Document Sample

                                     Stephen J. Henning1

                            Wood, Smith, Henning & Berman LLP


        A suit brought by an affluent homeowner against their builder usually represents the
culmination of a highly emotional sequence of events related to the construction of their
dream home. Packed within the four corners of the operative complaint are typically
allegations of fraud, misrepresentation, defective construction and unfair dealings which are
laced with hostility, revenge and anger. Money often is no object for these individuals;
having already poured incredible resources into the construction of their proverbial castles.

        Distinguishable from mass produced housing or the remodel job gone bad, the high-
end single family home lawsuit represents perhaps the most challenging case for both the
attorney and the claim professional with respect to defending the builder. Resolution of this
case is a two- fold task, requiring evaluation of the merits of the claim, coupled with
removing the emotion and passion of both the homeowner and builder. The emotional
intensity inherent in this type of suit presents a greater prospect of proceeding to trial.
Accordingly, the claims must be evaluated with an eye towards resolution, while at the same
time, being ever mindful that the case may ultimately proceed to trial.

        This paper deals with practical issues confronting the claim professional and attorney
when defending the high-end single family home case, as well as the aspects of the litigated
high-end/custom home case which make it unique. To better understand these issues and
aspects, three factual scenarios, most common to the high-end case, are presented and
analyzed. Against this backdrop, we evaluate technical litigation strategies available to the
attorney and claim professional to assist in moving the case toward resolution. Regardless of
the strategy employed, the high-end home litigation is more likely to proceed to trial.
Consequently, preparation for this event should be mapped out early in the life of the case.
Given the breadth of the subject area, this paper does not evaluate in depth the legal theories
available to the defense of the builder; it merely highlights the areas for exploration as the
facts may warrant.


       In the mass produced home case, the homeowner experiences limited contact with the
builder. Such contact usually entails discussions regarding product, model, colors, upgrades
and price. Even this type of contact is extremely limited and most of these details are already
formalized in the purchase contract. Punch list or warranty work may possibly involve some
limited personal interaction between the homeowner and builder, but just as likely, the two
may never have any direct contact.

        In contrast, the construction of a custom home involves extensive homeowner contact
with the design professional and builder. Design professionals must translate expectations as
to the size, shape, feel and look of the home into unique plans and specifications. Builders
make promises to the homeowner as to quality, cost, time, project supervision and
coordination of trades. This extensive contact between the homeowner, the builder and the
design professionals transforms a simple home purchase into a logistical labyrinth; creating
situations that help the fury when a suit is filed. Some illustrations of how this extensive
contact changes the dynamic of the high-end home case are detailed below.

        Custom contracts drafted and executed between the parties often specify in great
detail the expectations and intentions of the parties. Depending on the sophistication of the
parties, these building contracts vary greatly in terms of defining the duties, scope of work,
indemnity, insurance, time, dispute resolution and other critical provisions.2 Often the owner
misunderstands certain terms found in the contract, such as allowances, exclusions and other
mechanisms, whose purpose is to define the price. As explained in more detail later, this
confusion can result in a fraud in the inducement claim once a suit is filed.

        The extensive contact between the parties may further result in increased attention
being paid to the progress of the construction by the owner. The homeowner feels entitled,
even obligated, to frequently visit the site. These visits will often result in changes to the
construction in order to maximize views, incorporate decorator ideas, or accommodate ever
changing minds. Instructions may be given informally in the field directing workers to
effectuate changes that deviate from the plans, or alternatively, additional instructions may
be conveyed as a formal change order. Such seemingly innocent changes, however, may add
to the contract price or time required for completion.

       Site visits by the owner also manifest as increased costs of construction. Time is
money for the builder, and changes in the field impact the ability to order materials, schedule
workers and coordinate work in a cost-effective manner. While individual alterations may
not seem worth the time and trouble to draw up a formal change order, these small changes
can quickly multiply, requiring a formal change order which increases the contract price and
extends the time for completion of construction. Builder proposed changes similarly affect
the cost of construction. The homeowner often feels compelled to accept whatever change is
presented, as they feel that they are too far along in the construction process to change
contractors, or that they need to proceed as planned in order to complete the home in the
desired time frame. Such increased construction costs may impact the owner's budget or
expectations of project cost.

       Unscheduled construction delays present yet another aspect that serves to frustrate the
process. Delays occasioned by problems with weather, materials, and sequencing may not
only confound the homeowner, but may also result in an increase to the price tag for the
home. Likewise, homeowner delays in payment, for whatever reason, may amplify
contractor tensions and impact the performance of its subcontractors who in turn are not
being paid promptly.

        In the end, the owner may find construction of the custom home to be more stressful
than initially contemplated given the time, money and energy consumed. Innocent statements
made to the homeowner during the course of construction as to the shortcomings in a sub-
trade or design may fuel the litigation fire later in time. At the same time, builders are not
infallible and problems do arise in the work performed - either as a result of poor
supervision, coordination or sloppy workmanship.


        In order to effectively defend the high end case, it is critical that the attorney and
claim professional understand the homeowners motivation. Armed with an understanding of
the driving force of the homeowner, the attorney and claim professional can develop the
appropriate strategy. Experience dictates that there are three classic factual situations which
are the harbinger of homeowner litigation on a custom home. We examine each scenario

        The first scenario occurs where the homeowner runs out of money as a result of
increased changes in the scope of work and contract price; leaving the homeowner unable to
complete the home. Here, the suit alleging various contractual and tort breaches is oftentimes
a menacing tool designed to offset amounts validly due to the builder, who has already
demanded payment through a mechanics lien or other tool. Alternatively, the suit functions
as a device through which the owner hopes to fund completion of the project by claiming a
myriad of shortcomings in the as-built conditions. In essence, the owner seeks to escape the
payment obligation to the builder or otherwise offset the amount due by complaining that the
construction itself is poor, defective and incomplete. Traditionally, it is a race to the
courthouse in terms of whether the homeowner is a plaintiff or cross-complainant in such

        The second scenario encompasses the litigation as the end result of a relationship
gone sour. This is the case of broken trust and confidence, leading to a classic case of
revenge litigation. This type of suit is predicated upon representations made during the
contracting and construction process, as well as unfulfilled expectations. Assertions made as
to quality, price and time may be twisted into misrepresentation and fraud based causes of
action. Innocent admissions regarding the performance of sub-trades may come back to
haunt the builder. On the flip side of the coin, the builder may be similarly frustrated with the
homeowner who has delayed the project, directed numerous changes, and subsequently
balked at the costs directly attributable to those changes.

      The third scenario involves litigation bred from failure to perform customer service,
warranty work, or otherwise address valid concerns of the homeowner. Warranty periods that
are strictly enforced by the builder may leave the homeowner no other alternative than to file
suit in order to remediate construction defects that manifest after the expiration of the
warranty period. Water intrusion through roofs, windows or slabs may give rise to
exploration of other as-built conditions and, in the end, result in the classic suit against the
builder. Deceptive claims by the builder as to the "highest quality of construction" coupled
with the massive sums of money involved inevitably create an emotional and unhappy


        Utilizing the classic fact patterns and motivations inherent in the high-end home suit,
we have set out below some general strategies to apply in defense of a claim of defective
construction. We examine the application of these strategies as a tool for diffusing a hostile
situation and achieving an equitable and timely resolution of the case. By proceeding in the
manner set out below, the attorney, builder and claim professional can position the suit for
resolution, while at the same time accomplish appropriate trial preparation.

A.     Eliminate Problematic Causes of Action and Theories of Recovery

        Given the factual scenario under which the high end home is constructed, the
operative complaint will often assert various theories of fraud, misrepresentation, emotional
distress and contractual breaches, in conjunction with various claims of defective
construction. Given the potential for punitive or exemplary damages, it is imperative for the
attorney to eliminate, if possible, these problematic causes of action. While this paper is not
meant to be a legal primer on the case law relevant to defeating or defining proper causes of
action, problematic causes of action and cases germane to their examination are discussed.
Similarly, we set forth strategies to be employed by any defense counsel in order to
accelerate the case towards resolution, or in the alternative, prepare the case for trial.

       1.      Eliminate Strict Liability Causes of Action

         Many litigators who are only slightly familiar with the nuances of construction defect
practice have a vague notion that defective construction may be encompassed by the rules of
strict liability, and will often allege this cause of action when they file the complaint. While it
is true that a strict liability cause of action is available against some classes of builders in
several states, most parties to a high-end single family home construction contract will not be
subject to strict liability.

         Because strict liability is limited to a specific class of builder-developers, many times
it will be possible to eliminate the cause of action early in the pleading stage, or to convince
plaintiffs counsel to amend the complaint to drop the cause of action. Eliminating this cause
of action has the double benefit of both increasing plaintiffs pleading burden, thus making
him more vulnerable to demurrer, and subjecting plaintiff to more rigorous destructive
testing and investigation in order to prove causation. Further, elimination of the strict liability
claim will allow the builder to escape liability exposure for all areas that he is not directly
responsible. In order to understand strict liability's application to construction defect law, it is
useful to examine the evolution of strict liability beyond general tort law.

        California's strict liability law, for example, is founded upon Greenman v. Yuba
Power Products, Inc., the seminal case holding producers of products, intended for
distribution to the public, strictly liable for any injury occurring during a foreseeable use of
the product.3 This tort doctrine was further extended some three years later by Gherna v.
Ford Motor Co., which held that strict products liability could be imposed upon a
manufacturer based solely upon physical harm to property, and that bodily injury was not
required.4 Both cases dealt with items which were mass produced, intended for public
consumption, and flowed freely through the ordinary stream of commerce.

         However, shortly after the theory of strict liability was formally recognized in
California, Kriegler v. Eichler Homes,5 further extended the strict liability doctrine to
encompass construction defects found in mass produced homes.6 Justifying this expansion
of stict liability application, the court announced that "in terms of today's society, there are
no meaningful distinctions between [the] mass production and sale of homes and the mass
production and sale of automobiles."7 In holding the developers of mass produced homes
strictly liable, the court explicitly announced that buyers of such homes did not stand on
equal footing with the developers anymore than a car buyer stands on equal footing with a
producer. As such, buyers need the protection of strict liability in order to protect them from
unscrupulous builder-developers of "massed produced" housing.8

        The Kriegler decision more or less represents the state of the law today. Strict liability
is firmly implanted in both California and American jurisprudence while, at the same time, it
is also confined for the most part to "mass produced" homes in the construction defect

       While strict liability is still theoretically only applied to "mass producers" as opposed
to custom home builders, recent court decisions have begun to expand the definition of "mass
producer." This expansion may have the effect of including within the ambit of "mass
producers" some low volume contractors whose primary business is the construction of high-
end single family homes.

       This trend is exemplified by the 1997 case of Fleck v. Bollinger Home Corp., in
which the court affirmed the proposition that "one may not be liable for manufacturing
homes or selling lots under the doctrine of strict liability unless one can be deemed a 'mass
producer' of such homes."9 Despite this recitation of the general rule, the court held that the
builder of the plaintiffs custom home was a "mass producer" because he had "built and sold
11 homes to the general public in the general area between 1984 and 1989."10

         Not only did the Fleck court allow a mere three custom homes per year in the general
area to suffice as "mass production," they also allowed the lower court's instruction on strict
liability to include the phrase "substantial numbers" instead of "mass" in the jury instruction
regarding the issue of scale of production.
         While doctrinally the rule imposing strict liability on homebuilders has changed very
little since the 1960s, recent holdings demonstrate that courts are beginning to take a more
relaxed view of who qualifies as a "mass producer." More importantly, the Kriegler
rationale11 seems to have faded into the background of the "mass production" equation. The
growing trend seems to be a willingness by courts to impose strict liability even on small to
mid-size developers for defects in the property, so long as they have built a "substantial
number" of homes in the same general area.

       While this trend toward an expansive definition of "mass production" may appear
disheartening to construction defense litigators, there is an ample body of case law
supporting a more traditional definition of "mass producers." Additionally, many
construction professionals will still fall outside even the broadest definition of mass

        If your client does not qualify as a "mass producer" and strict liability has been
alleged against him, it is important to draw this to the attention of both opposing counsel and
the supervisory court. Doing so may both eliminate a substantial cause of action in the early
stages of the litigation and place a much more formidable evidentiary obstacle in the path of
plaintiffs counsel.

       2.     Eliminate Fraud Causes of Action

        Many disgruntled purchasers of high-end single family homes will allege that they are
the victims of fraud by contractors or design professionals, based upon statements allegedly
made to them regarding the finished condition of the home under construction. By making
allegations of fraud in the inducement or of fraudulent misrepresentation, plaintiff
homeowners may claim punitive damages not ordinarily available in contract based causes of

       Because of the possibility of recovering punitive damages, allegations of fraud
surrounding the dispute are attractive to the plaintiffs bar. Regardless of whether plaintiff
alleges that the misrepresentations were negligent or intentional, the proof problem remains
the same. Plaintiffs counsel must establish that the party who made those representations did
so with the intent of inducing the person who heard those statements to enter into the
transaction which forms the basis of the suit.13

        Many times this requirement alone may be enough to eliminate a fraud cause of
action in the early stages of litigation. Because many construction contracts are secured after
competitive bidding, the contract often will have been confirmed prior to the parties' first
meeting. Once the parties have signed and executed the contract to construct the dwelling, it
would be virtually impossible for any statements or representations made afterward to be
construed as having been intended to induce entry into a transaction. The requirement that
the statements be made with the intent of inducing the other party to enter into the transaction
in question likewise prohibits plaintiffs from alleging statements made during construction as
the basis for a fraud cause of action. In the final analysis, any allegedly fraudulent statements
must be made prior to the commencement of some transaction. If the complaint is analyzed
with an eye toward this temporal order: statement prior to the close of the transaction; many
claims of fraud which involve representations made after execution of the contract may be
summarily eliminated.

        In addition to the intentional inducement prong of a successful fraud allegation, the
plaintiff must also have actually relied upon the statements when entering into the
transaction.14 This may prove to be a difficult evidentiary burden for plaintiffs to shoulder.
Many times the types of statements claimed as the basis of fraud are reassurances of the
quality of the work such as: "the finest materials known to man," "the best workers in the
area," or "a perfect finish;". These types of statements tend to be given little weight by courts
across the nation.15

        Often times, homeowners who allege such aggrandizing statements as the basis of a
fiaud claim are unsuccessful. Courts are quick to characterize superlatives offered during
construction, or even contract negotiation as "mere puffery."16 The lack of weight that such
statements cany to both parties may be used to militate against findings of both intent to
defraud and reliance. In such negotiations, both parties understand that generic statements
asserting the high quality of the product to be delivered are merely statements indicating the
competence of the contracting party.

        Lastly, damages arising out of promises made during construction may be very
difficult to establish. Any promises peculiar to a homeowner's individual taste may not be
quantifiable, and hence compensable as damages. For example, it would be virtually
impossible for a homeowner to state damages springing from a builder's breach of his
obligation to honor a specified general "feel" or "theme." Oftentimes in high-end-home
construction, representations are made, either verbally or in the construction contract,
regarding esoteric conditions.

        A homeowner might specify that the exterior is to be "cactus" in color, or that a
fountain give the impression of falling rain, or that the overall design have a "Mediterranean"
feel. While all of these specifications may be tremendously important to the homeowner, and
while the homeowner may feel damaged should these specifications not be achieved, it is
hard to quantify the resultant damage. Even if the homeowner can establish the three prongs
required by a fraud allegation: that a builder falsely represented that he would abide by the
specification, the builder intended to induce the homeowner to enter into the construction
contract, and the homeowner relied on those representations in entering into the contract in
reliance on the representation; actual damages will be difficult to state.

       Further, whether the damage ever occurred at all will be difficult to establish.
Reasonable minds can differ as to whether the house is cactus, or whether the fountain
resembles rain, or if the home feels Mediterranean. The bottom line is that if the plaintiff is
not able to state damages which may be quantified by an objective appraisal of as built
conditions, it is likely that he will not be able to recover.
       Anytime this type of "not delivered as promised" claim of fraud arises, defense
counsel must analyze the transaction through a three step process. First, were the statements
made after the transaction was a fete accompli? Second, did plaintiff really rely on those
statements, or did both parties recognize them as "mere puffery?" Third, even if a fraudulent
misrepresentation regarding the contract may have been made, are there any quantifiable
damages as a result?

       3.      Eliminate "Indirect Fraud" Claims

       Fraud claims have for years been popular in construction litigation claims. A
preeminent reason for their popularity is the fact that most of the causes of action for
defective construction find their basis in contract law; such as breach of warranty and breach
of contract. Fraud, however, is grounded in tort, making it subject to the possibility of
punitive damage and thereby raising the total aggregate liability exposure presented by the

        In the past, the privity of parties requirement imposed the greatest limitation of a
fraud cause of action. In the context of high-end single family home litigation, this meant
that although plaintiffs could often establish direct privity between themselves and the
designer and perhaps the general contractor, privity with the sub-contractors and various
other parties could not be established. This left these parties immune to fraud claims.

       In recent years, courts have begun to erode the privity barrier that formerly served to
protect these parties. Through an indirect fraud theory, a plaintiff can, in effect, allege that
fraudulent misrepresentations made to an intermediary party affected them in the same
manner as if they had been in direct contact with the individual making the fraudulent

        A longstanding trend in many states has allowed a cause of action for fraud to stand
based upon statements relied upon by a plaintiff not directly privy to those statements. To
recover, the plaintiff must establish that the statements were made with the intent that
plaintiff-third party would rely and act upon them.17 Once again, however, courts have
generally required that the party making the false statement intend that statement to be
passed along to the particular third party who claims to be the victim of the fraud.

        A relatively new theory of indirect fraud has been achieving growing acceptance in
some courts. Under this indirect fraud theory, a plaintiff can argue that they are a member of
the class of people whom fraudulent statements were intended to influence.18 These
plaintiffs are allowed to state a cause of action for fraud as if they were the direct recipients
of the fraudulent information. Such a cause of action can be described as "indirect fraud"
because the party bringing suit was not a direct victim of the fraudulent statements, but rather
is merely a member of a class intended to be defrauded.

       In an indirect fraud cause of action, plaintiffs may not be required to allege that they
are a member of the class of intended victims at the time the statement was made. The only
requirement would be that plaintiff became a member of the class some time after the
statement was made, and that plaintiff detrimentally relied on the fraudulent statements. If a
contractor who made fraudulent statements, had reason to expect that those statements would
be transmitted to the class of persons that the plaintiff is a member of, a cause of action for
indirect fraud may be stated.19

        This indirect fraud theory clearly relaxes the pleading and evidentiary requirements of
stating a fraud cause of action, making it more likely that plaintiffs will be able to plead these
causes of action successfully. By implication, a sub-contractor who dealt with the general
contractor directly or a general contractor who reported only to the design group may face
exposure to damages based on indirect fraud.

        In order to eliminate indirect fraud from a pleading, focus should be directed on the
intent and damage elements of the cause of action through procedural and discovery tools.
Further, the content of the alleged statements must be examined to determine whether the
statements in question, even if fraudulently made, would induce reliance on those statements
by a person standing in the plaintiffs shoes.

       4.      Eliminate Claims of Emotional Distress

        Building a custom home can be an emotional roller coaster. When problems arise in
the construction sequence, the inevitable frustration can provide the basis for emotional
distress claims. While it is possible to recover damages for infliction of emotional distress
springing from defects in construction, significant restrictions are imposed on the cause of
action in a construction defect setting that do not apply to general civil liability cases.

        Several states recognize a recovery theory for infliction of emotional distress arising
out of a construction defect lawsuit. Because Nevada law allows for emotional distress
recovery in tort actions, the Nevada Supreme Court has explicitly endorsed recovery for
emotional distress in a construction defect suit on the general grounds that negligent
construction is a tort."20 Likewise, the Massachusetts Supreme Court, although declining to
address the issue directly, has intimated that in some situations emotional distress damages
may be recovered in a negligent construction context.21

       Similarly, in California, courts have held that a plaintiff may recover damages for
emotional distress suffered as a result of physical injury to property only.22 In general, the
courts have divided such claims into two categories: percipient witness claims and direct
victim claims.

      In a percipient witness situation, the gravamen of a plaintiffs claim is that he was so
traumatized by witnessing the result of the defendant's tortuous act that he has suffered
emotional distress, despite the fact that the defendant's actions did not directly effect him.23
Whether or not the person claiming damages was a foreseeable bystander of the event
determines compensation in a percipient witness distress case. Though the possibility of
recovery and application to construction defect claims is remote, percipient witness claims
should be familiar to a practitioner defending against emotional distress claims.

       Emotional distress suffered by plaintiff as a direct and proximate result of defendant's
negligent conduct represents the most commonly alleged form of the cause of action. Direct
victim theory embodies the method by which plaintiffs attempt to collect emotional distress
damages for property damage suffered as a direct result of negligent construction. As
opposed to the percipient witness form of emotional distress,24 the direct victim theory only
requires proof that it was foreseeable the victim would suffer emotional distress as a result of
defendant's negligent act.25

        Explicit endorsement, in the form of dicta, exists as to the direct victim theory of
recovery for emotional distress as a remedy for plaintiffs claiming such distress as a result of
physical injury to property only.26 The test for allowing this type of emotional distress
recovery is founded upon the relationship between the plaintiff and the defendant. If a duty
exists, and the nature of the relationship makes the emotional distress foreseeable, the claim
will be successful.

               "[U]nless the defendant has assumed a duty to plaintiff in which the emotional
               condition of the plaintiff is an object, recovery is available only if the emotional
               distress arises out of the defendant's breach of some other legal duty and the
               emotional distress is proximately caused by that breach of duty. Even then, with
               rare exceptions, a breach of the duty must threaten physical injury, not simply
               damage to property or financial interest."27

        Accordingly, a preexisting relationship between plaintiff and defendant is necessary
to state a cause of action. This requirement often precludes homeowner-plaintiffs from
successfully prosecuting emotional distress claims in construction defect litigation.

        However, the current state of the law is in flux. Last year, in Erlich v. Menezes, the
Second Appellate District of California upheld an emotional distress award in favor of a
plaintiff whose home suffered numerous structural and water intrusion related defects as a
result of a contractor's negligent construction. The case is currently pending review by the
California Supreme Court.28

        In Erlich, the appellate court held that the foresee ability / special relationship
requirement for emotional distress damages was satisfied. The appellate court found that the
home in question was structurally defective, presenting a direct threat of physical injury and
that a preexisting contractual relationship existed between the contractor of a custom home
and its owners."29 Having established the two requisite elements, the court held that the
negligent construction was the proximate cause of the emotional distress.

       The narrow scope of the holding, a finding of both a direct contractual relationship
and a fear for physical safety, creates strong doubts that the Supreme Court will overturn the
decision. However, the area still maintains interesting and undecided issues. Questions still
remain as to the type of relationship required between the parties (what about a subsequent
purchaser of a custom home with no privity?) and the rare instance where fear of physical
danger is not necessary.

        While tremendous amounts of case law support an argument against awarding
emotional distress claims arising from construction defect allegations, a gradual lowering of
the threshold appears to be taking place. In most instances such claims will be susceptible to
challenge based on the lack of foresee ability of emotional distress resulting from the alleged
negligence. To ensure denial of the emotional distress claim, defense counsel should be
prepared to distinguish the facts of their own case from the Erlich facts, both in pleadings
and negotiations.

       5.      Identify Pure Economic Losses Which are Not Recoverable

        The bar placed upon recovery of economic damages for injuries resulting from a
tortuous act, as opposed to a breach of contract, flows directly from the essential differences
between the elements of the two causes of action. It is hornbook law that in order to prove
negligence, a plaintiff must establish that the defendant was negligent, that the defendant's
negligence was a cause of injury, and that damage, loss, or harm occurred to plaintiff as a
result of that negligence.30 In contrast, to prove breach of contract, a plaintiff must establish
that defendant's actions resulted in a material breach of the agreement between the parties,
thus imposing liability on the breaching party.31

        The reason for this threshold distinction is that in tort, the tortfeasor has not agreed to
behave in a particular manner with respect to the tort victim. The tortfeasor's sole obligation
is to act with reasonable care towards those around him. As a result, only foreseeable injuries
caused as a proximate result of his negligence may be recovered. In contract causes of action,
the parties have agreed to fulfill reciprocal obligations while being aware of the unique
damages that may result from failure to perform as promised. In the construction defect
context, this distinction means that plaintiffs will be precluded from recovering
compensation for certain damages even if they prove that the defendant-contractor
committed a tortuous act.

       California courts have time and again honored the distinction between the duties
owed to the public in general and special obligations that parties may undertake via contract.
In a particularly well articulated opinion, the California Supreme Court distinguished the
obligations owed in negligence and contract settings in the context of strict liability (tort) and
breach of warranty (contract).

               The distinction that the law has drawn between tort recovery for physical injuries
               and warranty recovery for economic loss is not arbitrary and does not rest on the
               "luck" of one plaintiff in having an accident causing physical injury. The
               distinction rests, rather, on an understanding of the nature of the responsibility a
               manufacturer must undertake in distributing his products. He can appropriately be
               held liable for physical injuries caused by defects by requiring his goods to match
               a standard of safety defined in terms of conditions that create unreasonable risks
               of harm. He cannot be held for the level of performance of his products in the
               consumer's business unless he agrees that the product was designed to meet the
               consumer's demands ... Even in actions for negligence, a manufacturer's liability
               is limited to damages for physical injuries and there is no recovery for economic
               loss alone.32

        The court takes the position that it is inherently unfair to hold a party liable for
damages which are peculiar to the injured party, unless the tortfeasor has had the injured
party's susceptibility to that particular injury called to his attention and agrees to accept that
risk. This awareness of a danger of injury peculiar to the victim constitutes a "special
relationship". This relationship is native to contract, but only seldom arises in tort.

       In defending the high-end single family home, the homeowner will often be offended
by elements in design or construction that go unnoticed by the public at large. A homeowner
may have required a certain angle for a wall in order to accommodate a particular piece of
furniture, or had a visual image of the completed product that did not match the finished
design. So long as the "negligent" installation did not cause any physical injury to other
property or persons, plaintiff will not be able to state a cause of action sounding in tort.
Absent showing of a "special relationship" any such allegations will be made at the peril of
summary judgment or demurrer.

        This simple distinction between recoverable damages for tort and contract may allow
the astute construction defect defense attorney to eliminate early on all tort causes of action
for which physical injury is not pled apart from economic loss. In addition, the elimination of
tort causes of action will knock out punitive and treble damages, and in all likelihood, knock
out claims for attorney fees and costs as well.


              Immediate case evaluation is critical in the high end custom home case. In
       addition to approximating damages claimed, defense counsel, in conjunction with the
       claim professional, must identify viable defenses to claims contained in the
       complaint. At the same time, facts which give rise to an action against the homeowner
       and other trades need to be identified, explored, and set out in a cross-complaint. At a
       minimum, this includes the following:

               1.      Ascertain Critical Documents

                Depending on the builder, the documentation from the construction of the
       home may be scant or voluminous. Typically, if problems arise during the
       construction sequence, extensive documentation will be generated. While some
       builders are meticulous in terms of securing the requisite documents",33 other builders
       fail to secure and maintain such documentation. Those builders who construct the
       home on speculation, with the hope of turning a profit on its resale, may see no need
in maintaining tight document control. Some builders destroy the records, either
intentionally or through inadvertence once the building is complete.

       One thing to be cognizant of in the custom / high-end home case is the intense
documentation that the homeowner typically will have before, during and after
construction. It is not uncommon for the homeowner to frequently visit the project
and photograph or videotape the work in progress as construction proceeds. These
items may be valuable in terms of evaluating the as-built conditions and allowing for
reduced destructive testing. At the same time, photographs or videos can be powerful
evidence regarding the standard of care and construction practices employed. Such
documentary evidence can also aid the respective construction experts in the
preparation and presentation of their opinions.

       Securing these documents early in the process will allow the builder's counsel
to evaluate all information available and to factor that information into the litigation
strategy. Viable defenses can be developed through the document trail. Similarly,
these documents can be developed and woven through the cross-complaint, discovery,
dispute resolution meetings, and trial.

       2.     Propound Focused Discovery

        Allegations of the homeowner against the builder can change with the passage
of time. In this regard, it is imperative to ascertain the contentions of the homeowner
so each allegation can be addressed. Early in the case, counsel will want to nail down
the story of the homeowner case so the basis for the allegations are known. Armed
with this information, discovery can be crafted and the litigation plan can be focused
to address the allegations.

         Counsel and the claim representative should also be mindful in terms of the
discovery tools which are proper in construction litigation. However, given the tort,
fraud, emotional distress and other theories which are usually at issue, the allegations
can lend themselves to contentious discovery, requests for admissions, and
depositions. Sometimes the simplest way of nailing the story down is through a
deposition of the homeowner. Deposition requires that counsel be prepared to exploit
all of the affirmative defenses and allegations required for the cross-complaint.

       3.     Teamwork With Builder, Attorney and Claim Professional

        Preliminary evaluation of the claims and preparation of strong reply papers is
vital. The builder, attorney and claim professional each have information available to
them which, when properly utilized, can facilitate evaluation and preparation of the
case. Performing this task early in the life of the case saves time and money through
development of a coordinated, thoughtful defense strategy.
       4.      Coordinated Defense With Construction Trades

       It is often said that the best offense is a strong defense. To this end, care
should be taken to avoid the construction trades pointing the finger at each. Rather,
the construction trades need to let go of sour feelings over delayed payment and
personality issues, so they can work together in defeating any ill-founded claims of
the homeowner.

        Groundwork for this cooperative stance should be laid by counsel for the
builder early in the case. While it is true that the builder will most likely be cross-
complaining against the subcontractors and design professionals, open lines of
communication must be maintained in order to facilitate cooperation. Accordingly,
care should be taken to build a working relationship with the subcontractors
emphasizing that working together will minimize the claims and benefit all. This is
not to say that the builder will shut his eyes to valid defenses; rather, that working
together will minimize or eliminate the claims which have no justification.

       Experience has proven the best way to accomplish this coordinated defense is
by a meeting of the construction trades early in the case. This meeting of counsel
should take place either prior to inspection of the home or immediately following an
inspection. A good rapport, built and led by the builder's counsel, is imperative to
ensuring the defense is united.

       5.      Compliance with Plans and Specifications as Absolute Defense

       When homeowners issue orders to either the construction or design
professionals involved in the project, many causes of action that later arise may be
defeated when the changes they issued prove to have caused the damages complained
of. As a matter of California law, for example, when an accident or defect is the result
of work performed by a contractor in conformance with plans and specifications
provided by a homeowner; and those defects are a result of inadequacies in the plans
and specifications, the contractor is not liable for injuries or damages.34

       It is not uncommon for homeowners to issue changes in the construction as it
progresses. The owner may visit the site, notice that a condition is not developing as
they envisioned it on paper, and order that changes be made so as to suit the needs of
the family. However, these changes to plans and specifications may a have a twofold
impact upon the agreement between the parties.

         First, if the changes themselves result in a defective condition that later forms
the basis of a construction defect suit, those changes may be pled as a defense by the
contractor. As long as the changes requested by the homeowner are followed to the
letter, and appropriate steps are taken to incorporate those changes under the original
contract, the contractor may escape liability for defects that are a direct result of those
homeowner directed changes. To excuse liability in the homeowner-issued change
order context, the argument must be made that the homeowner has assumed
responsibility for the effects of this change. One California court commented on the
basis for such a rule as follows:

       "One important limitation recognized in several cases is that the contractor is not
       liable if he has merely carried out carefully the plans, specifications and directions
       given him, since in that case the responsibility is assumed by the employer ...
       Although there were no written plans or specifications in the present case, no
       reason appears why they should have been required. The rationale is simply that
       the employer has assumed the responsibility."35

        Second, multiple homeowner-issued change orders may trigger an
abandonment of the original contract. Abandonment is especially likely when the
homeowner issues the change orders himself and fails to follow the explicit
provisions in the contract dictating the procedures for issuing change orders. This
theory of defense is especially useful when the plaintiff-homeowner has alleged
failure to execute the blueprints and specifications accurately, or has refused to
acknowledge extra costs incurred during construction on the basis of a contracted for
maximum price.

        While under the general rules of contract law, completion of a contract is
inconsistent with abandonment of the same contract, some courts have carved out a
general exception for construction contracts.36 Under certain situations described
below, a contractor may complete construction of the project free of the original terms
of the contract, including final design specifications and maximum price covenants.

        Abandonment of a construction contract is generally found when two
conditions are met. The first indicia of abandonment of the contract is a failure to
utilize the procedures for issuing change orders which are delineated in the contract.
The second indicia of abandonment arises when a homeowner's change orders are so
pervasive that they alter the original purpose of the contract.

       In the California case, Opdyke & Butler v. Silver, the court held that numerous
verbal change orders, made contrary to the provisions of the construction contract,
constituted a mutual abandonment of the contract's terms; replacing the written
contract with a verbal contract to complete the same work. In so holding the court
remarked, "from the very start of the work appellant constantly changed his mind
concerning the construction, and the completed alterations differ markedly from the
blueprints and specification."37

        Several years after the Opdyke & Butler case, the First Appellate District
endorsed the Opdyke Court and further refined the original holding. In C. Norman
Peterson Co. v. Container Corp. of America, the court announced that "when an
owner imposes upon the contractor an excessive number of changes such that it can
be fairly said that the scope of work under the original contract has been altered an
abandonment [may be found]. In these cases, the contractor, with the full approval
and expectation of the owner, may complete the project ... Although the contract may
be abandoned the work is not."38

        So long as the homeowner wishes to continue the main goal of the project, the
work is not abandoned, even if the contract is. Therefore, a homeowner's numerous
on-site change orders may so alter the original contract that it no longer has full force
or effect. However his very instruction and supervision indicates his willingness and
desire to move forward with the work despite his departure from the terms of the
construction contract.

        In such a situation a contractor is entitled, if he so chooses, to continue work
on the project, in accordance with the demands and modifications issued by the
homeowner, while not being bound by the original covenants and restrictions formed
in the construction contract. The two parties will instead form a new agreement
founded upon the customs and practices they develop during construction, and the
contractor is entitled to recover the value of his work under the theory of quantum

        From the above described line of cases, the peril to which an overly involved
homeowner places himself is clear. A later suit against a contractor for failure to
conform to the designs and specifications, or for defects which result from conditions
which the plans do not describe, may be defended on the basis that the construction
contract which incorporated the plans and specifications had been abandoned. If
abandonment is found, and the homeowner directed the changes which have resulted
in the defects involved in the suit, liability for the defects will rest on the homeowner,
even if those defects are the result of deviation from the plans and specifications or
are otherwise violative of the contract.

       In addition to being used as a shield from liability, abandonment may also be
used as a sword. Because this case line allows contractor recovery for work
performed on a quantum merit basis, significant homeowner-issued changes may
form the basis of a counterclaim for conversion.

        Aside from allowing for recovery for "extra-work" that was performed at the
owner's direction without the benefit of a change order, this counterclaim may afford
the contractor-defendant with a significant source of damages which may be used as
leverage against the homeowner's claim. In addition to the cost of the changes on a
quantum merit basis, the owner can be held responsible, as a result of a conversion
claim, for the fair value of the work plus reasonable profit plus interest. Such a claim
also carries potential exposure to punitive damages.40

        Both of the above described claims can be attributed to the homeowner's
frustration of his own case through becoming intimately involved in the construction
process. These problems are especially relevant in high-end single family home
defense where overly involved homeowners tend to be the rule rather than the
exception. Most contractors will be able to provide numerous examples of intimate
homeowner involvement in the construction of a typical high-end home.


        Interestingly enough, review of the custom / high-end homes litigated in
Southern California revealed a common thread in terms of the counsel retained to
represent the homeowner. Typically, counsel was retained due to a prior relationship
stemming from family law, immigration or business relationships. For many, the
construction dispute was the first time the plaintiff lawyer waded into these waters
and, as a result, unfamiliarity with the subject area impacted the ability to bring

        Accordingly, we find it valuable to immediately build a relationship with the
plaintiff attorney for several reasons. Counsel will frequently need to educate the
homeowner attorney on the information which is required in order to evaluate the
parties' respective positions. The construction defect case is not going to be flushed
out through discovery that is more appropriate for a slip and fall matter. Rather,
inspection of the project, targeted destructive testing, facilitation of expert discussion,
and exchange of key documents will be dispositive of many issues. Working with the
attorney representing the homeowner to help this individual understand the unique
aspects of defect litigation is paramount.

        At the same time, counsel needs to educate the homeowner attorney as to the
law: what are not recoverable damages (e.g., economic loss); and what are proper
causes of action (e.g., inapplicability of strict liability and emotional distress claims as
discussed infra). The forum for accomplishing this education varies with the case and
certainly should not be condescending. Instead, a helpful approach to steering the case
towards resolution should be emphasized.

        In conjunction with this task, counsel should explore client control issues.
Given the hostility, emotions and anger that frequently arise in this genre of litigation,
the plaintiffs attorney often does not have control of the client. This is a problem that
should be recognized early on in the action. With knowledge of client control issues,
each counselor can make the appropriate handling decisions in an effort to reel in the
out-of-control homeowner or contractor which is a pre-requisite to bringing resolution
to the matter.


        Identification of the defective conditions, reasonable repair methodology, and
resulting cost of correction are items which are purely expert driven. Once consensus
can be reached as to the scope and gravity of the defects, the parties theoretically
should be able to move the case towards resolution.
        Getting the parties to buy into the concept of using a neutral expert kills two
proverbial birds with one stone. One, it allows the parties to ascertain the true value of
the claims for defective construction, as well as determine responsibility for them.
Two, it takes away from the passion and emotion each side may have and places the
issue squarely in the hands of an individual without allegiance to one party. In order
to make the neutral expert option workable, considerations of the factual dispute and
personalities must be taken into account.

        Timing and task identification are critical. If the defective construction or
standard of care issues are well defined at the time the complaint is made, neutral
experts can be utilized at this juncture to broker resolution. A neutral expert may be
brought in to act as a technical arbitrator of sorts when experts evaluating the as-built
conditions have reached an irresolvable impasse. Striking a precise definition as to the
role of the neutral expert from the beginning is paramount in both scenarios. In other
words, the expert's assigned task must be clear and no deviation from this task must
be allowed. For the defense attorney and claim professional, specific tasks reduce the
possibility of funding the homeowner's investigation of complaints of defective

        Ensuring that the homeowner and builder acquiesce to this process is also
imperative. No purpose is served if the opinion of the neutral expert is disregarded.
Accordingly, prior to this task, counsel should work to guarantee that all parties will
abide by whatever decision is rendered. The accomplishment of this task, whether in
writing or by placing credibility and reputation on the line with the mediator or trial
judge, is specific to each case. The key, however, is getting the parties to release their
emotions and positions to an equally respected and neutral third party.


        Almost all contemporary construction contracts contain some provision for
alternative dispute resolution in the event of a dispute between the parties. In larger
scale construction litigation, a full trial is virtually impossible due to the number of
parties involved and the myriad of contracts flowing between the parties.

        On the other hand, the typical high-end single family home litigation is most
likely consolidated enough to allow resolution in front of a traditional judge or jury.
However, even though full court litigation of the dispute may be a logistical
possibility, alternative dispute resolution should be considered for independent

       Mediation and arbitration procedures offer protective mechanisms that are
preferable to traditional trial mechanisms. Mediation and arbitration provide a forum
which will serve to educate an inexperienced opposing counsel of issues unique to
construction defect litigation. In addition, this forum will provide him with a realistic
assessment of the merits of his case and the value of the alleged damages. A mediator,
arbitrator, or special master with significant construction defect litigation experience
will be able to provide plaintiffs counsel with a realistic third party assessment of both
legal theories and damage estimates. An experienced mediator can accurately assess
the value of the case and direct the final resolution to within a reasonable window of
damages. In contrast, a trial, especially a jury trial, offers no such safeguards.

        When considering the option of proceeding forward with a traditional trial,
defense counsel in a high-end single family home case must consider that plaintiff is
probably a more sympathetic party. Regardless of his wealth, the high-end single
family homeowner still represents a scion of the American dream. He has expended a
large amount of money in order to realize his "dream house." This dream was
shattered when the defendant-builder failed to build the home to his specifications.
Conversely, the contractor is viewed as a business entity, regardless of his
comparative wealth. He is viewed as an embodiment of corporate America and, more
importantly, a jury will see him as an insured business. This image of the respective
parties presents a danger of a runaway jury verdict that is largely eliminated by
alternative dispute resolution.

        A recent survey conducted by one of the world's largest public relations firms,
confirmed the possibility that corporate prejudice may negatively affect business
entities when challenged by private citizens. The survey found that roughly 40% of
the randomly surveyed individuals believed that a company is probably "guilty as
charged" if it is accused of wrongdoing in a court of law.41

        This corporate prejudice gives rise to the danger of a "runaway verdict" a very
real possibility should the matter go before a jury. This huge downside possibility
should be considered early in the litigation, and the right to enforce any arbitration
clauses that may exist should be guarded. Under many states' laws, failure to assert
the right to arbitration, and participation in litigation without asserting the right to
arbitrate, may constitute waiver of the right to enforce the clause.42 Because of the
danger of implied waiver, a right to proceed to arbitration should be raised as an
affirmative defense as early as possible to prevent foreclosure of the option to

        The high-end single family home defense attorney must also remain aware that
disposition of the matter through arbitration may preclude punitive damages,
depending upon the content of the arbitration agreement.43 This generally will prove
to be an advantage for a defendant contractor who is defending tort causes of action.
If the clause limits or bars punitive damages, another incentive for arbitration exists.

        In most instances alternative dispute resolution procedures will prove to offer
an advantage to the defense in high-end single family home disputes. This must be
kept in mind throughout the process. As such, steps must be taken to insure that if
there is a pre-existing right to arbitrate it is not waived by careless pleading.

         The plaintiff in a high-end single family litigation may have security or
privacy constraints that most people do not have to take into consideration during
litigation. The owner may be a public personality, may have concerns about his
reputation in the community, or may not wish to publicize his wealth. All of these
concerns may militate against a litigation strategy that ends in the courtroom.

        Our Los Angeles office has represented clients opposed by royalty, celebrities,
and other various public figures who have significant publicity or security concerns
that would be compromised by a trial and the accompanying publicity. In contrast to
these plaintiffs, there are also plaintiffs who do not have such notoriety, but for
various reasons do not wish that the cost of their home, or other such matters become
part of the public record. Regardless of reasons for the concern, any plaintiff reticence
can be used as leverage to force alternative venues or, alternatively, concessions made
with an eye toward early resolution.

        Alternative forums to consider include mediation and arbitration, as well the
use of a "private trial". Any of these alternatives should assuage plaintiffs publicity
concerns while also removing the litigation from the hands of a jury. However, when
using publicity concerns to gain leverage, attention must be paid to the fact that a
plaintiff with significant notoriety may also use their access to the media in order to
generate negative publicity regarding your client and their work. This can be a serious
problem for construction professionals who generate much of their business from
word of mouth or local advertising. This concern is highlighted by a recent survey
which revealed that 48% of Americans nationwide would be less likely to do business
with a company who is being sued for alleged wrongdoing.44


         Perhaps the most difficult element to control in high end/custom home
litigation is diffusion of the emotion, passion, hostility and rage common to this type
of case. In the high end home case, the homeowner invariably has a feeling of
entitlement that has been aggrieved. They pledge to go to the ends of the earth to seek
justice. Money is often no object for the homeowner and, at points, it seems like
money is not the remedy sought. Rather, they want the builder to pay in terms of time,
money and energy to set the record straight.

       On the flip side, the builder is often enraged, believing that he has similarly
gone to the ends of the earth in delivering a fine product at a reasonable cost. Favors
provided to the homeowner, costs cut in an effort to save on the overall tab,
accommodation of constant changes; all of these accommodations made by the
builder escalate into rage when the relationship breaks down, ending up in a free for
         How to best control the passion: remove it from the case. Posture the matter so
that it can be resolved regardless of the personalities of the players in each case. One
constant is finding an individual respected by each side, an independent individual, to
evaluate the merits and render an opinion - either in the form of an expert or mediator.
Mediators engaged need to appeal to the sensibility of the homeowner. This often
entails allowing an appreciable period of time to "vent" or relate all the many wrongs
that have happened.

        One thing is clear - gauging, exploring and ascertaining appropriate vehicles to
remove the passion, anger and emotion of the case is critical to resolving the case.
This is one area where no one standard handling recommendation will suffice. This is
also the area that makes the case more likely than not to proceed to trial. Money is not
always the remedy sought; some aggrieved homeowners just want their day in court.
In this case, early preparation will serve the builder well in terns of preparing for this


        High end single family home litigation presents unique issues and challenges
to construction defense counsel. It shares many characteristics of both general liability
defense, as well as large scale developer defense, but at the same time markedly
differs from each as well. While most causes of action between individual
homeowners and contractors are predicated upon established tort and contract theories
under general liability law, these theories are affected and tempered by their
interaction with established "construction law." The import of construction law into
small scale civil litigation creates a distinct topography.

         By acknowledging and addressing the distinctive attributes of this hybrid
litigation, many of the potential pitfalls of such litigation may be avoided, while at the
same time exploiting the opportunities which run in tandem with the dangers. In
short, an awareness of the distinctive elements presented by high end single family
home litigation imparts a unique advantage to the prepared attorney when pitted
against counsel approaching the case from either a general liability or a typical "mass
production" construction law standpoint.

        The purpose of this paper has been to call attention to both the dangers and
opportunities inherent to high end single family home litigation. In particular, defense
counsel must be aware of the interpersonal relationships which are often forged
among the parties and the distinctive personal motivations that fuel the dispute. These
personal undertones often flavor the pleadings in the form of increased allegations of
tort cause of action such as fraud and emotional distress, which may often be
eliminated through aggressive defense pleading.

       The close relationship between the construction defendant and the homeowner
may also come to bear during discovery. It is likely that the homeowner has amassed
extensive documentation regarding construction as the work progressed and discovery
must be aimed toward this documentation.

        In addition to the complications that may arise as the result of the personal
interaction between the parties, the interaction of general liability law with
construction law has substantive legal repercussions. Theories applicable to mass
produced housing, such as strict liability, are often inappropriately pled in the context
of the high end single family home. Similarly, damages which are commonly pled in
general liability litigation, such as economic loss or emotional distress, are generally
not available to construction defect tort victims, even in the hybrid single family
home construction tort setting.

        Lastly, this paper suggests that the defendants and claims representatives in the
high end single family home case cooperate amongst themselves and present a united
defense. By working together the defendants may not only reduce damage exposure,
but are also more likely to succeed in achieving favorable venue, where much of the
emotional charge in the case may be neutralized.

        While this paper by no means constitutes an exhaustive listing of high end
single family home defense issues, it does highlight many of the areas that experience
has proven to significantly effect such cases. By being aware of and exploiting the
issues presented in this paper, a distinct advantage may be realized.
1 Mr. Henning is a founding partner of Wood, Smith, Henning & Berman, a firm of 37 lawyers
with offices in Los Angeles, Costa Mesa and Rancho Cucamonga California. Mr. Henning and
the firm provide full service representation to the construction community, representing the
developer, contractor, design professional and surety. In addition, the firm specializes in
environmental and toxic tort, general liability and business litigation matters. Mr. Henning
received both his undergraduate and law degree from the University of Nebraska, where he
competed on the National Trial team. He is involved with builders and the insurance community
in an effort to streamline the effective handling of construction defect litigation. Mr. Henning
thanks Luke P. Scolastico, a third year law student at the University of Southern California, for
his assistance in the preparation of this paper.

2 Whether a form contract is utilized or one is drafted from scratch, the need for a good working
set of contract documents responsive to the owner and project's specific needs cannot be
overemphasized. Development of a good set of contract documents at the outset rather than
relying on others, or blindly pulling a form, can avoid litigation in the first instance.

3    Greenman v. Yuba Power Products, Inc., 59 Cal.2d 57, (1963), 27 CaLRptr. 697,377 P.2d 897.
4    Gherna v. Ford Motor Co., 246 Cal.App.2d 639, 649 (1966), 55 Cal.Rptr. 94.

5    269 Cal.App.2d 224 (1 969), 74 Cal.Rptr. 749.
6    Kriegler v. Eichler Homes, Inc., 269 Cal.App.2d 224 (1969), 74 Cal.Rptr. 749.

7    Id at 227.
8    Id at 228.

9    Fleck v. Bollinger Home Corp., 54 Cal.App.4th 926,934 (1997), 63 Cal.Rptr.2d 407.
10   Id at 935.

11The Kriegler court justified special protection for homeowner purchasing mass produced
homes by citing their inability to protect themselves and bargain on equal footing with large
scale developers.

12Peitman v. Illmo 141 F2d 956 (1 944, CA8 Mo), cert den 323 U.S. 71 9, reh den 323 U.S. 813;
Georgia-Carolina Brick & Tile Co. v. Brown, 153 Ga.App. 747 (1980); Walker v. Signal
Companies, Inc. 84 Cal.App.3d 982 (1978).
13   BAI No. 12.50.1; Cal. Rules of Court 5.

14   BAI No. 12.5 1. 15.
15See for example the exclusion of "puffery" as the basis of a breach of warranty claim: U.C.C.
6 2-313 (2).
16   Tibbs v. National Homes Constr Cop., 52 Ohio App.2d 28 1 (1977).
17Simone v. McKee, 142 Cal.App.2d 307,3 13-3 14 (1 956), 298 P.2d 667; American T. Co. v.
California etc. Ins. Co., 15 Cal.2d 42, 67 (1940).

18 Restatement (Second) of Torts § 533; provides that: "The maker of a fraudulent
misrepresentation is subject to liability for pecuniary loss to another who acts in justifiable
reliance upon it if the misrepresentation, although not made directly to the other, is made to a
third person and the maker intends or has reason to expect that its terms will be repeated or its
substance communicated to the other, and that it will influence his conduct in the transaction

19   Geernaert v. Mitchell 3 1 Cal.App.4th 601,608-61 0 (1995), 37 Cal.Rptr.2d 483.

20   Mackintosh v. Cal. Fed. Savings & Loan Assn., 935 P.2d 1 154, 1 164 (Nev. 1997).

21   McDonough v. Whalen, 3 13 N.E.2d 435,442-443 (Mass. 1974).
22   Crisci v. Security Insurance Co., 66 Cal.2d 425,433 (1967), 58 Cal.Rptr. 13,426 P.2d 173.

23See for example; Dillon v. Legg 68 Cal.2d 728 (1968), 69 Cal.Rptr. 72,441 P.2d 912, allowing
a mother emotional distress recovery caused by watching the death of her daughter which
resulted from defendant's negligence.
24 Percipient witness claims require proof that the victim was a foreseeable witness to the trauma
of another.

25Molien v. Kaiser Foundation Hospitals, 27 Cal.3d 916 (1980), 616 P.2d 813, 167 Cal.Rptr.
831, 16 A.L.R.4th 518.

26   Cooper v. Superior Court 153 Cal.App.3d 1008 (1984), 200 Cal.Rptr. 746.

27Potter v. Firestone Tire & Rubber Co., 6 Cal.4th 965, 985 (1993), 25 Cal.Rptr.2d 550, 863
P.2d 795.

28Erlich v. Menezes, 60 Cal.App.4th 1357 (1998), 71 Cal.Rptr.2d 137, review granted, SO68325
(Cal. Apr. 15, 1998).
29   Id. At 1362.

30   BAJI No. 3.00; see also Cal. Rules of Court 5.
31   BAJI No. 10.85; see also Cal. Rules of Court 5.
32Seely v. White Motor Co., 63 Cal.2d 9, 18 (1965), 45 Cal.Rptr. 17,403 P.2d 145; see also
Wyatt v. Cadillac Motor Car Division, 145 Cal.App.2d 423,426 (1956), 302 P.2d 665,
disapproved on other grounds in Sabella v. Wisler, 59 Cal.2d 21,31 (1963), 27 Cal.Rptr. 689, 377
P.2d 889.

33 Such documents include subcontracts, insurance certificates and endorsements, documenting
job logs, change orders, field orders and correspondence with the necessary parties on deviations
in the approved plans and specifications.

34Johnson v. City of San Leandro, 179 Cal.App.2d 794, 80 1 (1 960); Barnthouse v. California
Steel Buildings Co., 215 Cal.App.2d 72, 74 (1963); Massei v. Lettunich 248 Cal.App.2d 68, 78 (1

35   Massei v. Lettunich 248 Cal.App.2d 68, 72 (1967), 56 Cal.Rptr. 232.
36 Daugherty Co. v. Kimberly-Clark Corp., 14 Cal.App.3d 151,157-157 (1971), Opdyke & Butler
v. Silver 1 1 1 Cal.App.2d 912, 91 6-91 9 (1952).
37   Opdyke & Butler v. Silver, 111 Cal.App.2d 912,917 (1952), 245 P.2d 306.

38C. Norman Peterson Co. v. Container Corp. of America, 172 Cal.App.3d 628 (1 985), 2 18
Cal.Rptr. 592.
39   Id. at 645.

40Zhadan v. Downtown L.A. Motors, 66 Cal.App.3d 48 1 (1 976), 136 Cal.Rptr. 132; California
Civil Code § 3294.

41Vivien Lou Chen, Innocent Until Proven Guilty? Not for Corporations Poll Says, Los Angeles
Daily Journal, November 20, 1998, at 1.
42   Sobremonte v. Superior Court, 61 Cal.App.4th 980,992 (1998), 72 Cal.Rptr.2d 43. 43.

43 Broadly worded clauses such as "any dispute arising from or related to this agreement" may
allow the arbitrator of a tort claim to award any remedy that is "equitable and just" including
punitive damages. Baker v. Sadick 162 Cal.App.3d 618,627 (1984). However, see also
JAMSIEndispute Comprehensive Arbitration Rules and Procedures, Rule 22 (D): "The arbitrator
may not award punitive damages unless previously agreed by the parties or unless punitive
damages are required by law."
  Vivien Lou Chen, Innocent Until Proven Guilty? Not for Corporations Poll Says, Los
Angeles Daily Journal, November 20, 1998, at 1.

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