Chinese Drywall talk is riddled with hearsay.

Is it or is it not bad for your health? Must the drywall be replaced completely, or can a filtration system solve the problem? Will the corrosive elements cross-contaminate into other components of the home, or is it isolated in the drywall only?

These questions certainly have practical implications. After all, the answers to some of these questions will dictate how the drywall is actually repaired.

However, the questions also have implications in the legal arena.

Most notably in Louisiana, the severity of the damages related to corrosive drywall will be a large factor in deciding the question of whether the builder is or is not liable to homeowners for the installed drywall.

In previous posts here at the Chinese Drywall Blog, we discussed the Louisiana New Home Warranty Act and whether it will or will not create liability for builders who installed Chinese Drywall. Because of the Act’s wording, it may simply come down to how severe the Chinese Drywall damages are.

Under the NHWA, builders are liable to homeowners for any “major strucutral defect” for a period of 5 years. The question becomes, therefore, are the Chinese Drywall damages major structural defects?

If the damages can be remediated with a simple filtration system, you can count on the builders using this as evidence that the defect was not a major structural defect. If they are successful, the 1 or 2 year warranty period, as opposed to the 5 year warranty period, would apply, and many of the currently filed claims would be considered as tardy.

If the damages cannot be easily remediated, however, and require the replacement of all sheetrock, and even the replacement of some elements of the framing…the homeowners will argue that this more closely resembles a major structural defect. Accordingly, the 5 year warranty period would apply.

More specific information about whether the Chinese Drywall damages will be covered under the New Home Warranty Act is found on our blog here.

While knowing the severity of the damages is important to estimate the damage itself, and to understand how to fix the damages….the severity and scope of damages plays an even more important role in the litigation against builders who installed contaminated drywall. It may be a very important question to answer when deciding whether the 5 year NHWA period applies.

Not all victims of Chinese Drywall are homeowners. Oftentimes, a tenant is living at a property with Chinese Drywall, or a property owner is a landlord to an apartment or home with Chinese Drywall.

Take, for example, a news story from the Baton Rouge’s Advocate about a tenant who was forced to move out of their rented home because of Chinese Drywall. Or, a news story about a Florida landlord to an apartment complex housing low-income elderly people, who were evicted en mass because the complex had imported drywall.

These scenarios present interesting legal questions:

• Can a tenant break a lease because of Chinese Drywall?
• Can a landlord evict a tenant because of Chinese Drywall?
• Is Chinese Drywall a “breach” of the lease?
• Should landlords evict / move tenants when properties have Chinese Drywall to avoid responsibility for future health effects?

While the answer to this question will greatly depend upon the terms and provisions with the lease agreement, here is what that Louisiana Civil Code may have to say about the matter.

The Landlord’s Warranties

The landlord makes a number of warranties to its tenants through the Louisiana Civil Code, and it can be argued that the existence of Chinese Drywall at the leased premises is a breach of these warranties.

La. C.C. art 2696, for example, provides that the “lessor warrants…that the thing is suitable for the purpose for which it was leased and…is free of vices or defects.” This warranty extends to vices “that arise after the delivery of the thing.” The following code article (2697) indicates that the warranty encompasses vices or defects not known to the lessor.

The landlord may be liable to the tenant for any damages that result from the landlord’s breach in warranty. These damages may include the cost for alternative accommodations, moving expenses, and sustained personal injury or health damages.

For landlords who are leasing properties with Chinese Drywall, it is important to consider the statutory warranties made to tenants. The existence of Chinese Drywall may be a breach of their warranties, and if so, landlords are likely liable to tenants for any ensuing damages.

Statutory Termination of the Lease

In addition to the landlord’s warranties, another area of Landlord/Tenant law implicated by Chinese Drywall regards the statutory termination of leases.

La. C.C. art 2714 provides that if a thing is lost or totally destroyed, without the fault of either party, the lease terminates and neither party owes damages to the other. In the case of partial destruction or “substantial impair[ment], that is not the fault of the lessor, the tenant may dissolve the lease or reduce their rent. If the lessor is at fault, the tenant may also seek damages.

What’s The Rub?

Chinese Drywall presents some interesting issues for Louisiana Landlord / Tenant law. Is the existence of Chinese Drywall a vice or defect that breaches the landlord’s warranty, or a partial destruction or “substantial impairment” to the property? Are landlords entitled to damages, or just dissolution of the lease? Should the landlord relocate tenants to mitigate its damages?

As is the case with most Chinese Drywall scenarios, as to landlord/tenant laws, there are more questions than answered here. Landlords and Tenants with Chinese Drywall should seek the counsel and advice of an attorney.

Are you learning about Chinese Drywall for the first time? Are you looking for representation in a Chinese Drywall dispute?

Check out Wolfe Law Group’s newly published Chinese Drywall brochure and learn how to get started on your drywall lawsuit.

In previous posts, we have discussed the New Home Warranty Act and how it relates to Chinese Drywall damages. However, this Act only applies to new homes.

As to the thousands of post-Katrina renovations and re-models that did not involve a new structure, homeowners must find remedies against their builders elsewhere.

Generally Speaking…Contractors Are Responsible for Defects in Materials and Workmanship

In construction contracts, Louisiana law implies that the contractor will construct the work in a good and workmanlike manner, the work will be suitable for its intended purpose, and the work will be free from defects in workmanship or materials. Peterson Contractors, Inc. v. Herd Producing Company, Inc., 811 So.2d 130 (2 Cir. 2002).

An owner seeking to recover from a contractor bears the burden of proving: 1) both the existence and nature of the defects; 2) that the defects were due to faulty materials or workmanship; and 3) the cost of repairing the defects. Guy T. Williams Realty, Inc. v. Shamrock Construction Company, 564 So.2d 689 (La. 5 Cir. 1990).

Therefore, under Louisiana law, the general rule is that a contractor is responsible for defects in workmanship and/or materials.

Articles 2762 and 2969

Aside from the general concept that contractor’s are responsible for the quality of its workmanship and materials, the Louisiana legislature has given us two articles that set forth a contractor’s liability for its work.

Article 2762: Liability of contractor for damages due to badness of workmanship

If a building, which an architect or other workman has undertaken to make by the job, should fall to ruin either in whole or in part, on account of the badness of the workmanship, the architect or undertaker shall bear the loss if the building falls to ruin in the course of ten years, if it be a stone or brick building, and of five years if it be built in wood or with frames filled with bricks.

Article 2769: Contractor’s liability for non-compliance with contract

If an undertaker fails to do the work he has contracted to do, or if he does not execute it in the manner and at the time he has agreed to do it, he shall be liable in damages for the losses that may ensue from his non-compliance with his contract.

Applying The Rules to Chinese Drywall

Application of these rules and articles to Chinese Drywall is not too difficult.

Although we’re not yet certain as to what exactly is causing the damages associated with Chinese Drywall, it is apparent that Chinese Drywall is a defective material, and that it is causing the ruin of property.

Accordingly, homeowners should be capable of seeking remedy against builders for damages and ruin associated with Chinese Drywall, regardless of whether the drywall was supplied or installed by a subcontractor of the builder (art. 2768), and regardless of whether the builder knew or had reason to know of the defect.

Warranty Provisions in Contracts

While the New Home Warranty Act cannot be waived or limited, this is an exception to the general rule in Louisiana that allows limitations and waivers.

Art. 2503 allows parities to increase, exclude or limit warranties. In Degeneres v. Burgess, the Court stated that the right to limit or waive stautory warranties extends to articles 2762 and 2769.

Therefore, it’s important for homeowners to review the contracts with their builder to determine the exact warranty period and terms applicable to their contract.

Baton Rouge’s The Advocate ran a story on June 29th titled “Drywall problems leave many in lurch.”

The story discussed how so many homeowner victims of Chinese Drywall are left in the balance of class action legal battles, failed construction warranty claims and legislative stalemates.

One person interviewed, Darryl Ledet from Praireville, stated that his home was built with Chinese Drywall by Sunrise Homes, and that when he contacted the company about finding defective drywall, “the company sent a letter saying it was not responsible for further repairs because, under Louisiana law, product defects are covered under a one-year warranty.” Ledet’s warranty, the article states, had expired.

Did Ledet’s warranty expire in one-year? Is his cause of action against Sunrise Homes hopeless?

Louisiana New Home Warranty Act

Since Ledet’s homes appears to be a new home, the New Home Warranty Act would likely apply.

The Louisiana New Home Warranty Act provides the “exclusive remedies, warranties, and preemptive periods as between builder and owner…and no other provisions of law relative to warranties and redhibitory vices and defects shall apply.”

As such, if a home qualifies as a “new home” for the purposes of the act, and has Chinese Drywall, the homeowner’s remedy against the builder (and its insurer) will likely lie exclusively in the New Home Warranty Act.

According to La. R.S. 9:3144, every builder warrants the following to the owner, as it may apply to Chinese Drywall claims:

(1) That the home will be free from any defects due to defects in materials or workmanship not regulated by building standards for 1 year.

(2) That the home will be free from major structural defects due to other defects in materials or workmanship not regulated by building standards for 5 years.

1 Year or 5 Years?

One of the first questions to answer with respect to Chinese Drywall damages is whether the applicable warranty period would be 1 year or 5 years.

Since most Chinese Drywall was installed between 2002 and 2008, homeowners first discovering the damage now will have difficulty proceeding against their builder if the 1 year period applies. If the 5 year period applies, builder liability is more likely.

To determine whether the 1 year or 5 year period applies, we must under the meaning of the term “major structural defects.” The definitions portion of the act (9:3143) provides as follows:

Major structural defect’ means any actual physical damage to the following designated load-bearing portions of a home caused by failure of the load-bearing portions which affects their load-bearing functions to the extent the home becomes unsafe, unsanitary or is otherwise unlivable:

(a) Foundaiton systems and footings; (b) Beams; (c) Girders; (d) Lintels; (e) Columns; (f) Walls and partitions; (g) Floor systems; (h) Roof framing systems.

In hopes of having the 5 year warranty apply, one could argue that Chinese Drywall damage is a “major structural defect” as contemplated by the Act because it is actual physical damage to the walls, which affects their load-bearing function to the extent the home becomes unsanitary or otherwise unlivable.

Of course, there is some question as to whether damage to sheetrock is actually damage to a “load-bearing portion” of the home.

A similar question came before the Louisiana First Circuit just a few weeks ago in Hutcherson v. Harvey Smith Construction, Inc., 7 So.3d 775 (1 Cir. 2009).

In the Hutcherson, the home had faulty or failed roof flashing causing leaks. The contractor argued that this was not the failure of any load-bearing portion of the home, and the homeowner argued that the roof as a whole served a load-bearing function, thus qualifying any damage to it as a “major structural defect.”

The court agreed with the homeowner.

HSC’s own expert civil engineer, Dr. Jerry Lynn Householder, testified that roof decking in a house is part of the framing [Pg 7] system and serves a structural function. Dr. Householder further testified that the rotten decking was caused by improper roofing design which allowed water to pool and leak under the shingles. The Hutchersons’ expert roofing consultant, Patrick E. Heil, testified [*10] that the damage to the Hutchersons’ home was not the result of normal wear and tear on a roof, but rather was the consequence of a faulty roof design or the way the roof was built. The trial court concluded that this type of damage was clearly contemplated by the NHWA in LSA-R.S. 9:3143(5) in which actual physical damage to roof framing systems is specifically enumerated as a major structural defect.

Based on this ruling, homeowners may have an argument that the damage to sheetrock and other building elements by the Chinese Drywall constitutes a ‘major structural defect,’ and therefore, that the 5 year warranty period applies.

Is Chinese Drywall Damage Exempt?

Once a warranty period is established, work is not complete in determining whether the New Home Warranty Act provides homeowners a remedy against their builder. Another question is whether the damage is specifically exempt from warranty.

La. R.S. 9:3144(B) lists 19 exemptions from the act. Here are some exemptions that may apply to Chinese Drywall damage:

(B)(4)(f): Any damage to the extent that it is caused or made worse by Dampness, condensation, or other damage due to the failure of the owner to maintain adequate ventilation or drainage.

(B)(14): Bodily injury or damage to personal property.

(B)(19): Mold and mold damage.

Remember, NHWA May Not Apply

Now that we have discussed the New Home Warranty Act to some length, remember that the Act may not apply to every home and every builder/homeowner relationship.

In post-Katrina Louisiana, much work was being performed to renovate damaged homes, and a lot (if not most) of the Chinese Drywall was installed into these projects.

If the Chinese Drywall was installed into an existing facility, the New Home Warranty Act would not likely apply.

Once the Chinese Drywall story began dominating news in the construction industry, attorneys, contractors, scientist and inspection outfits naturally looked to cash in on the crisis.

The rush to capitalize on the new demand for drywall inspections and replacement lead Florida’s Palm Beach Post to headline one of its articles on the topic “There’s gold in them there walls.”

While filling a void for services in demand is good, and profitable, those rushing to the aid of Chinese Drywall victims should analysis the legal risk of their new ventures to ensure they aren’t over-exposed and one-day facing expensive litigation and claims.

Here’s a breakdown of some of the legal risk associated with these new ventures.

No Puffing

puffing n. the exaggeration of the good points of a product, a business, real property, and the prospects for future rise in value, profits and growth. Since a certain amount of “puffing” can be expected of any salesman, it cannot be the basis of a lawsuit for fraud or breach of contract unless the exaggeration exceeds the reality. However, if the puffery includes outright lies or has no basis in fact (“Sears Roebuck is building next door to your store site”) a legal action for rescission of the contract or for fraud against the seller is possible.

The Florida Attorney General has already issued a consumer alert for scam artists trying to capitalize on Chinese Drywall problems, and other state’s are likely to follow suit with similar warnings.

While your business may not be a scam, the AG warnings and news reports on related scams will heighten the concern of your customers…and may make your customers over-sensitive to unfulfilled promises of your product or service.

Your company may eventually be exonerated from a complaint to the Attorney General’s office, but it will be subjected to the complaint, incur expense, and possibly find itself with negative press.

To avoid these legal troubles, tell things like it is with your produce and service, and try to avoid “puffing.” It would also help to have an attorney go through your promotional materials and ensure that you are not misrepresenting your company’s services.

Know the Unknown

Here is a fact: it’s impossible to know the unknown. So, why are we suggesting that you do know the unknown? Because we’re suggesting that you simply know that the unknown is there.

And with Chinese Drywall…there is a lot of unknowns.

Anyone setting up a business to remedy, repair, inspect or investigation Chinese Drywall should realize that experts just aren’t yet sure of what causes Chinese Drywall, or how to find it and properly replace it.

If your company purports to repair Chinese Drywall problems, be cautious that a coating may or may not do the trick, that the drywall may or may not need total replacement, and that other building elements may be affected. With the homeowner’s health and integrity of the property at possible risk, incorrect moves can expose you or your company to substantial damages.

Knowing the unknown involves two steps:

- Take inventory of the unknowns associated with your concept; and

- Legally protect yourself with disclaimers, good contracting and clear communication.

Consult Legal Counsel

Since scam artist have increased consumer sensitivity, the legal risks are high and the unknowns are plenty, it’s worth discussing your business plans with counsel.

Through advice and help with contracting, an attorney competent in construction law can help protect your company against liability risks it proceeds to provide services to a new and unpredictable customer.

Learn about good general contracting practices at our firms general construction law blog, the Construction Law Monitor here.

Also, Wolfe Law Group would be happy to review your company’s business model to advise you of its inherent risks, and to help craft a contract that can communicate the risks to the consumer and best protect your business from liability. Contact us to learn more.

Wolfe Law Group’s general construction law blog, the Construction Law Monitor, published three articles over the past two weeks that analyzed the choices faced by builders, homeowners and construction attorneys involved with Chinese Drywall claims.

The three-part series of articles provides these parties with a useful discussion of the decisions that must be confronted as each deal with damages sustained by the installation and supply of tainted drywall.

The article series can be found under the Chinese Drywall Tag on the blog. Or by clicking on one of the following links, whereby each article is briefly discussed.

Builders
This article discusses issues related to making insurance claims, remedying the drywall problem within homes, the duty to mitigate damages and options available to the builder in litigation.

Construction Attorneys
This article discusses the role of class action suits in the imported drywall crisis, warranties and the role of builders in the suits, and how the duty to mitigate damages affects all parties.

Homeowners
This article discusses the choices facing homeowners who have tainted drywall in their homes. It examines the pros and cons of class action suits, individual litigation, and making insurance claims….as well as the ultimate unfortunate job that homeowner might be forced to take: fixing the drywall out of their own pocket (at least for now).

We authored a legal guide on Avvo.com about what Builders & Suppliers should do If They Have Installed or Supplied Chinese Drywall.

The folks at Coastal Contractor magazine highlighted another such “guide” from attorneys at Wood Smith Hening & Berman, LLP. The useful guide is titled “Chinese Drywall Personal Injury Claims: Lessons from Prior Mass Torts.”

While our discussion focused on practical choices facing builders and suppliers who should move quickly to mitigate their damages, involve insurance and retain counsel….this guide focuses on the mass tort aspect of the Chinese Drywall claims.

A tort – for the non-lawyer readers – a body of law that addresses, and provides remedies for, civil wrongs not arising out of contractual obligations. Usually, they are commonly referred to as “personal injury” damages.

As the authors in the Mass Torts guide discuss, the Chinese Drywall claims are interesting in that they present construction defect claims & tort claims. The authors suggest that builders, suppliers and other effected parties should learn from prior mass tort cases in preparing their defenses.

The thesis is good, and useful for both construction attorneys and construction industry participants faced with these claims. It ties in to previous discussions here at the Chinese Drywall Blog about whether Class Actions are a right fit for drywall claims and about builder exposure in the claims.

A few posts here at the Chinese Drywall Blog has hinted to this post – now, though, we’re going to lay it out there.

Lately, the class action legal community has been abuzz about Chinese Drywall, and class action suits have been lodged in at least three states. As this situation unfolds, however, some attorneys are beginning to question whether class action litigation is the best vehicle for homeowners to bring these claims.

Here are the top 3 reasons why Chinese Drywall class action suits are bad for homeowners:

It Won’t Replace Drywall…Or Resolve Itself For Years

The class action suits have mostly named huge foreign manufacturing companies responsible for creating or exporting the defective drywall. It’s virtually guaranteed that these large-scale suits won’t resolve themselves – much less get properly organized – for years.

Moreover, during the interim period homeowners will not receive any help in getting the defective (and potentially dangerous) drywall out of their homes.

Read more about this problem on Stark & Stark’s Construction Litigation Law Blog, under the article captioned: “Chinese Drywall Class Action Suit May Not Help Homeowners For Years If Ever.”

There Are Collection Problems

Just this morning at the China Law Blog, Dan Harris asked those involved with the class actions suits to “Show [Him] The Money.” And based on his experience with foreign judgments, here is what he had to say about the potential recovery by Chinese Drywall class plaintiffs:

The US plaintiffs are not likely going to be able to collect anything from the Chinese defendants by suing in them in the United States and collecting from the German defendants is likely to prove difficult as well.

After all the legal complexities and procedural hurdles are dealt with (read: time and money), if the class action plaintiffs are then able to persuade a court that these foreign manufacturers are liable…it might simply be downright difficult to enforce those civil judgments.

Time Is Ticking

Finally, time is now ticking on Chinese Drywall claims. The class action suits may be giving builders, suppliers and homeowners a bit of false security that all will be well with respect to these claims, allowing the statute of limitations on potential claims and defenses to steadily approach a closing date.

For homeowners, signing up with a class action attorney may give them a false sense of security that their claim is being properly asserted and handled.

However, is the class action attorney sending certified letters to the builders under the New Home Warranty Act? Is the class action attorney asserting a claim under a tort or contract theory against the builder / installer? Are homeowners mitigating their damages?

For builders, installers and subcontractors, no news feels like good news.

However, since they are not named in a class action, and suit is not brought against them, they are not mitigating their own damages, asserting necessary defenses, or bringing claims they may have against suppliers and manufacturers.

In the Chinese Drywall litigation world, the flame is getting closer and closer to contractors, suppliers and home builders. Just this week it was reported that Lennar Co. was named in a Florida class action and a comment on this blog suggested that an individual suit against a builder had been filed.

As these actions continue to turn up, will insurance policies cover builders and suppliers for damages caused by the installation of Chinese Drywall?

Those monitoring the matter have predicted that insurance companies may attempt to rely on a broad pollution exclusion in most GL policies to deny coverage. And in fact, the pollution exclusion clause makes a “center-stage appearance” in a lawsuit recently filed regarding insurance coverage for Chinese Drywall damages.

What is a “Pollution Exclusion”

Of course every insurance policy is different…but in the construction industry, a general liability policy usually has some form of “pollution exclusion” within it. And generally speaking, it looks a little something like this:This insurance does not apply to:

(1) “Bodily injury”, “property damage”, “personal injury” or “advertising injury” which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time.

(2) Any loss, cost or expense arising out of any:

(a) Request, demand or order that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of pollutants; or

(b) Claim or suit by or on behalf of a governmental authority or others for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing, or in any way responding to, or assessing the effects of pollutants.

Pollutants means solid liquid, gaseous, or thermal irritant or contaminant including smoke, vapor, soot, fumes, acid, alkalis, chemicals and waste. [Pg 3] Waste includes material to be recycled, reconditioned or reclaimed.

This exclusion does not apply to “bodily injury”, “property damage”, “personal injury” or “advertising injury” caused by heat, smoke or fumes from a hostile fire. As used in the exclusion, a hostile fire means one which becomes uncontrollable or breaks out from where it was intended to be.

Insofar as Chinese Drywall is concerned, the possible applicability of the pollution exclusion is clear: The drywall has been alleged to emit gases that cause physical problems and deterioration of property.

Courts, therefore, will be called upon to determine whether the damages caused by Chinese Drywall is caused by a “pollutant” as contemplated by the insurance contract.

If it is, builders, suppliers and other construction professionals will be liable for the losses without the benefit of insurance coverage.

If it is not, involved parties will breathe a huge sigh of relief as the potential offset of expense will tally in the millions.

How Louisiana Will Interpret the Pollution Exclusion

The seminal case on insurance pollution exclusions in Louisiana is Doerr v. Mobil Oil Corp., a 2000 Louisiana Supreme Court decision.

In that decision, Chief Justice Calogero examines the history of the pollution exclusion in insurance contracts to conclude that “there is no history in the development of the exclusion to suggest it was ever intended to apply to anyone other htan an active pollutor of the environment.”

Overruling a Louisiana Supreme Court case decided just 1 year prior (Ducote v. Koch Pipeline Co., L.P., 730 So.2d 432, La. 1999), the Doerr court stated as follows:

In light of the origin of pollution exclusions, as well as the ambiguous nature and absurd consequences which attend a strict reading of these provisions, we now find that the total pollution exclusion was neither designed nor intended to be read strictly to exclude coverage for all interactions with irritants or contaminants of any kind. Instead, we find that “it is appropriate to construe [a] pollution exclusion clause in light of its general purpose, which is to exclude coverage for environmental pollution, and under such interpretation, [the] clause will not be applied to all contact with substances that may be classified as pollutants.” The applicability of a total pollution exclusion in any given case must necessarily turn on several considerations:

(1) Whether the insured is a “polluter” within the meaning of the exclusion;

(2) Whether the injury-causing substance is a “pollutant” within the meaning of the exclusion; and

(3) Whether there was a “discharge, dispersal, seepage, migration, release or escape” of a pollutant by the insured within the meaning of the policy.

Using the Doerr analysis, it seems that builders or suppliers would not be considered a “polluter” within the meaning of the exclusion. However, as the Doerr court makes clear, this is a fact-based conclusion that must result after consideration of all relevant circumstances.

Additional Resources about Pollution Exclusions and Chinese Drywall

Since many are anticipating a fight over the applicability of the pollution exclusion to Chinese Drywall claims, there is a significant amount of commentary from lawyers across the Gulf Coast on the topic. Here are some valuable resources for those interested in learning more on this topic:

• Insurance and Financial Implications of Defective Chinese Drywall upon the Construction Industry, Saxe Doernberger and Vita, P.C.
• Applying the Absolute Pollution Exclusion in the ISO CGL Form, Bates & Carey, LLP
• Enforcement of Pollution Exclusions in Standard CGL Policies in the Wake of Doerr v. Mobile Oil Corp., G. Andrew Veazey
• Louisiana Court Strikes Pollution Exclusion for Workplace Exposure, Anderson Kill & Olick, P.C.