Out of Bounds: The Dallas Cowboys Practice Facility Collapse and the - - PDF document

Out of Bounds: The Dallas Cowboys Practice Facility Collapse and the Implied Covenant to Build to Code

Presented to:

25th Annual Construction Law Conference San Antonio, Texas

Presented by:

Mason P. Hester Coats | Rose Chase Center Oak Park, Suite 800 1020 NE Loop 410 San Antonio, TX 78209

TABLE OF CONTENTS Introduction..........................................................................................................................1 I. The Collapse: how the facility fell and who was involved......................................1 II. The Covenant: Tips v. Hartland and related case law ............................................4 A. Tips v. Hartland ...........................................................................................4 i. Background: facts, holding, key dicta..............................................4 ii. Cause of action created....................................................................7 iii. Evidence of an agreement voiding the implied covenant................8 B. Other opinions related to Tips......................................................................9 III. The Consequences: issues left open by Tips.........................................................11 A. Will any code violation do?.......................................................................11 B. Does Tips only apply to design-build contractors?....................................14 C. Is privity required to assert a cause of action for code violations?............16 D. Does your contract comply? ......................................................................20 E. Does the Tips covenant apply to subcontractors?......................................24 F. With which “code” must the contractor comply?......................................26

1 Introduction1 On May 2, 2009, the massive Dallas Cowboys practice facility collapsed. People were permanently injured. Property was decimated. And the devastation could have been worse. Storm winds of only approximately 60 miles per hour brought the structure down. Local building codes required the facility to withstand winds of 90 miles per hour minimum. A key issue arose during the subsequent litigation over the collapse: did the builder have an implied covenant to ensure the facility complied with local code? Surprisingly, there is only one Texas appellate opinion substantively addressing the issue: the 1998 San Antonio Court of Appeals Tips v. Hartland opinion. Tips answered many questions, but left others unanswered. I will attempt to analyze both.2 In Section I., I will briefly provide as many details as possible regarding what caused the collapse and how the implied covenant issue arose. If the reader prefers, it may skip this first section and jump to the sections analyzing substantive legal issues: Section II. will discuss and analyze Tips and related cases; Section III. will address some key questions left unanswered by the opinion. I. The Collapse: how the facility fell and who was involved The Cowboys practice facility was like several other football practice facilities you have probably seen: these facilities look like a massive cloth bubble covering an entire football field.3 More specifically, the Cowboys facility was comprised of a steel frame, with the roof in a semi- triangular (“gable roof”) shape at the top. The frame was roughly 200 by 400 feet horizontally and almost 90 feet high at the ridge, that is, approximately nine stories high at its peak. That steel frame was then covered by a tensioned fabric. The facility was designed and constructed in 2003, and in 2008 it was upgraded by reinforcing some steel members, adding purlins,4 and installing a new roof covering. It was located in Irving, Texas, just west of Dallas. Before and after pictures of the facility are provided below:

1

Thank you to Bill Short and Frank Branson for involving me in the litigation discussed herein and to Mr. Short for his significant contributions to this paper, as well as law student Ashley Lucas for her help preparing the power point presentation.

2

I have focused on six issues/ questions unanswered, though there are no doubt additional questions/ issues that others can think of.

3

Some of the facts of the Dallas Cowboys case should not be discussed in this paper, due to the settlement between the parties. But the key facts relevant to the implied covenant are covered here. An excellent, detailed discussion of the circumstances which may have led to the collapse can also be found in the final report by the Commerce Department’s National Institute of Standards and Technology (“NIST”). I have relied on that report for some of the factual discussion contained herein. John L. Gross et. al., Final Report

• n the Collapse of the Dallas Cowboys Indoor Practice Facility, May 2, 2009 (Jan. 2010),

http://www.bfrl.nist.gov/investigations/pubs/NISTIR7661_January%202010.pdf (hereinafter NIST Report).

4

That is, horizontal structural members in the roof that support loads from the roof deck.

2

An interior view of practice facility prior to the 2009 collapse (above) and an exterior view of the facility shortly after the collapse (below)

The structure was governed by the 2000 International Building Code (the “Code”), which had been adopted under section 8.5 of the Irving City Code. The Code required a structure like the practice facility to be able to withstand winds of 90 miles per hour. Unfortunately winds of 55 to 65 miles per hour sufficed to raze it. The existence and roles of certain entities in the collapse were murky and convoluted. A detailed description of all entities and their roles need not be elaborated here. For our purposes, it will suffice to say that the property records listed the owner of the practice facility as Cowboys Center, Ltd. (“Cowboys Center”). However, the Certificate of Occupancy and the building permit listed Blue Star L.P. and/or Blue Star Land (“Blue Star”) as the owner. Blue Star and Cowboys Center also had an unclear oral contract between them. Adding to the confusion, though, was the fact that Blue Star was listed as the “general contractor” on several subcontracts for the project. Among these was a written “subcontract” with Summit Structures (“Summit”), for Summit to design and build the practice facility. But, finally, there also existed an oral

3

Manhattan Construction Group “GC” (per building permit); construction manager/ advisor per depo testimony (oral contract)

contract between Cowboys Center and Manhattan Construction Group (“Manhattan”). Many readers will probably recognize Manhattan as the same entity that constructed Cowboys Stadium, completed in May 2009. Deposition testimony in the practice facility litigation revealed that Manhattan had an oral contract with Cowboys Center for Manhattan to serve as something akin to a construction manager and advisor on the practice facility project. The building permit for the project also listed Manhattan as the “general contractor.” Confused yet? Here’s a diagram: One of the issues that arose in the litigation was Manhattan’s duty, if any, to ensure the Cowboys facility complied with local code. The waters were muddied by the fact that there was no written contract between Manhattan and Cowboys Center. The question then became: did Manhattan have an implied duty in its oral contract to ensure code compliance? And what role did code compliance play generally on the project?

Blue Star L.P./ Blue Star Land Listed as “GC” on subcontracts, but as “Owner” on Cert. of Occup. & building permit (oral contract) Summit Structures Written “subcontract” w/ Blue Star to design & build structure Cowboys Center, Ltd Owner (per property records)

4 II. The Covenant: Tips v. Hartland and related case law

• A. Tips v. Hartland

i. Background: facts, holding, key dicta In Tips v. Hartland Developers, Inc., the owner, Tips, and the prime contractor, Hartland, executed a contract for Hartland to construct an airplane hangar.5 The construction of the airplane hangar also included installation of a mezzanine for offices and ramp access to the hangar. Under the contract, “Hartland was to prepare the drawings and plans and specifications for the hangar and to secure all permits for its completion.”6 At first glance, this assignment of design responsibility to the builder would appear to be a key fact in the court’s opinion. But we will see in Section III.B. that this fact may be of lesser significance. During construction, a Tips representative instructed Hartland to cease work – prior to completion of the mezzanine and ramp – because Tips could no longer make payments.7 Tips could not obtain a certificate of occupancy from the city because the building failed to comply with fire code requirements.8 Unfortunately, the court of appeals did not state specifically what these fire code violations were. Because of Tips’s cease work directive, Hartland eventually sued Tips for breach of contract, unjust enrichment, and fraud. Tips counterclaimed for breach of contract and DTPA violations.9 The trial court awarded Hartland the amount owing on the contract, less the cost of completing the office mezzanine, plus attorney’s fees, and interest. It allowed Tips an offset of $65,000 for Hartland’s failure to provide ramp access to the hangar.10 The trial court ruled that the items needed to bring the hangar in compliance with the city fire code were not contemplated by the parties in their contract.11

5

961 S.W.2d 618, 620 (Tex. App.—San Antonio 1998, no pet.). This was a conveniently parallel fact for the Cowboys litigation because an airplane hangar is structurally much like the Cowboys facility. In fact, the NIST Report made this same comparison. NIST Report § 7.1.

6

Tips, 961 S.W.2d at 620.

7

• Id. at 623.

8

• Id. at 620.

9

Id.

10

Id.

11

• Id. at 620-21.

5 Tips appealed, raising three points of error related to the implied duty to build to code, arguing: 1) the trial court failed to consider that implied covenants in a contract require the builder to deliver a building that complies with relevant building codes and regulations; 2) the evidence was legally and factually insufficient to support a finding that items necessary to bring the structure into compliance with the fire code were not within the scope of the contract; and 3) Hartland had a duty to deliver a structure usable for its intended purposes.12 The Fourth Court of Appeals agreed with Tips that an implied covenant to comply with code exists. But the court also held that the implied covenant may be modified by contract and, further, that the parties made such modification: He [Tips] asks this court to hold that all contractors, when entering into building contracts, impliedly agree to comply with relevant municipal and county codes so that the building is suitable for its intended purpose. … We find that such a covenant is implied in construction contracts, but we agree with Hartland that these parties modified the covenant by agreement.13 Thus, the court of appeals agreed with Tips on his first point of error: there generally exists an implied covenant from the builder to build to code. But the court disagreed with Tips on points two and three: there was sufficient evidence that the parties modified the implied duty, so that items necessary to bring the structure into compliance with the fire code were not within the scope of Hartland’s contract (point two); therefore Hartland had no duty to deliver a structure fit for its intended purpose (point three): In reaching our decision on this point, we dispose of Tips's second and third points of error. There is sufficient evidence in the record to support the trial court's findings on the scope of the agreement. We agree that Hartland had a general duty to deliver a structure fit for its intended purpose, including compliance with code requirements. But we also find that the parties made their own arrangements that modified the general duty.”14

12

• Id. at 621.

13

• Id. (emphasis added).

14

• Id. at 623 (emphasis added).

6 In reaching its holding, the court of appeals emphasized the superior knowledge of a contractor when compared to an owner. It cited the Texas Supreme Court Gupta v. Ritter Homes

• pinion:15

In Gupta … the supreme court stated that builders carry the burden of delivering structures in a good and workmanlike manner because (1) they should be in the business of constructing buildings free of latent defects; (2) buyers are not in a position to discern defects; (3) buyers cannot normally rely

• n their own judgment in such matters; (4) buyers rely on builders to construct

in a good and workmanlike manner; and (5) the builder is the only one who knows the manner in which the building was built.16 The Tips court bracketed the discussion between the owner and builder, with no reference to the responsibility an architect might play, particularly on non-design-build projects: “existing codes require newly constructed buildings to meet certain standards; however, the codes do not dictate whether the responsibility for ensuring compliance rests on the building owner or the building contractor.” The court concluded “the burden should fall on the builder.”17 It stated in blunt dicta: “[c]ontractors, not owners, are in the best position to know about and comply with relevant building codes”18 Similarly, the court cited court opinions from other states relying on the “unique” position of the contractor in finding such an implied covenant: “[s]everal other jurisdictions have found such implied covenants in construction contracts. The rationale for these holdings is plain: a builder is uniquely situated to know or discover compliance requirements.”19

15

Gupta v. Ritter Homes, Inc., 646 S.W.2d 168 (Tex. 1983). Gupta held that an implied warranty from the builder can transfer to subsequent homeowners but note that Gupta was subsequently overruled at least as to the transfer of DTPA warranties by PPG Indus., Inc. v. JMB/Houston Ctrs. Partners Ltd. P’ship. 146 S.W.3d 79, 89 (Tex. 2004).

16

Tips, 961 S.W.2d at 622 (citing Gupta, 646 S.W.2d at 169).

17

Tips, 961 S.W.2d at 621.

18

Tips, 961 S.W.2d at 622.

19

• Id. (citing, inter alia, Denice v. Spotswood I. Quinby, Inc., 248 Md. 428, 237 A.2d 4, 9 (1968)). This dicta

in Tips is eerily similar to the dicta from the seminal Texas Supreme Court opinion, Lonergan v. San Antonio Loan & Trust Co., regarding the builder’s superior knowledge, compared to the owner, as to the sufficiency of plans and specifications. 104 S.W. 1061, 1065 (Tex. 1907) (“There is no more reason why the loan and trust company [owner] should be held responsible for the alleged defects in the specifications that it did not discover for want of skill and knowledge of the business of an architect, than there is for holding Thos. Lonergan & Co. [contractor] to be bound by their acceptance of the defective plans which they understood as well as the trust company did, and in all probability much better.”). Though some Texas courts of appeal have declined to follow Lonergan, the San Antonio court of appeals still follows it. Alamo Cmty. Coll. Dist. v. Browning Constr. Co., 131 S.W.3d 146, 155 ( Tex. App.— San Antonio 2004,

• pet. dism'd by agr.).

7 In addition to the unique position of the builder, the court of appeals also looked at other tort duties imposed upon contracts by Texas courts: “As one court noted, ‘[i]mplicit in every contract is a common-law duty to perform the terms of the contract with care, skill, and reasonable experience.’ Texas courts have also recognized that builders have a duty to deliver buildings that are habitable.”20 Surprisingly, in reaching its opinion, the court did not discuss related Texas opinions holding that parties are deemed to have understood the laws in effect at the time of executing a contract.21 ii. Cause of action created Armed with this new implied covenant, what cause of action did a plaintiff now have when building codes were violated? The court of appeals held that the cause of action available was for breach of contract: “We hold that a cause of action is available to plaintiffs for breach of contract where a contractor has failed to comply with building codes relevant to the intended use

• f the structure.”22 On this point, the court acknowledged that Texas courts imply covenants
• sparingly. But it counterbalanced this policy with the notion that “buyers, when seeking to have

buildings constructed, intend that the building will meet the relevant standards that make the building usable.”23 But the court of appeals was not providing a blanket cause of action. The court again added the qualification that the covenant could be modified by contract: “[a]n implied covenant to comply will be presumed; however, this presumption may be countered with evidence that the parties agreed differently. A breach of the covenant is a breach of contract.”24 The ramifications of this cause of action are discussed in more detail in Section III.C. below.

20

Tips, 961 S.W.2d at 621 (quoting Sipes v. Langford, 911 S.W.2d 455, 457 (Tex. App.—Texarkana 1995, writ denied); citing Parkway Co. v. Woodruff, 857 S.W.2d 903, 910 (Tex. App.—Houston [1st Dist.] 1993), aff'd as modified, 901 S.W.2d 434 (Tex.1995)).

21

E.g., Jamestown Partners, L.P. v. City of Fort Worth, 83 S.W.3d 376, 381 (Tex. App.—Fort Worth 2002,

• pet. denied) (“Courts presume the parties to a contract knew and took into consideration the laws affecting

matters about which they contracted, unless the contrary clearly appears in the written terms of the contract.”). Though the Tips court did note that “[e]very contract incorporates existing laws, and a party's

• bligation under a contract is measured by the standard of the laws existing at the time the contract is

made.” Tips, 961 S.W.2d at 621.

22

Tips, 961 S.W.2d at 622.

23

Id.

24

• Id. (citations omitted).

8 iii. Evidence of an agreement modifying the implied covenant The above begs the question: what are the magic words? If the covenant can be modified by contract, what is the contract language necessary to waive the implied covenant? Unfortunately – though the Tips opinion provides good guidance on certain issues – this is one aspect of the opinion that leaves something to be desired. The court of appeals held that the parties had modified the implied covenant, so that Hartland was not responsible for ensuring compliance with the local fire code.25 But in reaching this conclusion the court cited only the following facts: In the case before us, we believe there is sufficient evidence to support the trial court's finding that the parties agreed to address the fire code requirements in change orders because of Tips's uncertainty about how the structure would be used. Hartland knew the intended purpose of the

• mezzanine. It was to contain offices, which meant stricter code

requirements than those contained in the contract. The City of San Antonio approved the plans conditioned upon Hartland's meeting these requirements in the mezzanine, and Hartland's representative, Doug Crossland, agreed in writing to meet these requirements.26 The court stated further: There was some testimony from both Crossland and David Lavelle, Tips's representative, that the parties did not initially know what kind of fire protection would be required because of uncertainty about whether adjacent structures would be torn down and about the size of the hangar

• itself. Both men testified that Hartland had not included fire protection in

its bid and that Tips and his representative knew this to be the case.27 The above two passages were the only evidence cited by the court of appeals regarding how the parties had modified the implied covenant. There was thus clearly an agreement between the parties to modify the covenant. But the express, specific terms of that agreement are not clearly discernible from the opinion. This leaves guess work for attorneys who want to avoid the implied covenant, e.g., an attorney representing a builder against an owner, or potentially, as

25

E.g., id. at 623 (“In reaching our decision on this point, we dispose of Tips's second and third points of

• error. There is sufficient evidence in the record to support the trial court's findings on the scope of the
• agreement. We agree that Hartland had a general duty to deliver a structure fit for its intended purpose,

including compliance with code requirements. But we also find that the parties made their own arrangements that modified the general duty.”).

26

• Id. at 622-23.

27

Id.at 623.

9 we will see below, an attorney representing a subcontractor against a contractor, and on down the line. B. Other opinions related to Tips There is a dearth of Texas court opinions addressing the covenant of code compliance. This lack of Texas case law on the issue existed prior to Tips28 and the pattern has not changed

• since. The Fort Worth Court of Appeals has cited Tips favorably for the general notion that

implied covenants are to be made “sparingly,” but such covenants will be found where necessary to effectuate the parties’ intentions in contracting.29 However, that court did not examine issues related to code compliance.30 Other Texas courts of appeal have cited Tips favorably for general contract concepts, for example, the notion that a breaching party who has substantially performed may still recover on a contract.31 But no other Texas appellate court has analyzed the issue of code compliance in the construction context nearly as closely as Tips did. Seemingly the only court to come remotely close was the Corpus Christ Court of Appeals in its 2002 opinion Bender v. Moya.32 As far as code compliance is concerned, the upshot was Bender held the facts in Tips were distinguishable and thus Tips did not apply.33 Still, the Bender court discussed Tips in detail and did not expressly disagree with the holding in Tips regarding the implied covenant to build to code.34 The case thus warrants some discussion. In Bender, the City of Corpus Christi (the “City”) annexed an unplatted subdivision known as Rodd Field Village (the “Village”). Tony Bender was interested in constructing a dog kennel in the Village. He eventually met with John Kendall, the “plan reviewer” for the City’s building division. Bender asked Kendall about the requirements for constructing a dog kennel in the Village. Kendall made it clear that Bender’s property needed to be platted before he could get any building permits to construct the kennel.35 Bender failed to plat the property but

28

• Id. at 621 (noting “[n]either we, nor the parties, have found a Texas case that determines whether an

implied covenant exists in construction contracts that the contractor comply with relevant municipal codes.”).

29

Longfellow v. Racetrac Petroleum, Inc., No. 02-06-00124-CV, 2008 WL 2404233, at *4 n. 18 (Tex. App.—Ft. Worth June 12, 2008, pet. denied) (not designated for publication).

30

• Id. at *1-4.

31

Irving Flood Control Dist. v. Calgary, Inc., No. 05-01-01462-CV, 2002 WL 1495017, at *1 (Tex. App.— Dallas July 15, 2002, no pet.) (not designated for publication).

32

• No. 13-00-578-CV, 2002 WL 287707 (Tex. App.—Corpus Christi Feb. 28, 2002, no pet.) (not designated

for publication).

33

• Id. at *3.

34

E.g., id. at *2.

35

• Id. at *1.

10 nevertheless contracted with Ruben Moya (“Moya”) to construct the kennel. Moya started construction even though building permits for the project had not yet been obtained, due to Bender’s failure to plat the property. Sometime during construction, the City ordered Bender to stop work because he had not obtained the proper building permits. Bender allowed construction to continue anyway. Upon discovering Bender had violated the first stop work order, Kendall (the city plan reviewer) issued a second stop work order and ordered Bender to plat his property and obtain the required building permits.36 Bender eventually sued Moya under breach of contract and fraud causes of action. Bender alleged that Moya had agreed to obtain the building permits for the project. At trial, Bender requested the following jury instruction, incorporating Tips: “In the absence of a contrary agreement, all contractors impliedly agree to comply with relevant city codes so that the building is suitable for its intended purpose.” The trial court refused Bender’s jury instruction and Bender appealed.37 The Corpus Christi Court of Appeals held the trial court did not abuse its discretion in refusing to submit Bender’s requested jury charge.38 In reaching its holding, the Bender court noted the general rule derived from Tips: “Thus, the holding in Tips is that a breach of contract claim exists when a contractor has failed to comply with building codes relevant to the intended use of the structure. This presumption, however, may be countered with evidence that the parties agreed differently.”39 The Bender court did not note any problems with the Tips holding. Bender thus came close to giving its approval of Tips on the code compliance issue; but the Bender opinion arguably did not go quite that far. Bender held Tips was distinguishable and thus did not apply. The key distinguishing fact was that Tips “did not involve a land owner who knew that he had to plat his property before he could obtain building permits.”40 It was irrelevant that there was disputed evidence as to whether Moya agreed to obtain the required building permits. Even if Moya had agreed to obtain the building permits, he could not have obtained them due to the fact that Bender had not platted his

• property. Thus, Bender’s requested Tips instruction would not have assisted the jury.41

The Bender rationale is understandable from a common sense perspective. Unfortunately, though, the Bender court cited no case law or other legal principles when discussing its rationale for reaching its holding.42 Still, there may be at least one lesson to derive

36

Id.

37

Id.

38

• Id. at *3.

39

• Id. at *2 (citations omitted).

40

• Id. at *3.

41

Id.

42

• Id. at *3. The Bender rationale seemingly has parallels to the “prevention doctrine,” i.e., the principle that

each contracting party has an implied duty to not do anything that prevents the other party from performing

11 from Bender: unless the contract provides otherwise, an owner should make sure it has taken all steps necessary to allow its contractor to comply with code if the owner wants to be able to rely

• n the implied covenant mandated by Tips.

Court opinions from other states offer additional direction on code compliance issues. Those cases are discussed in Sections III.A. and III.B. below. Unfortunately for Texas practitioners, Tips remains the only Texas case to substantively address the implied covenant to build to code. While offering good direction on certain issues, the Tips opinion left open a host

• f other issues. For example, it seems the builder in Tips was a design-builder. Does the opinion
• nly apply to design-build contractors? Also, will any code violation, no matter how minor,

suffice to create a viable cause of action under the implied covenant? These issues, among

• thers, are addressed in Section III. immediately below.

III. The Consequences: issues left open by Tips A. Will any code violation do? With the Cowboys practice facility collapse, there was little question about the significance of the code violation: the structure collapsed, people were severely injured, and property was substantially damaged. But sometimes in a construction defect case, a plaintiff may cite certain code violations that are so minor as to have had no real effect on the outcome of the project. That is, there is no question that there were one or more minor deviations from the code by the builder; yet those deviations did nothing to prevent the owner from getting what it wanted: a building that functions without issue. In light of Tips, the builder might still harbor concerns about its exposure. The question arises, will any code violation, no matter how de minimis, suffice to expose the builder to liability? While the Tips court did not render a holding on this point, its dicta, and the case law it relied upon, appear to answer the question: the code violation must be substantial enough to render the building unsuitable for its intended purpose. Recall the Tips court stated: “[C]ontractors, when entering into building contracts, impliedly agree to comply with relevant municipal and county codes so that the building is suitable for its intended purpose.”43 In Tips, the code violation was significant enough to prevent the owner from occupying the building.

its obligation. E.g. BLACK’S LAW DICTIONARY 997 (8th ed. 2005); Moore Brothers Co. v. Brown & Root, Inc., 207 F.3d 717, 725 (4th Cir. 2000) (describing the prevention doctrine as “a generally recognized principle of contract law according to which if a promisor prevents or hinders fulfillment of a condition to his performance, the condition may be waived or excused.”); Thornhill, Inc. v. NVR, Inc., 422 F.Supp.2d 646, 657-58 (N.D. W.Va. 2006). But again the Bender court by no means stated that it was relying on the prevention doctrine – or more general equitable principles – in reaching its conclusion. Bender, 2002 WL 287707, at *3.

43

Tips, 961 S.W.2d at 621 (emphasis added).

12 The court noted: “An occupation permit cannot be obtained for a building that does not meet fire codes.”44 One of the sister state opinions that Tips relied upon was the Maryland Court of Appeals

• pinion Denice v. Spotswood I. Quimby, Inc.45 In Denice, a homeowner sued its homebuilder for

breach of contract. The homeowner’s primary complaint was that the height of the basement – which was to be used as a recreation room – was substantially shorter than that required by the county code. The basement ceiling was only 6 feet, 8 inches above the floor, not the 7 feet, 6 inches required by the code. The contract was silent regarding the height of the basement/ recreation room and the plans showed only a “rough basement” (marking the distance between the basement slab and the finished floor above as 8 feet, 8 inches).46 The Maryland Court of Appeals disagreed with the trial judge’s statement that “[t]he expanse of [basement] ceiling gave the impression of being extraordinarily low but not to the point where the room was unusable.” The court of appeals, in compelling dicta, stated it did “not think that usability was the test to be applied. The dwelling was not being constructed for

• Lilliputians. The ordinance specified 7 1/2 feet for ‘habitable’ rooms; there has been no

contention raised that the recreation room was not intended by all parties to be a ‘habitable’ room.”47 The court of appeals held the homebuilder breached an “implied condition” in the construction contract to build the house to code. Importantly, in reaching its holding, the court stated: We do not intend this opinion to be construed as holding that any failure to comply with the provisions of a building code will excuse performance of the contract by the complaining party. However, where the non- compliance is substantial, as in this case, we think non-performance is justified.”48

44

• Id. at 622.

45

237 A.2d 4 (Md. Ct. App. 1968) (citing with favor Tips, 961 S.W.2d at 622).

46

• Id. at 5-6.

47

• Id. at 9.

48

• Id. (emphasis added).

13 Opinions from other states cited in Tips – from Illinois,49 Colorado,50 Iowa,51 and Delaware52 – also involved fact scenarios where the code violations were substantive. This trend has been followed to a degree by courts in other states, in addition to the above opinions cited by

• Tips. For example, in David Company v. Jim W. Miller Construction, Inc., the Minnesota

Supreme Court focused primarily on whether certain arbitrators had exceeded their power in issuing a uniquely equitable award.53 But substantive building code violations played a role in the opinion. The general contractor, Miller, contracted with David Company to construct seven townhouses in two phases on a particular lot owned by David Company. Following completion

• f the first phase, a dispute arose after numerous substantial defects became apparent. The

arbitrators chosen to resolve the dispute, as part of their award against the general contractor,

• rdered the general contractor to buy the property on which the subject buildings had been

constructed.54 The Minnesota Supreme Court upheld the arbitrators’ award. In so doing, the supreme court noted a slew of reasons justifying the award, including major code violations: The extent and nature of the construction defects demonstrated gross disregard of standard construction practice, noncompliance with contract requirements, and violation of applicable building codes. Further evidence presented to the arbitrators revealed that the omissions, defects, and overall poor workmanship had resulted in rescission demands from owners to whom David had sold units prior to completion, and had rendered the unsold units, in a practical sense, unmarketable absent extensive and costly repairs.55 Finally, the California Supreme Court case of AAS v. Superior Court involved a negligence action by homeowners against the developer, general contractor, and subcontractors who built their homes. The plaintiffs alleged their homes contained several code violations. But the plaintiffs conceded that many of the code violations had caused no bodily injury or property

49

Shiro v. W.E. Gould & Co., 165 N.E.2d 286, 288 (Ill. 1960) (citing major city code violations, including failure to connect plaintiff owner’s water pipes directly with city water system, instead connecting them with system on adjoining lot owned by defendants).

50

Carpenter v. Donohoe, 388 P.2d 399, 400 (Colo. 1964) (noting that condition of plaintiff’s home became so serious that plaintiff had to shore up basement wall with “heavy lumber” to keep it from caving in, and house eventually became “hazardous” to plaintiff’s family).

51

C&F Maint. and Prop. Mgmt, Inc. v. Eliason and Knuth Drywall Co., 418 N.W.2d 44, 44 (Iowa 1988) (fire code violations cited as cause of motel’s destruction by fire).

52

Koval v. Peoples, 431 A.2d 1284, 1288 (Del. Super. Ct. 1981) (water code violated where water in residential well was unpalatable, had high iron content, unpleasant odor, and rusty appearance).

53

444 N.W.2d 836, 837 (Minn. 1989).

54

Id.

55

• Id. at 839 (emphasis added).

14 damage at the time of suit.56 The trial court barred the plaintiffs from introducing evidence of the defects that had caused no injury to persons or property. The California Supreme Court upheld the trial court’s ruling. Analyzing the case primarily under the economic loss rule, the supreme court stated “appreciable, nonspeculative, present injury is an essential element of a tort cause of action” and construction defects “that have not ripened into property damage, or at least into involuntary out-of-pocket losses … do not comfortably fit the definition of ‘appreciable harm’—an essential element of a negligence claim.”57 The supreme court noted: Certainly, as plaintiff … noted in its offer of proof, the express purpose of the building codes is to “provide minimum standards to safeguard life or limb, health, property and public welfare....”…Plaintiffs have not shown, however, that any of the alleged defects actually poses a serious risk of harm to person or property. To say, as plaintiffs do, that the purpose of construction standards for shear walls is to “minimize property damage and personal injury in the event of seismic and wind forces,” is not to say that any given defect is sufficiently grave to pose a realistic risk of structural failure.58 To be clear, the AAS opinion involved unique facts and was primarily concerned with other issues such as a plaintiff’s general ability to recover future damages, strict liability theories, and the economic loss rule.59 The holding was also later superseded by a California statute passed in reaction to the AAS opinion; that statute now allows for recovery of certain future potential

• defects. While keeping these qualifications in mind, to a degree the AAS opinion still parallels

the other cases discussed above; all of these cases at least indicate that exiguous code violations – causing no substantial harm to the intended use of the structure – should not be the basis for imposing liability against a builder. Given the above, the answer to the question “Will any code violation do?” is: maybe not. The answer is qualified in Texas because there does not appear to be a specific case with an express holding on this point. But the cases cited above arguably give the builder some leeway, in the sense that a code violation must be “substantial” to expose the builder to liability. But at the same time, the fact that a building is usable will not let the builder off the hook: the case law above – particularly Denice – also indicates the building must still be usable for its intended purpose if a code violation is to be considered minor enough to relieve the builder of liability. B. Does Tips only apply to design-build contractors?

56

12 P.3d 1125, 1128-29 (Cal. 2000).

57

• Id. at 1137.

58

• Id. at 1138 (emphasis added) (California Building Code citations omitted).

59

E.g. id. at 1128 (noting the supreme court was applying “settled law limiting the recovery of economic losses in tort actions” in reaching its holding).

15 Recall the fact in Tips “[u]nder the agreement, Hartland [the contractor] was to prepare the drawings and plans and specifications for the hangar and to secure all permits for its completion.”60 At first glance, this appears to be a critical fact. Common sense dictates that a builder who is responsible for design would also be in charge of ensuring code compliance. Indeed, an attorney representing a non-design-build contractor would be foolish not to raise this factual distinction in an attempt to resist the implied covenant. But this fact – Hartland’s additional design responsibilities – may not have been critical to the holding in Tips. First, the Tips court had every opportunity in the world to emphasize this fact and thus tailor the opinion accordingly. One or two sentences would have sufficed. Something like: “In cases like this, where the builder is also responsible for design, we hold that an implied covenant to build to code will exist. We reach no conclusion, one way or another, as to the application of the implied covenants for builders who are not responsible for design.” But the Tips court said nothing remotely like this. Instead, the court seemingly went in the opposite direction, proffering broad statements for any “contractor,” whether a design-builder or

• therwise. Recall the court’s broad holding:

He [Tips] asks this court to hold that all contractors, when entering into building contracts, impliedly agree to comply with relevant municipal and county codes so that the building is suitable for its intended purpose. … We find that such a covenant is implied in construction contracts, but we agree with Hartland that these parties modified the covenant by agreement.61 Recall also the court’s dicta that “[c]ontractors, not owners, are in the best position to know about and comply with relevant building codes.”62 To be fair, the Tips court was making these statements in the context of the contractor’s position relative to the owner, without reference to the scenario involving a separate architect/

• engineer. The only parties before the court were the owner and a design-builder. But the court’s

broad statements regarding “all contractors,” coupled with the court’s failure to easily tailor its holding as to design-builders, undermines an argument that the holding can only apply to design- builders. Further, recall the court’s reliance on, among other cases, the Maryland Denice opinion. That opinion, which again also found an “implied condition” to build to code, appears to have involved a non-design-builder.63 That is, whether the builder had design responsibilities appears

60

Tips, 961 S.W.2d at 621.

61

• Id. (emphasis added).

62

• Id. at 622 (emphasis added).

63

Denice, 237 A.2d at 6-7.

16 to have had no effect on the Denice court’s finding an implied covenant for all builders. The same can be said for the other sister state opinions cited in Tips.64 Secondary sources have also cited the implied covenant without focusing on whether the builder had design responsibility.65 On this particular issue, some might view Tips as a quintessential example of bad facts make bad law. But given the above, the answer to the question “Does Tips apply only to design- builders” is, somewhat surprisingly: maybe not. C. Is privity required to assert a cause of action for code violations? Recall the Tips court held that “a cause of action is available to plaintiffs for breach of contract where a contractor has failed to comply with building codes relevant to the intended use

• f the structure.”66 The court spoke only in terms of breach of contract and a Texas court might

decide to limit available causes of action accordingly. But the Tips court perhaps spoke only of a breach of contract because the parties before the court had a contract. The same can be said for the other sister state opinions cited by Tips,67 except, to a degree, for the Eliason opinion discussed later in this section. Further, the Tips court did not rule out other causes of action by

• ther parties, saying only that a breach of contract cause of action was “available.” Moreover, in

light of other Texas case law, the Tips court – and other Texas courts – might be open to other causes of action when faced with a dispute between parties not in privity. Some guidance on this point was provided in the frequently cited Texarkana opinion Goose Creek Consolidated I.S.D. v. Jarrar’s Plumbing, Inc.68 To be sure, much of that opinion focused on the economic loss rule and little on code compliance. There, Goose Creek Independent School District contracted with Lee Lewis Construction (“Lewis”) to construct three

• schools. Lewis subcontracted with Jarrar’s Plumbing (“Jarrar’s”) to install, as you might guess,

plumbing.69 After the schools were occupied, plumbing defects were discovered. The school

64

E.g., Carpenter, 388 P.2d at 402 (involving a “builder-vendor” with no apparent design responsibilities); Koval, 431 A.2d at 1284-85 (holding defendant home builder had obligation to comply with code implied in its contract, with no discussion of home builder’s design responsibilities, if any). In addition, the Minnesota Miller and California AAS opinions also did not appear to involve design-builders, though those courts did not focus on code issues as much as Denice and Tips. Miller, 444 N.W.2d at 837; AAS, 12 P.3d at 1128-29.

65

PHILIP L. BRUNER & PATRICK J. O’CONNOR J., BRUNER AND O’CONNOR ON CONSTRUCTION LAW § 14.28 n. 6 (June 2011).

66

• Id. (emphasis added).

67

Schiro, 165 N.E.2d at 288 (warranty deed for property and building thereon, executed by plaintiffs and defendants); Carpenter, 388 P.2d at 402 (agreement between “builder-vendors” and home purchasers); Koval, 431 A.2d at 1284-85 (contract between home builder and home purchasers).

68

74 S.W. 3d 486 (Tex. App.—Texarkana 2002, pet. denied).

69

• Id. at 491.

17 district sued Lewis and later sued Jarrar’s for various causes of actions including negligence.70 The school district alleged that Jarrar’s negligence caused “the invasion of raw sewage and sewer gas into the school buildings ... caus[ing] portions of the buildings to be unusable at times.”71 The jury concluded Jarrar’s was negligent and awarded the school district damages for cost of repairs and loss of use.72 The trial court denied Jarrar’s argument that the school district's negligence claim was barred under the economic loss rule.73 On appeal, Jarrar’s unsuccessfully argued, as a matter of law, there was no evidence Jarrar’s owed a duty to Goose Creek and no cause of action was available under the circumstances of the case. The court of appeals rejected this argument, with important dicta, citing the seminal Texas Supreme Court DeLanney and Austin Court of Appeals Thompson

• pinions:

The fact that an act is induced by and done pursuant to a contract does not shield it from regular tort liability. One who undertakes to perform a contract assumes a duty to all persons to take reasonable care not to injure them or their property in the performance of that contract, and one who is not privy to the contract may assert a claim for negligence for a breach of that duty.74 Recall the Tips court cited similar language, stating “[i]mplicit in every contract is a common- law duty to perform the terms of the contract with care, skill, and reasonable experience.”75 The Goose Creek court cited Thomson’s holding that a property owner may assert a claim for negligence against a subcontractor based on the subcontractor’s performance under the contract, where the cause of action is independent of the duties imposed by the contract. In analyzing issues related to the economic loss rule and Goose Creek’s loss of use claim, the Goose Creek court acknowledged there was no contract between Jarrar’s and Goose Creek; and there was no contention Goose Creek was made a third-party beneficiary. But, although Goose Creek could “not raise a claim based on the duties imposed on [Jarrar’s] under that contract,” Goose Creek could assert “a claim against [Jarrar’s] based on a breach of [Jarrar’s] duty to all

70

• Id. 491– 92.

71

• Id. at 495.

72

• Id. at 492.

73

• Id. at 493– 94.

74

• Id. at 494 (citing Thomson v. Espey Huston & Assoc., 899 S.W.2d 415, 420 (Tex. App.—Austin 1995, no

writ); Southwestern Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 494 (Tex. 1991)).

75

Tips, 961 S.W.2d at 621 (quoting Sipes v. Langford, 911 S.W.2d 455, 457 (Tex. App.—Texarkana 1995, writ denied).

18 persons to use reasonable care not to injure persons or property in the performance of the contract.”76 Again, the injury Goose Creek alleged was the invasion of raw sewage and sewer gas into the school buildings. Goose Creek contended Jarrar’s Plumbing’s failure to use reasonable care in installing the plumbing system directly and proximately caused these injuries. Importantly, Goose Creek alleged Jarrar’s Plumbing failed to use reasonable care by: [F]ailing to comply with all applicable plumbing codes, by failing to install all necessary trap primers and sealing the ones that were installed with pipe dope so that they did not function, by failing to install any vacuum breakers, by allowing uncapped pipes connected to the sewer systems to be sealed into the walls where they vented sewer gas into the school buildings, and by installing the sewer lines in such a manner that they were obstructed and caused raw sewage to back up into the schools’ cafeterias, restrooms, mechanical rooms, and other areas with floor drains.77 The court of appeals stated that the economic loss rule did not bar Goose Creek’s negligence cause of action against Jarrar’s. The acts Goose Creek alleged may have breached Jarrar’s contract with Lewis; but the injury Goose Creek alleged, the invasion of sewage and sewer gas into the school buildings, constituted an injury to property that was not the subject matter of the contract, “that portion of the contract Goose Creek had with Lewis for which Lewis contracted with Jarrar’s, namely the plumbing.” The court of appeals concluded by emphasizing that Jarrar’s owed an independent tort duty to use reasonable care in the performance of the contract to install the plumbing so as not to injure persons or property and Goose Creek had alleged that such injury to property was caused by the failure to use such reasonable care. Thus, “Goose Creek properly maintained a tort action for negligence against [Jarrar’s], and the trial court did not err in allowing such action to be maintained.”78 Perhaps even better guidance on this issue is found in the 1988 Iowa Supreme Court case C&F Maintenance and Property Management, Inc. v. Eliason and Knuth Drywall,79 cited in

• Tips. The Eliason case involved somewhat unique facts: the Royal Inns of America (“Royal

Inns”) was the original “owner-builder-operator” of a motel. Royal Inns contracted with Eliason and Knuth Drywall Co., Inc. (“Eliason”), to perform certain drywall work, though the scope of that work remained a disputed fact. C&F Maintenance and Property Management, Inc. (“C&F”) later bought the motel from Royal Inns and became the owner and operator of the motel. The

76

Goose Creek, 74 S.W. 3d at 494.

77

• Id. at 495 (emphasis added).

78

• Id. at 495.

79

418 N.W.2d 44 (Iowa 1988).

19 motel was later destroyed by fire. An issue arose as to whether the drywall installed met local fire code requirements for fire resistance.80 C&F sued Eliason as third-party plaintiffs, alleging negligence and breach of contract, even though Royal Inns and Eliason were the only parties to the original contract. Eliason moved for summary judgment, apparently arguing81 that the express terms of the contract did not

• bligate Eliason to ensure compliance with the fire code. C&F argued that, regardless of the

contract terms, Eliason could be held liable under its negligence claim for failing to comply with

• code. The Iowa Supreme Court did not clarify which cause of action was created, but it did

agree “with plaintiffs’ argument that local ordinances governing buildings may be an implied

• bligation of a construction contract.”82

The Iowa Supreme Court agreed that Eliason only had to “comply with the building code

• nly to the extent of the work which it contracted to perform.” But because the scope of

Eliason’s drywall responsibilities under the contract were a matter of disputed fact, summary judgment was not proper. Thus, while not clarifying which cause of action was created – though it appeared to be a negligence cause of action – the Iowa Supreme Court allowed someone who was not an original party to the contract (the subsequent motel purchaser, C&F) to sue a contractor (Eliason, who had a direct contract with “owner-builder-operator” Royal Inns) for code violations, which the supreme court held were an “implied obligation” of the construction contract.83 This is still an area of the law needing further development in Texas. The Goose Creek analysis above was focused primarily on the economic loss rule and should not be stretched to provide a clear answer on other tangential issues. But what might be gleaned from Goose Creek, and related Texas cases, is: under a general negligence theory, the contractor has a duty to perform its contract with reasonable care and code violations might be evidence of the failure to use such reasonable care, thus a breach of that duty.84 As noted above, Goose Creek did list a host of other facts related to Jarrar’s lack of reasonable care, including code violations,85 and the Goose Creek court did not analyze the failure to comply with code nearly to the extent Tips did.86

80

• Id. at 44-45.

81

The substance of Eliason’s argument must be gleaned from the unclear description of the argument in the supreme court’s opinion. See, e.g., id. at 45.

82

Id.

83

• Id. at 44-45.

84

74 S.W.3d at 495.

85

• Id. at 495.

86

• Id. at 495 (the only mention of the word “code” was the list of facts in the above block quote regarding

Jarrar’s lack of reasonable care).

20 Still, contractors (and subcontractors, as discussed below) should be aware of facts like those in Goose Creek where a contractor was found liable to a third party, when, among other things, the contractor violated codes and the third party was damaged accordingly.87 Perhaps even more compelling are cases like Eliason where a contractor is held liable to a third party for code violations, seemingly also under a negligence theory.88 Thus, despite the language in Tips that “a cause of action is available to plaintiffs for breach of contract where a contractor has failed to comply with building codes,”89 the answer to the question “Is privity required to assert a cause of action for code violations?” is: maybe not. D. Does your contract comply?90 Recall the discussion above91 regarding the nebulous contract drafting guidance provided by Tips, i.e., the Tips court failed to provide an example of the kind of contract language necessary to waive the implied covenant. Also recall the broad holding in Tips regarding contractor compliance with all local codes related to allowing the building to function for its intended purpose, stating “all contractors, when entering into building contracts, impliedly agree to comply with relevant municipal and county codes so that the building is suitable for its intended purpose.”92 Again, the facts the Tips court faced involved the failure to comply with fire codes, a responsibility one might typically expect to belong to the design professional.93 With this in mind, attorneys are left to wonder if their contract forms suffice to clearly waive the broad Tips covenant. The most common contract forms in the construction industry remain the family of documents produced roughly every decade by the American Institute of Architects (“AIA”). As most construction lawyers know, the latest version of the AIA forms came out in 2007. One might expect the 2007 AIA documents to clearly define which construction party has the role of ensuring code compliance. But some courts might view the 2007 documents as creating an ambiguity regarding the contractor’s duty under Tips. The issues created by the 2007 AIA

87

• Id. at 495.

88

Eliason, 418 N.W.2d at 44-45.

89

Tips, 961 S.W.2d at 622 (emphasis added).

90

Special thanks to Adam Richie of Coats Rose for his helpful review and insight regarding this section of the paper.

91

Section II.A.iii. supra.

92

Tips, 961 S.W.2d at 621.

93

• Id. at 622. Recall also the discussion in Section III.B. above regarding the fact that, though the contractor

was a design-builder, this fact did not appear to be critical to the Tips court’s holding that all “contractors” were subject to the implied covenant.

21 documents can be understood by comparing them to the ConsensusDOCS, a group of contract documents proffered by a variety of construction groups in 2007 as an alternative to the AIA. Start first with the responsibilities of the architect under the ConsensusDOCS versus the AIA 2007. The ConsensusDOCS owner-architect agreement (ConsensusDOCS 240) leaves little doubt that the architect is responsible for ensuring that its drawings and specifications comply with code: 3.2.5 CONSTRUCTION DOCUMENTS Based on the approved Design Development Documents and updated estimate of the Cost of Construction and Project Schedule, the Design Professional shall prepare, for the Owner's review and approval and the approval of governmental authorities, including any revisions necessary to secure such approvals, Construction Documents setting forth in detail the quality levels of and the requirements for construction of the Project, and consisting of drawings and specifications that comply with Laws.94 “Laws” is defined as “federal, state, and local laws, ordinances, codes, rules and regulations applicable to the Services and to which Design Professional must comply that are enacted as of the Agreement date.”95 Compare this with the parallel provision in the AIA owner-architect agreement, stating

• nly that the “Architect shall incorporate into the Construction Documents the design

requirements of governmental authorities having jurisdiction over the Project.”96 Arguably this provision requires only that the architect obtain approval of its plans and specifications from the applicable local authority (typically a city), particularly when compared with ConsensusDOCS Section 3.2.5 above. This point is made even more apparent when construed with other AIA provisions discussed below. The AIA A201-2007, of course, contains the General Conditions typically incorporated into the owner-contractor agreement. Section 3.2 of the A201-2007 is entitled “Review of Contract Documents and Field Conditions by Contractor.” Within that section, Section 3.2.3 states “the Contractor is not required to ascertain that the Contract Documents are in accordance with applicable laws, statutes, ordinances, codes, rules and regulations, or lawful orders of Public authorities.” That same section also provides that “the Contractor shall promptly report to the Architect any nonconformity discovered by or made known to the Contractor as a request for information in such form as the Architect may require.”97 These provisions together may remove the onus from the contractor to ensure the design complies with code. But other

94

ConsensusDOCS 240, Standard Agreement Between Owner and Design Professional, § 3.2.5 (2007) (emphasis added).

95

• Id. § 2.5.7 (emphasis added).

96

AIA B101-2007, Standard Form of Agreement Between Owner and Architect, § 3.4.2.

97

AIA A201-2007, General Conditions of the Contract for Construction, § 3.2.3.

22 provisions in the AIA could raise concerns for contractors in light of the holding in Tips, particularly after the design phase is completed. Section 10.2 of the A201-2007 is entitled “Safety of Persons and Property.” Within that section, Section 10.2.2 provides “The Contractor shall comply with and give notices required by applicable laws, statutes, ordinances, codes, rules and regulations, and lawful orders of public authorities bearing on safety of persons or property or their protection from damage, injury or loss.”98 Admittedly, this section can be construed as relating only to safety issues during the performance of the work – such as OSHA requirements – as the other portions of Section 10.2

• reflect. But compare Section 10.2.2 to the more innocuous (from the builder’s perspective)

ConsensusDOCS 200 Section 3.11.2: 3.11.2 The Constructor shall seek to avoid injury, loss or damage to persons or property by taking reasonable steps to protect: 3.11.2.1 its employees and other persons at the Worksite; 3.11.2.2 materials and equipment stored at onsite or offsite locations for use in the Work; and 3.11.2.3 property located at the site and adjacent to Work areas, whether or not the property is part of the Work.99 The ConsensusDOCS provision does not as easily subject the contractor to – in the words of AIA A201 Section 10.2.2 – potential liability for “injury” to “persons” where “codes” were violated.100 But perhaps the most compelling point can be found in A201-2007 Section 3.7.2, which provides: “The Contractor shall comply with and give notices required by applicable laws, statutes, ordinances, codes, rules and regulations, and lawful orders of public authorities applicable to performance of the Work.”101 Note the word “codes” is an addition to the 2007 version of Section 3.7.2; the 1997 version did not contain that word, stating only that: “The Contractor shall comply with and give notices required by laws, ordinances, rules, regulations and lawful orders of public authorities applicable to performance of the Work.” There is no provision like Section 3.7.2 in the ConsensusDOCS, i.e., no provision requiring the contractor to perform all work in compliance with applicable codes. In fact the

• nly portion of the ConsensusDOCS 200 that uses the word “code” or “codes” is Section 3.3

entitled “Responsibility for Performance.” That section, in relevant part, states only that: 3.3.2 If in the course of the performance of the obligations in Subparagraph 3.3.1 [examining and comparing the drawings and

98

• Id. § 10.2.2 (emphasis added).

99

ConsensusDOCS 200 § 3.11.2.

100

AIA A201-2007 § 10.2.2.

101

• Id. § 3.7.2.

23 specifications with other furnished information] if the Constructor discovers any errors, omissions or inconsistencies in the Contract Documents, the Constructor shall promptly report them to the Owner. It is recognized, however, that the Constructor is not acting in the capacity of a licensed design professional, and that the Constructor's examination is to facilitate construction and does not create an affirmative responsibility to detect errors, omissions or inconsistencies or to ascertain compliance with applicable laws, building codes or regulations. 3.3.3 The Constructor shall have no liability for errors, omissions

• r inconsistencies discovered under Subparagraphs 3.3.1 and 3.3.2 unless

the Constructor knowingly fails to report a recognized problem to the Owner. The contractor’s responsibilities for code violations under the ConsensusDOCS seem only limited to those violations that it actually knows about or discovers and fails to report during its review of the documents. Finally, note also the A201-2007’s broad language allowing the owner to terminate the general contractor for cause “if the Contractor … repeatedly disregards applicable laws, statutes, ordinances, codes, rules and regulations, or lawful orders of a public authority.”102 A parallel provision specifically referencing codes cannot be found in the ConsensusDOCS. Other provisions in each document could be discussed here, but the bottom line is that ConsensusDOCS Section 3.3, coupled with the design professional’s clear obligation to prepare plans and specifications compliant with code (ConsensusDOCS 240 section 3.2.5) and the ConsensusDOCS’s lack of a provision remotely like AIA A201-2007 Section 3.7.2 (or other AIA sections discussed above), lead to the following conclusion: it seems more likely that a court would hold the ConsensusDOCS remove the contractor from the Tips covenant when compared to the AIA 2007 documents. A court still might hold the AIA documents also suffice to waive the implied covenant and the particular facts of each case will, of course, play a role. Again, the drafting guidance provided by Tips is unclear and its holding applied broadly to compliance with all local “codes” related to the building functioning for its intended purpose.103 The AIA A201-2007’s allocation

• f code responsibility, discussed above, might not be enough to waive the broad covenant

implied by Tips in certain cases. Of course, a contractor will face even higher hurdles where there is no contract – e.g., the

• ral contract between Cowboys Center and Manhattan, discussed in Section I. above – or a

contract that is much shorter and simpler than the AIA or ConsensusDOCS, with no discussion

• f code responsibility, or an owner contract form that tries to push certain unexpected

responsibilities on the contractor. These issues are also important because, if a contract is held to require a builder to ensure code compliance, this might be viewed as the contractor’s rendering

• f a “professional service,” which is often excluded under the contractor’s commercial general

102

• Id. § 14.2.1.3 (emphasis added).

103

Tips, 961 S.W.2d at 621-22.

24 liability policy. These issues obviously warrant a careful review of the contract documents by the contractor’s attorney. Given the above, the answer to the question “Does your contract comply?” – i.e., does it sufficiently waive the implied covenant to build to code - is: maybe not, if you are using the 2007 AIA documents, and probably yes, if you are using ConsensusDOCS. E. Does the Tips covenant apply to subcontractors? What about subcontractors? Or sub-subcontractors and suppliers? Under Tips, an owner may have an implied covenant with a general contractor, but can that contractor turn around and impose that same covenant downstream? Can the contractor argue, as between contractor and subcontractor, it was the subcontractor who had an implied covenant to build to code? And what about the subcontractor’s responsibilities for code violations effecting third parties? Tips did not address these questions, perhaps because the only parties involved were the

• wner and contractor. There is thus no clear answer for these questions under Texas case law.

As to a dispute between the contractor and subcontractor, the subcontractor in this situation may emphasize the Tips dicta that “[c]ontractors, not owners, are in the best position to know about and comply with relevant building codes.”104 That is, the Tips court only talked about the general contractor, not subcontractors, falling under the implied covenant. But the contractor might turn this quote back around on the subcontractor and emphasize the “best position to know” language, e.g., a plumbing subcontractor is in the “best position to know” whether the plumbing complies with code. The contractor, the argument would go, is often merely facilitating the project and the bulk of the detailed work falls under each subcontractor’s particular scope.105 A subcontractor might apply this same argument as between it and a sub- subcontractor who had greater control over a particular aspect of the subcontractor’s scope of work; i.e., the sub-subcontractor was in the “best position to know” about code compliance within that aspect of the work. Further, a contractor might argue a plumber, e.g., is clearly in the “best position to know” about code compliance because a plumber is required to be licensed to perform its work106 while a general contractor is not. As to claims from third parties against the subcontractor, recall the discussion of Goose Creek in Section III.C. above. The case specifically involved a plumbing subcontractor who was found liable to a third party owner, where, among other things, the subcontractor violated plumbing codes and the owner was damaged accordingly.107 Again, Goose Creek did not

104

Tips, 961 S.W.2d at 622.

105

Id.

106

• TEX. OCC. CODE ANN. § 1301.351 (Vernon 2012).

107

Goose Creek, 74 S.W.3d. at 495.

25 analyze code issues nearly to the extent that Tips did and focused on a negligence theory, not an implied covenant to build to code. But subcontractors should be aware of the potential duties imposed by cases like Goose Creek when it comes to code compliance, as well as the dicta in Tips discussed above. Perhaps more importantly, recall the discussion in Section III.C. above regarding the Iowa Supreme Court Eliason decision (cited in Tips). There, apparently under a negligence theory, the supreme court allowed someone who was not an original party to the contract (the subsequent motel purchaser, C&F) to sue a drywall contractor (Eliason, who had a direct contract with the original “owner-builder-operator” Royal Inns) for code violations. The supreme court held the code requirements were an “implied obligation” of the construction contract.108 In some sense, the drywall contractor in Eliason might be viewed more like a general contractor, in light of the drywall contractor’s direct contract with the owner/builder.109 But note that the contract at issue was at times described as a “Sub-contract Agreement” and that Eliason’s scope of work, focusing on drywall, was similar to the typically limited scope of a subcontractor’s work.110 At a minimum, subcontractors must take note of the fact that Eliason was faced with the same scenario many other subcontractors are faced with in litigation: suit by an entity with which the subcontractor has no privity. There is at least some solace subcontractors can take from the Eliason opinion: given comments by the Iowa Supreme Court, it appears a subcontractor’s liability exposure – if any – for code compliance might be limited the subcontractor’s respective scope of work. That is, the subcontractor likely would not be responsible for ensuring all aspects of the project comply with code, just those related to its subcontract. Recall from Eliason that when the drywall contractor argued that “it was to comply with the building code only to the extent of the work which it contracted to perform,” the supreme court acknowledged “this is doubtless a valid argument.”111 The supreme court thus tailored the “implied obligation” to build to code to Eliason’s scope of work; it remanded the case because the “extent of work which [Eliason] contracted to perform” was a disputed fact.112 Neither the Tips court nor any other Texas court seems to address whether the Tips implied covenant to build to code applies to subcontractors. But in light of opinions like Goose

108

Eliason, 418 N.W.2d at 44-45.

109

See, e.g., TEX. PROP. CODE ANN. § 53.026 (Vernon 2012) (essentially treating a subcontractor as a general contractor for lien purposes, where the subcontractor has a contract with a general contractor entity that is also the property owner).

110

418 N.W.2d at 46.

111

• Id. at 46.

112

Id.

26 Creek and Eliason, the answer to the question “Does the Tips covenant apply to subcontractors” is: maybe. F. With which “code” must the contractor comply? Recall the Tips court’s holding that “[C]ontractors, when entering into building contracts, impliedly agree to comply with relevant municipal and county codes so that the building is suitable for its intended purpose.”113 Recall that the Tips court stated this even more broadly elsewhere in the opinion: “We hold that a cause of action is available to plaintiffs for breach of contract where a contractor has failed to comply with building codes relevant to the intended use

• f the structure.”114 What about state statutes? Or state or federal regulations? These arguably

are not “codes” and certainly not “municipal and county codes.” First, note the last part of the above quote: “[C]ontractors, when entering into building contracts, impliedly agree to comply with relevant municipal and county codes so that the building is suitable for its intended purpose.”115 The Tips court was addressing a specific failure to comply with local code. But the court might have reached the same conclusions regarding state or national statutes and regulations, if the contractor’s failure to comply therewith made the building unsuitable for its intended purpose. That conclusion might comport with the intent of Tips and the other sister state opinions it relied upon. Second, one of the sister state cases Tips relied upon sheds additional light on this

• subject. In Koval v. Peoples, a Delaware court of appeals addressed a dispute between a home

builder and a home purchaser.116 The construction contract primarily concerned the construction

• f a house plus a well “intended to supply the water needs of the house.” However, the contract

contained no specification regarding the quality of the water.117 The water in the well turned out to be unpalatable, high in iron content, and had an unpleasant odor and a rusty appearance.118 The Delaware court of appeals held that “compliance with applicable laws and regulations is a requirement and condition of building contracts for work to be performed in this State unless the contract expressly provides for a different measure of performance.”119 In reaching this conclusion, it relied on provisions in the county code regarding water quality, but also relied on “the drinking water standards found in the regulations of the State Board of

113

Tips, 961 S.W.2d at 621 (emphasis added).

114

• Id. at 622 (emphasis added).

115

• Id. at 621 (emphasis added).

116

431 A.2d. 1284, 1284-85 (Del. Super. Ct. 1981).

117

• Id. at 1286.

118

• Id. at 1288.

119

• Id. at 1286.

27 Health.”120 It also referenced state “statutes and codes” designed to protect public health, citing specifically to the Delaware state statute requiring that, “All premises intended for human habitation or occupancy shall be provided with a supply of pure and wholesome water.”121 The court emphasized “[r]egulations adopted by the State Board of Health” pursuant to Delaware state statute: the water quality standards in these regulations determined “the requirements for potable water as that term is used” in the county code. Thus, if the water failed to meet any of the above standards – including state regulations and state statutes – the contractor violated the code requirements.122 There is not a clear answer on this issue, particularly in Texas. But given the above, the answer to the question “With which ‘code’ must the contractor comply?” is: maybe all applicable state and federal codes and regulations, not just local codes. Good luck.

120

• Id. at 1284.

121

• Id. at 1287 (citing, inter alia, 16 Del. C. § 7909).

122

• Id. at 1287 (citations omitted).