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In Abraham v. T. Henry Constr., Inc., 230 Ore. App. 564
(2009), the Oregon Court of Appeals addressed when a contractor
could be liable to an owner for negligence under Oregon
law. In Abraham, the owners of a residential house
brought a lawsuit against several contractors and subcontractors
for water damage allegedly caused by construction
defects. The owners alleged both breach of contract and
negligence. The defendant contractors sought summary
judgment on both counts, arguing that the breach of contract
action was barred by the statute of limitations and that the
negligence action was barred by
the economic loss rule. The trial
court granted summary judgment
in favor of the defendants on both
counts. The Court of Appeals upheld
the trial court’s decision dismissing
the breach of contract
count, but reversed the trial court’s
decision regarding the negligence
count.
The statute of limitations for
breach of contract actions is six
years in Oregon. Additionally, Oregon’s
statute of limitations runs
from the date that a construction
defect occurs, not the date that a
party discovers the defect. The
plaintiffs in Abraham brought suit
eight years after the project was substantially complete. The
plaintiffs tried to argue that the 10-year statute of repose
governed, not the statute of limitations. However, the Court
of Appeals correctly noted that a statute of repose is separate
from a statute of limitations, and operates as a fixed limit on
the time-frame for bringing suit in the event, for example, a
statute of limitations is tolled. Accordingly, the court concluded
that the plaintiff failed to file its breach of contract
claim within the six-year statute of limitations.
The Abraham court also created a new exception to Oregon’s
economic loss rule. All states have some variation of
the economic loss rule which bars negligence or other tort
suits by one party to a contract against the other party for
purely economic losses. The principle behind the economic
loss rule is that parties to a contract should be governed by
the duties and damages contemplated by their contract, not
tort law. As a result, parties to a contract are generally prevented
from suing each other for negligence. There are,
however, exceptions to the economic loss rule, including,
for example, negligence that causes personal injury, negligence
that results in property damage, or when a party
breaches a duty imposed independent of the contract. The
issue before the Court of Appeals in Abraham was whether
the defendants violated a duty that was imposed independent
of the contract.
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As noted by the Court of Appeals, to have a tort claim
against a contracting party, a “party must allege the breach
of a standard of care that is independent of the contract and without reference to its specific terms.” Duties independent
of a contract usually arise from a “special relationship,”
such as that of a lawyer, doctor, architect or engineer and
their client. The plaintiffs argued that a “special relationship”
existed between themselves and the defendants because
the plaintiffs had “trusted” the defendants to build a
home free from defects and had “relied” upon the defendants’
assurances that the home would be free of defects.
The Court of Appeals rejected that argument, noting that the
owners had not demonstrated that they “had delegated authority
[to defendants] to make important
decisions with the understanding
that the authority [was] to be exercised
on behalf of and for the benefit of
plaintiffs.” As such, the relationship
between the owners and contractors
was simply an arms-length contractual
relationship, not a “special relationship.”
The Court of Appeals then assessed the
plaintiff’s argument that there does not
have to be a “special relationship” in
order for a contracting party to be liable
in tort. As the court noted, a statutory
requirement -- such as a building
code -- can create a duty independent
of a contract and form the basis for tort
liability. As part of their negligence
claim, the plaintiffs had alleged that the defendants’ violation
of the Oregon Building Code caused damage to their
property. Therefore, the Court of Appeals held that the negligence
claim was not barred by the economic loss rule because
of the independent duty imposed on the defendants
under the Oregon Building Code.
Abraham is an important case, as Oregon contractors are
much more susceptible to tort actions and the longer statute
of limitations associated with tort claims. As many construction
defect cases include claims of building code violations,
Abraham exposes contractors to potential tort liability,
above and beyond the terms of the construction contract.
Until the Oregon Supreme Court reverses or limits
Abraham, contractors in Oregon should be aware of the
Abraham exception to the economic loss rule.
continued from page 4
an improvement to real property. Second, the engineering
and construction work resulted in substantially enhancing
the value of the property as the alterations both increased
productivity of the mill and enhanced the quality of the paper
produced.
The court concluded that the redesign and rebuild amounted
to more than just a replacement of fungible parts and, accordingly,
that the Ohio statute of repose barred the
widow’s untimely claim against the contractor and engineering
firm.
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