Insurance Defense Team

Eric Kekel, Leader
Randy Arthur
John Barhoum
Anne Foster
Damon Henrie
Sam Smith
Don Templeton
Tom Tongue

SEP 2009

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The "Contracting Parties Rule" is Alive and Well ... and Irrelevant

In Abraham v. T. Henry Construction, Inc.  the Oregon Court of Appeals further defined the relationship between claims for breach of contract and claims for negligent construction in Oregon.  __ Or. App. __, WL 2766868 (2009).  Plaintiffs brought suit for construction defects approximately 8 years after original construction was completed.  Plaintiffs’ claims included a claim for negligent construction, including violations of the building code, and a claim for breach of contract.  The trial court dismissed both claims, the breach of contract on statute of limitations grounds, and the negligence claim based on the so called “contracting parties rule.”  That rule provides that when two parties reduce their relationship to an agreement, “the contract details the specific obligations that each party agrees to undertake with respect to the other and, if one party fails to meet an obligation, the breach results in contract liability.”  Said another way, if there is a contract between two parties, there can be no negligence claim for breach of the contract.  The contracting parties rule was applied to Oregon construction defect cases in Jones v. Emerald Pacific Homes, Inc.  188 Or App 471, rev. den. 336 Or 125 (2003).

In Abraham, Court of Appeals first affirmed the dismissal of the breach of contract claim with little discussion, referencing the recent decision of Waxman v. Waxman & Associates, Inc. 224 Or. App. 499 (2008) which held breach of contract claims in construction settings must be brought within 6 years.

The Court then addressed several of plaintiffs’ arguments regarding the negligence claim.  As typical of many Oregon construction defect cases, plaintiffs’ argument as to why the negligence claim should survive was two fold.  First, plaintiffs argued the holding of the recent case of Harris v. Suniga 344 Or 301 (2008) provided that a construction defect plaintiff could assert a claim for negligence without asserting a non-contractual duty of care.  In Harris, the court held that an owner who was not in contractual privity with the original contractor could assert negligence claims against the contractor provided there was property damage.  The Abraham Court declined to follow plaintiffs’ arguments stating “we decline to retreat from Jones,”  as long as an owner and a contractor have a contract, the claims between them are for breach of contract.  One exception to that rule is if a special relationship exists between contracting parties that gives rise to an extra-contractual obligation.  
           

Thus plaintiffs’ second argument, that a special relationship existed between the plaintiffs and defendant.  This too was not persuasive for the Court.  The court noted the exception to the contracting parties rule has always been that a party can maintain a claim for negligence in the event there has been a breach of a standard of care which arises independent of the terms of the contract.  Ultimately the Court was not persuaded, even though the plaintiffs alleged they “trusted” “relied on” and “delegated responsibility” to defendants.  The Court held “using particular adjectives to describe an arms length contractual relationship between the parties does not transform that relationship into a ‘special’ one.” 

However, plaintiffs were successful in maintaining their negligence claims.  The Court noted the plaintiffs had alleged a violation of the Oregon Building Code.  The court held the Building Code sets a standard of care independent of the contract, even though no special relationship existed, thus the negligence claim survived.  The plaintiffs asserted the building code was designed to protect people from the effects of substandard construction, and the Court held that this assertion regarding the building code was correct “as a matter of law.”  This holding is significant in Oregon construction law because now, as long as a plaintiff pleads violations of the building code, a negligence claim can be maintained, regardless of whether or not the parties have a contract.  Thus, while the Court’s holding affirmed the “contracting parties rule,” the holding also effectively gutted that doctrine of any worth. 

It is not yet known if the contractor defendant T. Henry Construction, Inc. will pursue further judicial review with the Oregon Supreme Court.   

This is a significant development to the defense of construction claims as the contracting parties rule has been useful in cutting off construction claims between an owner and a contractor at six years.  After Abraham, the contracting parties’ rule may be virtually dead as nearly every construction defect case can be also be plead as a negligent violation of building codes.  This, in effect, pushes out the statute of limitations for construction defect claims between contracting parties.  As long as the negligence claim is asserted within six years of discovery of the building code violation, the claims can be brought within the statute of ultimate repose for construction cases, 10 years.

The one potential save for a construction defendant may be contractual language incorporating building codes or requiring the work to be performed pursuant to all applicable building codes.  Arguably, a defendant whose contract incorporates the building codes as a standard can successfully argue that the building codes do not create an extra-contractual obligation, but rather are considered by or even incorporated into the contractual agreement.

Thanks to Damon L. Henrie for writing this article.