Narrowing the Playing Field

In construction litigation, it is critically important that defense counsel and insurance professionals correctly estimate the potential damages. In a perfect world, counsel would be able to immediately determine that dollar amount with absolute accuracy so that the claims representative could assess the value of the case from day one. Often, this is simply not possible. 

There are defenses that may be raised in post-trial motions to mitigate a damage award that seriously impacts the client’s exposure. Whether or not a client may have a large set-off available can have a substantial bearing on whether the value of a case is $20,000 or $2 million. Further, plaintiff’s attorneys do not always have their repair estimates finalized. This can leave a question mark as to what a plaintiff will seek in damages at trial. Also problematic, clients cannot always recall their scope of work on a given project. This makes it nearly impossible for the attorney to parse repair estimates for the amounts potentially attributable to their client’s scope of work. If the associated claims include punitive damages, treble damages, and damages in the form of attorneys’ fees and costs, this is considerably more dangerous. 

Regardless of whether those damages are covered under the policy, it is everyone’s goal to eliminate (or mitigate) the risk to the client. These subjective, amorphous damages allow runaway juries to award large verdicts in cases where objective damages may be relatively small.

While there are always going to be circumstances outside of the control of attorneys and the claims professionals with whom they work, predicting the real risk to the client and eliminating subjective damages is critical.

Following is part one of a two-part article in which we examine the South Carolina landscape and strategies to limit liability for subcontractor clients.

The Stoneledge Doctrine and the 
One-Two Punch

In South Carolina, a party may collect punitive damages if it can prove injury due to “willful, wanton, or reckless conduct.” [See South Carolina Code Section 15-32-520(D)]. This is a low bar when one considers that violation of a building code can be considered evidence of gross negligence, and certain building codes are incredibly vague and subject to interpretation. 

Most subcontractors in construction cases face the possibility of claims by both the plaintiff and the general contractor. General contractors typically seek to cover the damages the plaintiff asserted against them by pursuing their own claims against subcontractors. However, with careful planning, a subcontractor defendant may be able to escape liability to the general contractor, including for gross negligence. 

First, the South Carolina Court of Appeals ruled in Stoneledge at Lake Keowee Owners’ Ass’n, Inc. v. Clear View Const., LLC that a subcontractor cannot be sued by a general contractor for causes of action that are merely disguised in indemnification. In Stoneledge, a general contractor filed various claims in tort and in equity against its subcontractor. However, when challenged, the court ruled that the general contractor’s tort claim was “a claim for equitable indemnity,” explaining the allegations and remedies sought by both actions stemmed directly from the potential liability the general contractor could face for the damages claimed by the plaintiff. (See Stoneledge, 776 S.E. 2d at 428-429). 

The court outlined a two-part test for determining whether a general contractor’s claims in tort are merely indemnification in disguise. First, do the general contractor’s claims against the subcontractor hinge on the plaintiff successfully prosecuting the general contractor? Second, are the damages alleged by the general contractor against the subcontractor merely repayment of the damages and attorneys’ fees the plaintiff has levied against it? If the answer to those questions is “yes,” and it usually is, then a subcontractor can eliminate all claims excluding indemnification. 

Having successfully eliminated the claims in negligence, including claims for gross negligence that include the potential for punitive damages, counsel can turn her attention to eliminating the remaining indemnity claim. Subject to a very narrow exception, in South Carolina, the doctrine of “unclean hands” means that if the general contractor is even 1% liable, then it cannot recover in indemnity. If counsel successfully secures testimony from the general contractor conceding its own responsibilities for its subcontractor’s work, then all of the general contractor’s claims against the subcontractor may be eliminated through dispositive motion practice. 

This does not get the client out of the case; it merely ends the general contractor’s ability to collect against the subcontractor, but it would be myopic to misjudge the value of eliminating the general contractor claims. Even if the general contractor’s claims were not very strong or valuable in and of themselves, a general contractor may try to block a subcontractor’s attempts to settle with the plaintiff, keeping a subcontractor in the case longer to squeeze some settlement bloodwite and avoid being the last man standing at trial. Without a claim to hold the subcontractor in the case, counsel may sidestep the general contractor, settle early, and avoid years of litigation.

The Unfair Trade Practices Act

The South Carolina Unfair Trade Practices Act is tricky. It is generally considered a very high bar to prevail, but the mere threat may greatly increase settlement costs in an effort to avoid the possibility of treble damages, punitive damages, and attorneys’ fees at trial. Fortunately, there is a narrow, but oft-overlooked, method for eliminating these claims.

In the case of Reynolds v. Ryland Group, Inc., 340 S.C. 331, 531 S.E.2d 917 (2000) the Supreme Court of South Carolina accepted certification of the question:

“Under South Carolina law, can plaintiffs in a residential construction-defects case sue defendant builder, seller and developer under the South Carolina Unfair Trade Practices Act if plaintiffs did not purchase their residences from defendant but from the original homeowner more than three years after the initial sale?”

The court answered the question as follows: 

“Although there is no specific provision within SCUTPA which limits a cause of action to an immediate purchaser, we answer the certified question in the negative.” (emphasis added)

In sum, if the plaintiff is not the original owner, he has no right of recovery under the SCUTPA. This has not been tried yet in the context of a multi-family project or a multi-house pseudo-class action, but, hopefully someday soon defense counsel will be permitted to at least try to use this to attack the claim in a big-dollar, high exposure condominium or multi-house neighborhood case.