C.App. 79, 415 S.E.2d 99 (1992).
In any given case where substantial time has passed from the discovery of a building leak, a careful analysis of the facts should be made. It will be important to determine whether the deficiency was reasonably apparent and when the claimant discovered that problem. If too long a time has passed, a statute of limitations or statute of repose defense may be available.
A waiver is the intentional relinquishment or abandonment of a known right. Clement v. Clement, 230 N.C. 636, 55 S.E.2d 459 (1949). Waivers may be implied by a party's conduct, but the more sound basis is a written waiver. If an owner has accepted repairs of a building leak and signed a written waiver of any future claims arising from it, then the waiver will be an affirmative defense against future claims.
Waivers of certain categories of damages may be part of a construction contract. For instance, recent versions of the AIA A-201 general conditions of the contract for construction and the AIA owner-architect agreement contain mutual waivers of consequential damages by both contracting parties. When consequential damages make up a significant portion of a water intrusion or mold claim, the existence of a waiver of consequential damages can dramatically trim the amount of recoverable damages.
3. Compliance with Design Documents.
Under North Carolina law, when an owner engages a contractor to build a project in accordance with plans furnished by the owner or the owner's architect, the contractor is not liable for damages arising from required compliance with those plans. Burke Co. Bd. of Ed. v. Juno Const. Co., 50 N.C.App. 238, 273 S.E.2d 504 (1981). Thus if the claimant is a project owner who furnished the design documents to a contractor, the contractor will not be liable for any leaks if the contractor complied with the project plans.
However, the contractor's failure to fully comply with the plans, even if the design was defective, may subject the contractor to liability. Thus, a contractor or subcontractor may have a defense to a claim for water intrusion or mold damage if the contractor can show he complied with the owner's plans, but may incur liability by departing from the plans and attempting to fix a leak without the architect's involvement.
4. Contributory Negligence.
The affirmative defense of contributory negligence may be available when the claimant's failure to use reasonable care has contributed to causing the damage in question. North Carolina law, in contrast to the law of most other states, bars a claimant from recovering at all if the claimant's negligence has contributed in even the slightest amount to causing the claimant's damage or injury. Newton v. Hanover Co. Bd. of Education, 342 N.C. 554, ___ S.E.2d ___ (1996).
A party faced with a claim for water intrusion or mold contamination based on negligence should carefully consider whether the claimant's negligence contributed to causing the problem. The claimant may have failed to use reasonable care in maintaining a building. The claimant may have carelessly altered something in the building. The claimant may have used the building in a way that was not reasonably intended or expected. In such circumstances, the affirmative defense of contributory negligence may be available.
5. Contractual Limitations of Remedy.
Contract law allows the contracting parties broad latitude to fashion their own remedies and to allocate risks between themselves. Thus, by their contract, the parties may agree to waive or exclude certain categories of damages such as consequential damages. They also are free to agree upon limits to the amount of legal damages that may be recovered. For instance, a contractual limitation of damages clause which limits the defendant’s liability for any and all injuries, damages, or losses to $50,000 is legally enforceable even when a jury would have awarded $575,000 in damages. Blaylock Grading Co. v. Smith, 189 N.C.App. 508, 658 S.E.2d 680 (2008). It is not unusual to find clauses in owner-designer agreements that limit the designer’s liability to the amount of the designer’s fee or the amount of the designer’s malpractice insurance coverage. Any party faced with a contract claim for water intrusion or mold contamination should carefully review the contract for such limitations ofremedy clauses.
6. Product Liability Defenses.
Manufacturers of building products, such as windows, have several statutory defenses to claims against them under the North Carolina Products Liability Act. N.C. Gen. Stat. §99B-1, et seq. A manufacturer is not liable where a cause of personal injury or property damage was an unauthorized alteration or modification of the manufacturer’s product or a failure to observe routine care and maintenance of the product. N.C. Gen. Stat. §99B-3. A claimant’s failure to exercise reasonable care under the circumstances in using the product also is a defense. N.C. Gen. Stat. §99B-4. In a sense, these product liability defenses are for acts of contributory negligence, which would bar a common law negligence claim against the manufacturer.
7. Indemnity and Contribution.
Because the construction process involves many different parties, the legal liability for a claim for water intrusion or mold contamination also may involve many different parties. A contractor or designer facing a water intrusion or mold claim should consider whether there are other parties who should bear some or all of the responsibility for it. Under North Carolina law, a defendant who believes some other party is responsible for the claim may seek indemnification, which essentially is reimbursement, from the responsible party even if the claimant has not initially brought a claim against the other party. Similarly, when the negligence of others, along with the defendant’s own negligence, has contributed to causing a water intrusion or mold problem, the defending party can seek contribution from others for their share of the damage. In general, shifting legal responsibility for a claim to another party is straightforward when there is an express contractual basis to do so, but otherwise it can be difficult.
Indemnity. In North Carolina, indemnification from a contractor or other entity involved on a construction project may be available when: 1) a written contract for indemnification exists between the parties; 2) a contract of indemnity implied in fact exists; or 3) equitable concepts arising from the tort theory of indemnity exist, which are also called indemnity “implied-in-law.” Kaleel Builders, Inc. v. Ashby, 161 N.C. App. 34, 587 S.E.2d 470 (2003).
In most cases, it is clear whether an express contract for indemnification exists. Most construction contracts and subcontracts contain a provision requiring the contractor or subcontractor to indemnify the other contracting party against third party claims arising out of the construction work on a project. If a contractual obligation to indemnify exists, then the party seeking indemnification may recover. If no contractual indemnity provision exists, the situation is more difficult, because the party seeking indemnification will need to show that a contract of indemnity implied in fact or one implied in law exists.
A contract of indemnity implied in fact stems from the existence of a binding contract between two parties that necessarily implies the right of indemnity. Thus, absent a contractual relationship of some sort between the party seeking indemnity and the party from whom indemnity is sought, no implied in fact obligation to indemnify will exist. Additionally, a right of indemnity is implied only in master-servant (employer-employee) or principal-agent relationships. In the typical construction context, a contractor will not have a principal-agent relationship with subcontractors or suppliers and no implied in fact right to indemnity from them will exist.
Indemnity implied in law is an equitable right. It exists when one defendant is passively negligent but is exposed to liability because of another’s active negligence, or when one party is derivatively liable for the negligence of another. Both situations require the underlying third party claim to be based in negligence as opposed to contract. Thus, under North Carolina law, a right of indemnity from another party often will be available when a written contract provides for it, but seldom if not.
Contribution. The right to contribution in North Carolina is a statutory right that exists between joint tortfeasors – all those whose negligence has contributed to causing the damage or injury complained of. N.C. Gen. Stat. §1B-1. The claimant’s total damage is pro rated among the defendants. For example, if four defendants are responsible for a negligence claim, each will be liable for 25% of the claimant’s damages.
Tort claims for construction defects, as opposed to breach of contract or warranty claims, generally are not legally viable in North Carolina. While a contractor, subcontractor, or supplier may be liable in contract for breaching a contractual or warranty obligation, that party will not be liable in tort and cannot be a joint tortfeasor. Thus, there generally will be no statutory right to contribution. Kaleel Builders, Inc. v. Ashby, 161 N.C. App. 34, 587 S.E.2d 470 (2003).
C. Liability Insurance – Insurance Coverage Issues.
An important question with regard to any water intrusion or mold contamination claim is whether the damage is covered by insurance. Building owners typically purchase "first party" property insurance directly from an insurer. First party insurance covers losses suffered by an insured. Contractors, subcontractors, suppliers, and design professionals also purchase "third party" liability insurance. Third party liability insurance covers personal injury or property damage to third parties caused by the insured's negligence. All the parties dealing with a water intrusion or mold problem may submit claims to their insurance companies. Given the high costs often associated with such claims, insurance companies have a strong incentive to avoid covering them or to deny coverage for them.
1. First Party Insurance.
First party insurance is coverage purchased to protect the insured from the insured's own losses. Building owners buy (or their mortgage lenders require them to buy) first party policies to protect their property against losses due to storms, fire, and other similar casualties. Such first party insurance policies typically provide coverage to structures where there is a "direct physical loss" to the covered property. Starting with this basic statement of broad coverage, the policies then proceed to state various exclusions. The exclusions remove certain types of losses from coverage under the insurance policy. A common insurance policy exclusion for mold contamination states that loss to the covered property caused by corrosion, mold, wet or dry rot will not be covered. Thus, damages caused solely by mold typically are excluded from property insurance coverage.
However, the law provides that insurance policies should be interpreted to provide coverage if the language of the policy can be reasonably construed to do so. Under this principle, the courts will look for coverage under a policy even when an exclusion is present — i.e., they will consider whether the mold caused the damage or whether some covered peril such as wind driven rain, caused the mold. If a covered peril caused the mold, there may be insurance coverage for the loss. If, however, the mold developed slowly over time as a result of some uncovered peril, such as ordinary wear and tear or defective construction, insurance coverage probably will not be available for mold remediation or repairs to the structure. Consequently, to determine whether there is first party insurance coverage for a mold problem, one must identify the cause of the mold damage and then review the insurance policy to see whether any exclusions from coverage apply.
2. Third-Party Liability Insurance.
Third party insurance provides coverage to the insured for any liability incurred to others – the third parties. Contractors, designers and even commercial building owners purchase third-party policies known as Commercial General Liability ("CGL") policies. CGL liability policies typically provide coverage for all sums the insured becomes legally obligated to pay as damages because of bodily injury or property damage.
Like first party insurance policies, CGL policies contain coverage exclusions which reduce the scope of this broad statement of coverage. Initially, the most pertinent exclusion concerning mold claims was the pollution exclusion clause. Third party insurance usually excluded coverage for bodily injury or property damage arising out of the discharge, dispersal, release or escape of toxic chemicals, liquids or gases, waste materials or "other irritants, contaminants or pollutants". However, the question whether mold was part of this exclusion resulted in frequent controversy. Consequently, liability insurers began to include a mold clause in the exclusions of their CGL liability policies.
These clauses typically exclude coverage for bodily injury or property damage resulting from the inhalation of, ingestion of, contact with, exposure to, existence of, or presence of, any “fungi” or bacteria on or within a building or structure, including its contents. Another typical policy exclusion excludes coverage for liability in connection with the insured's work. The "your work" exclusion often is relied upon to exclude coverage under a contractor or subcontractor's CGL policy for damage resulting from defective construction. Because of their exclusions, CGL liability policies often do not cover claims by others for water intrusion or mold contamination.
3. Errors and Omissions Insurance
Errors and omissions insurance protects design professionals such as architects and engineers from liability risks due to negligent acts, errors or omissions while performing their professional services. This type of insurance also is referred to as malpractice or professional liability insurance. Errors and omissions policies are "claims made" insurance - a claim has to be reported during the term of the policy in order to be covered. In contrast, CGL policies are "occurrence" policies - an event is generally covered as long as it occurred when the policy was in force, even if a claim doesn't occur until after the policy expires. However, errors and omissions insurance, like third party liability insurance, typically excludes coverage for claims arising out of pollution, mold/fungus, bacteria and other microorganisms.
Although the insurance industry uses exclusions to avoid covering personal injury or property damage claims caused by moisture intrusion or mold contamination, for an additional premium the insurer may agree to provide some amount of coverage for such claims. In effect, the insurer may agree to undo a "mold exclusion" to some extent by offering a policy endorsement for such coverage in a limited amount.
The important question whether water intrusion or mold damage is covered by insurance should be considered as soon as a party becomes aware of a claim. Notifying the insurer of the situation is prudent to make sure they have notice of a potentially covered loss. Analyzing insurance policy exclusions and endorsements to see whether mold damage or a mold claim is covered can be complicated, so involving an insurance agent, risk management professional, or attorney may be helpful.
D. Informal Solutions.
In some situations where a leak is clearly the result of a construction or design deficiency, promptly negotiating with the claimant to fix a problem condition may be the best approach. If the money otherwise directed to defending a lawsuit or arbitration is redirected toward fixing a water intrusion or mold problem, then performing repair work for the claimant at a reduced cost or no cost can be a cost effective way of resolving a claim even if a party doubts it has any legal responsibility for the problem. The scope of repair work will need to be negotiated carefully so that there is little or no uncertainty about what is to be done. It may be possible to join other parties, such as suppliers or subcontractors in the repair effort.
If negotiating the resolution of a water intrusion or mold contamination claim does not seem practical, proposing a mediated settlement discussion may make sense. Mediation can be undertaken voluntarily at any stage of a claim. An early mediation can help everyone involved explore all the alternatives available for dealing with a claim before they become heavily invested in a particular course of action. Mediations that do not result in a full resolution of a claim may nevertheless yield valuable insight to all involved about what the key points of disagreement are.
When a claim for water intrusion or mold contamination is settled through negotiation or mediation, the party defending the claim should insist upon the preparation of a written settlement agreement. A written and signed settlement agreement avoids complications that otherwise might arise at a later time regarding the scope and terms of the settlement.
Whether a party is pursuing or defending a legal claim in North Carolina for water intrusion or mold, the legal and factual complexities are significant. They should be considered from the outset. A successful resolution of the problem in the legal arena will depend on how effectively a party is able to effectively marshal the law and the facts to its advantage.