2
COMPENDIUM OF OREGON CONSTRUCTION LAW
I. BREACH OF CONTRACT
A breach of contract occurs when one party fails to perform as required by the
contract. Kantor v. Boise Cascade Corp., 75 Or. App. 698, 708 P.2d 356 (1985), rev den
300 Or. 506 (1986). To state a claim for breach of contract, the plaintiff must allege the
existence of a contract, its relevant terms, plaintiff's full performance and lack of breach,
and defendant's breach resulting in damage to plaintiff. Slover v. Oregon State Bd. of
Clinical Social Workers, 144 Ore. App. 565, 570, 927 P.2d 1098 (1996).
Frequently litigated contract provisions include: (1) notice; (2) site investigation;
(3) waiver of rights; (4) changed condition; (5) change orders; (6) disclaimers; (7) no
damages for delay; (8) scope of work; and (9) time extensions. Other claims often stem
from: (1) changes in sequence; (2) late or defective owner-furnished items; (3)
acceleration of performance requirements; (4) delays or suspensions in the work; (5)
excessive inspections; (6) precompletion termination.
A contractor has an implied duty to perform its work in a proper and workmanlike
manner. Newlee v. Heyting, 167 Or. 288, 292, 117 P.2d 829 (1941). In addition, a contract
between a general contractor and a subcontractor contains an implied affirmative duty
for all parties to act in a way that does not impede progress of the job or increase the cost
of performance by another party. Elte, Inc. v. S.S. Mullen, Inc. 469 F2d 1127, 1132-1133
(9th Cir. 1972).
II. NEGLIGENCE
The primary tort arising in construction claims is negligence. Such claims are
based on an affirmative duty of the obligor to use reasonable care in performing all
contractual promises. In any negligence claim in Oregon, the plaintiff must allege facts
showing that the defendant “unreasonably created a foreseeable risk to a protected
interest of the kind of harm that befell the plaintiff.” Fazzolari v. Portland School Dist. No.
1J, 303 Or 1, 17, 734 P2d 1326 (1987).
A contractual obligation to provide a workmanlike performance in a custom
construction contract does not give rise to a duty in negligence to the owner. Jones v.
Emerald Pac. Homes, 188 Or App 471, 478, 71 P3d 574, rev den 336 Or. 135 (2003).
However, a contract in which one party gives the other authority to make important
decisions on its behalf and for its benefit can create a “special relationship,” Vtech Comm.
v. Robert Half, Inc., 190 Or App 81, 77 P3d 1154 (2003), but a sales agreement in which a
supplier selects products does not, Moore Excavating v. Consol. Supply Co., 186 Or App
3
324, 63 P3d 592 (2003). Further, the existence of a contract does not preclude a
concurrent claim for negligence, even though contractual privity exists between the
plaintiff and the defendant. Abraham v. T. Henry Construction, Inc., 350 Or 29 (2011).
The contractual standard of care may supplement the common law standard, but it does
not replace it unless the contract specifically forecloses claims for negligence with an
acceptable disclaimer. Id. Generally, any waiver of a negligence claim must clearly and
unambiguously apply and use the word “negligence” in the waiver in order to be
enforceable. Estey v. MacKenzie Engineering Inc., 324 Or 372 (1996), but see American
Wholesale Products v. Allstate Ins. Co, 288 Or App 418 (2017) (holding that a commercial
lease provision allocating insurance risks and stating that “neither party shall be liable to
the other for any loss or damage caused by water damage” effectively waived claims for
negligence).
And, deficient performance that results in damage to property other than the
work itself can give rise to a tort claim. Oak Crest Construction Co. v. Austin Mutual Ins.,
329 Ore. 620, 998 P.2d 1254 (2000).
Contractors have common law duties under Fazzolari to refrain from injuring the
property of all foreseeable future owners, i.e. a subsequent purchaser, not just the
person who owned the property at the time the work was performed. Harris v. Suniga,
344 Or 301 (2008); see also Bunnell v. Dalton Construction, Inc., 210 Or App 138, 143, 149
P3d 1240 (2006) (allowing a nonprivity owner to maintain a negligent construction claim
against a builder for damages to the building resulting from construction defects). The
characterization of damage to a building resulting from negligent construction as property
damage rather than economic loss is not affected by the purchaser’s knowledge of
construction defects prior to purchasing the building. Bunnell, 210 Or App at 143-44.
A homeowner may not assert a claim of negligence per se for a violation of
occupational health and safety regulations because homeowners are not within the class
of persons OSHA seeks to protect. Safeco Ins. Co. of America v. Olstedt Construction, Inc.,
2004 WL 1050877 (D Or 2004). However, homeowners generally are successful asserting
that a violation of the relevant building code constitutes negligence per se.
Governmental building inspectors, like all persons, have a duty to exercise due
care to prevent foreseeable harm. Dykeman v. State, 39 Or App 629, 633-34 (1979).
However, in . Farnworth v. Rossetto, 285 Or App 10, 16 (2017), the court held that in the
absence of a requirement in the law for an inspection for violations of the building code
in general, or for an inspection specifically directed to the presence of a weather barrier,
the law does not provide a remedy in negligence for the city's conduct in failing to take
any action in response to the alleged violation with respect to a home that was
constructed without a weather barrier to protect the structure from outside moisture.
4
Oregon follows a modified comparative negligence rule, barring recovery if the
plaintiff’s fault exceeds 50%. ORS 31.600. In multi-party litigation, the jury will apportion
fault to each party, including the plaintiff, and each party will be solely responsible for
that percentage of the total damages caused. Id. However, if one party’s share is
uncollectible, then that party’s share can be reallocated to certain of the remaining co-
defendants. ORS 31.610(3).
III. BREACH OF WARRANTY
A contractor is liable for breaches of warranty even though he has exercised all
reasonable care in the execution of his duties. Chandler v. Bunick, 279 Or 353, 356, 569
P2d 1037 (1977).
A. Breach of Express Warranty
Express warranties are written assurances of fact on which a party may rely. While
no particular words are required to form an express warranty, the intent to warranty must
appear. Express warranties are enforced according to their terms. Oregon has not yet
decided whether, in residential construction agreements and sales, express warranties
can ever negate the protection implied by law. The predominant law in other states is
that there must be clear and conspicuous language negating the implied warranties.
Express warranties are required in relation to all components of new
condominiums under Oregon’s Condominium Act. ORS 100.185. The warranties may be
time-limited in accordance with the statute. A claimant who succeeds on a theory breach
of the express warranty may recover attorney fees under the Condominium Act. ORS
100.470.
B. Breach of Implied Warranty
Several implied warranties give rise to causes of action.
i. Fitness of Plans and Specifications
Oregon adopted the Spearin doctrine (established in US v. Spearin, 248 US 132,
136 (1918)), which requires an owner to warrant that plans and specifications supplied to
a contractor are adequate. Barbour & Son v. Highway Com., 248 Or 247, 257-58, 433 P2d
817 (1967), and restated in Gen. Constr. v. Ore. Fish Com., 26 Or App 577, 581-82, 552 P2d
185 (1976). The doctrine comprises two warranties: (1) accuracy, and (2) suitability. The
author implicitly warrants that his or her plans and specs are “adequate, accurate, and
complete, and, if followed, an acceptable result would follow.” Gilbert Pac. Corp. v. Dep’t
of Transp., 110 Or App 171, 175, 822, P2d 729 (1991) (rejecting argument that a provision
5
allowing for changes and alterations in plans negated the implied warranty). The implied
warranty, however, will not protect a contractor who advised an owner that his or her
selected plan was suitable. Bhattarai v. Stein, 119 Or App 133, 849 P2d 1153 (1993).
ii. Workmanlike Manner
As noted, a warranty that all work will be performed in accordance with plans,
specs and codes, and in a good and workmanlike manner, is implied into every
construction agreement. Workmanlike manner is “work done in an ordinarily skillful
manner, as a skilled workman should do it.” Newlee v. Heyting, 167 Or 288, 292-93, 117
P2d 829 (1941).
iii. Habitability
An implied warranty that a residence is fit for habitation is imposed on the
contractor/seller who builds a home for later sale. Yepsen v. Burgess, 269 Or 635, 641,
525 P2d 1019 (1974). By contrast, a contractor who builds a house according to the
owner’s plans is not subject to this warranty. Chandler v. Bunick, 279 Or 353, 357-58, 569
P2d 1037 (1977). The different legal treatment is based upon the presumed involvement
of the owner/purchaser in the construction. An owner who provides plans is presumed
to have the opportunity to observe and guard against defects during construction, while
the purchaser of a pre-built home, or one in which the builder provides the plans, may
not have an equivalent opportunity to protect her own interests.
Developer-sellers of developed but unimproved residential lots do not offer
implied warranties. Cook v. Salishan Properties, 279, Or 333, 337-338, 569 P2d 1033
(1977); Beri, Inc. v. Salishan Properties, Inc., 282 Or 569, 575, 580 P2d 173 (1978).
Design professionals are not subject to implied warranties; they are responsible
only for what is in the contract between the parties. White v. Pallay, 119 Or 97, 247 P 316
(1926) (reaffirmed in Scott & Payne v. Potomac Ins. Co., 217 Or 323, 341 P2d 1083 (1959)).
Thus, any warranty by the designer must be express.
IV. QUANTUM MERUIT CLAIMS
A claim for quantum meruit is a quasi-contractual claim. Safeport,Inc. v.
Equipment Roundup & Manufacturing, Inc., 184 Or App 690, 706, 60 P3d 1076 rev den
335 Or 255, 66 P3d 1025 (2002). The elements of a claim are a benefit conferred,
awareness by the recipient that a benefit has been received, and judicial recognition that,
under the circumstances, it would be unjust to allow retention of the benefit without
requiring the recipient to pay for it. Id.
6
In Tum-A-Lum Lumber v. Patrick, 95 Or App 719, 770 P2d 964 (1989), the
defendant property owner hired a contractor to build a barn, and the plaintiff supplied
materials to the contractor for use in the construction. The contractor ceased work
before the barn was finished, and the defendant did not pay for the materials. Instead of
filing a construction lien or suing the contractor directly, the plaintiff filed a quantum
meruit claim against the property owner. Noting cases from other jurisdictions, the court
held:
'We adopt the majority rule and hold that, under facts such as pled here, a
material element that must be alleged and proved for a claim of unjust enrichment to
succeed is that the remedies against the contractor were exhausted. *** No direct
contractual relationship existed between the parties here. For these reasons, a furnisher
of materials must exhaust all remedies against the contractor before the "enrichment"
can be "unjust."' 95 Or App 719, 721-2 [Italic included in original.]
In L.S. Henricksen Construction, Inc. v. Shea, 155 Or App 156, 961 P2d 295, rev den
328 Or 40, 977 P2d 1170 (1998), the court made clear that a subcontractor may not
include the general contractor and the owner in the same suit. Citing Tum-A-Lum, the
court stated: "Initiating a remedy *** is not the same as exhausting that remedy, and it
is exhaustion that the law requires." 155 Or App 156, 160. A subcontractor, however,
may join his quantum meruit claim to a breach of contract claim in the same action, but
he must lose the breach of contract claim before he can prevail on the quantum meruit
claim.
V. PAY-WHEN-PAID CLAUSES
The majority rule from other jurisdictions is that pay-when-paid clauses are
interpreted to entitle a subcontractor to payment within a reasonable time after
performance, regardless of the owner's failure to pay the contractor for the work.
In Mignot v. Parkhill, 237 Or 450, 457-8, 391 P2d 755 (1964), the court stated that
where the contract contains a definite and unambiguous promise to pay for labor and
materials performed and furnished, or for other services, equally clear and unambiguous
language, expressing the intention that the happening of a contingency over which the
promisee has no control shall be a condition precedent to payment, must be found in the
contract before the positive and absolute agreement to pay will be considered as
superseded."
VI. STATUTORY PROTECTIONS FOR ARCHITECTS AND ENGINEERS
Claims against architects and engineers must be “certified” before suit can be brought:
7
31.300 Pleading requirements for actions against construction design
professionals.
1. (1) As used in this section, “design professional” means an
architect, landscape architect, professional engineer or professional land
surveyor registered under ORS chapter 671 or 672 or licensed to practice
as an architect, landscape architect, professional engineer or professional
land surveyor in another state.
2. (2) A complaint, cross-claim, counterclaim or third-party
complaint asserting a claim against a design professional that arises out
of the provision of services within the course and scope of the activities
for which the person is registered or licensed may not be filed unless the
claimant’s attorney certifies that the attorney has consulted a design
professional with similar credentials who is qualified, available and willing
to testify to admissible facts and opinions sufficient to create a question
of fact as to the liability of the design professional. The certification must
contain a statement that a design professional with similar credentials
who is qualified to testify as to the standard of professional skill and care
applicable to the alleged facts, is available and willing to testify that:
3. (a) The alleged conduct of the design professional failed to
meet the standard of professional skill and care ordinarily provided by
other design professionals with similar credentials, experience and
expertise and practicing under the same or similar circumstances; and
4. (b) The alleged conduct was a cause of the claimed damages,
losses or other harm.
5. (3) In lieu of providing the certification described in subsection
(2) of this section, the claimant’s attorney may file with the court at the
time of filing a complaint, cross-claim, counterclaim or third-party
complaint an affidavit that states:
6. (a) The applicable statute of limitations is about to expire;
7. (b) The certification required under subsection (2) of this
section will be filed within 30 days after filing the complaint, cross-claim,
counterclaim or third-party complaint or such longer time as the court
may allow for good cause shown; and
8. (c) The attorney has made such inquiry as is reasonable under
the circumstances and has made a good faith attempt to consult with at
least one registered or licensed design professional who is qualified to
8
testify as to the standard of professional skill and care applicable to the
alleged facts, as required by subsection (2) of this section.
9. (4) Upon motion of the design professional, the court shall
enter judgment dismissing any complaint, cross-claim, counterclaim or
third-party complaint against any design professional that fails to comply
with the requirements of this section.
10. (5) This section applies only to a complaint, cross-claim,
counterclaim or third-party complaint against a design professional by
any plaintiff who:
11. (a) Is a design professional, contractor, subcontractor or other
person providing labor, materials or services for the real property
improvement that is the subject of the claim;
12. (b) Is the owner, lessor, lessee, renter or occupier of the real
property improvement that is the subject of the claim;
13. (c) Is involved in the operation or management of the real
property improvement that is the subject of the claim;
14. (d) Has contracted with or otherwise employed the design
professional; or
15. (e) Is a person for whose benefit the design professional
performed services. [2003 c.418 §1; 2015 c.610 §1]
VII. MISREPRESENTATION AND FRAUD
Both misrepresentation and fraud are potential claims in construction situations.
A fraud claim requires a plaintiff to show, by clear and convincing evidence, nine separate
elements: “(1) a representation; (2) its falsity; (3) its materiality; (4) the speaker's
knowledge of its falsity or ignorance of its truth; (5) his intent that it should be acted on
by the person and in the manner reasonably contemplated; (6) the hearer's ignorance of
its falsity; (7) his reliance on its truth; (8) his right to rely thereon; (9) and his consequent
and proximate injury.” Or. Pub. Emples. Ret. Bd. v. Simat, Helliesen & Eichner, 191 Or App
408, 423-424, 83 P3d 350 (2004) (citing Conzelmann v. N.W.P. & D. Prod. Co., 190 Or 332,
350, 225 P2d 757 (1950)). All of the elements must be shown, the absence of any one will
bar recovery. Palmberg v. Astoria, 112 Or 353, 382-383, 229 P 380 (1924).
One who makes a fraudulent misrepresentation can be liable to the person or
class of persons he or she intends or has reason to expect will rely on the representation.
Handy v. Beck, 282 Ore. 653, 665-664, 581 P2d 68 (Or., 1978) (liability is for pecuniary
losses).
9
Negligent misrepresentation in an arm’s-length transaction, causing only
economic losses, is not actionable. Onita Pacific Corp. v. Trustees of Bronson, 315 Or 149,
165, 843 P2d 890 (1992). However, where a plaintiff can allege some special relationship
with the defendant, such misrepresentation is actionable. Id. To invoke a “special
relationship” a plaintiff must establish facts showing a special relationship that created
some specific duty to not misrepresent facts. Gibson v. Bakofier, 275 Or App 257, 277
(2015).
VIII. STRICT LIABILITY CLAIMS
ORS 30.920 imposes strict liability on one who sells or leases “any product in
defective condition unreasonably dangerous” to others. Warrantors who breach their
warranties are held strictly liable, even when they have exercised all reasonable or
possible care. Chandler v. Bunick, 279 Or 353, 356, 569 P2d 1037 (1977). Condominiums
are not considered “products” within the meaning of ORS 30.920, so a strict product
liability claim cannot be based on the defective design and construction of the condo.
Ass'n of Unit Owners of Bridgeview Condos. v. Dunning, 187 Or App 595, 599, 69 P3d 788
(2003). In practice, this rule includes all situations where an entire structure is sold.
However, a contractor, subcontractor, or supplier may be have products liability exposure
if its work involved only a component part of the structure, such as a floor installation
when the ingredients were mixed at the project site in order to create the finished
product. Brokenshire v. Rivas and Rivas, Ltd., 142 Or App 555, 922 P2d 696 (1996) (finding
that the floor was a combination of service and product).
The Employer Liability Law also imposes a heightened standard of care on
employers and other “indirect employers” who have charge of dangerous work. ORS
654.305. In practice, this heightened standard of care is tantamount to strict liability:
covered persons are required to use every safety “device, care and precaution that is
practicable” limited by “the necessity for preserving the efficiency of the structure” but
“without regard to the additional cost” of the measure. Id. There are various tests which
apply to determine whether a general contractor or even project owner is the indirect
employer of a subcontractor’s employee, but the basic question is whether there was
control over some aspect of the specific activity which created the risk of harm to the
employee.
In Yeats v. Polygon Northwest Co., 268 Or. App. 256, 341 P.3d 864 (2014), a
subcontractor’s employee was injured in a fall at a worksite. He then sued the general
contractor under Oregon’s Employer Liability Law (ELL) and negligence. The court held
that a general contractor’s right to require additional safety measures or terminate the
contract for safety violations did not allow it to control the manner in which the
subcontractor carried out its safety requirements, particularly because the contract
placed safety responsibility upon the subcontractor. ELL liability is not established by
10
direction of work, “[r]ather, it is only triggered if the defendant actually controlled the
manner or method – i.e. how – the plaintiff or plaintiff’s employer performs that work.”
Id. at 278.
IX. INDEMNITY CLAIMS
Oregon recognizes claims for both common law indemnity and contractual
indemnity. There are three elements in a common law indemnity claim: (1) the claimant
discharged a legal obligation owed to a third party; (2) the defendant was also liable to
the third party; and (3) as between the claimant and the defendant, the defendant ought
to pay. Maurmann v. Del Morrow Construction, Inc., 182 Or App 171, 177, 48 P3d 185
(2002) (quoting Fulton Ins. v. White Motor Corp., 261 Or 206, 210, 493 P2d 138 (1972)).
The third element invokes an analysis of active/passive fault and primary/secondary
liability. Such an analysis has not yet been applied in the contract context, but “there is
no reason for a distinction between indemnity in tort cases and in contract . . . cases with
respect to evaluation of fault.” Star Mountain Ranch v. Paramore, 98 Or App 606, 609,
780 P2d 758 (1989).
Common-law indemnity claims are no longer enforceable in Oregon where a jury
apportions fault under the comparative fault statutes. In Eclectic Investment, LLC v.
Patterson, 357 Or. 25, 346 P.3d 468 modified 357 Or. 327 (2015), the Supreme Court held
common-law indemnity claims are incompatible with Oregon’s comparative fault system
established in ORS 31.610. That statute provides that each defendant is only severally
liable so each defendant is only liable for its percentage of fault. So long as a tortfeasor
is liable for its liability alone and not for the liability of other tortfeasors, it has no ability
to pursue indemnity from other tortfeasors.
The Eclectic rule may not apply in strict liability situations. In Wyland v.
W.W.Grainger, Inc. No. 3:13-CV-00863-AA, 2015 WL3657265 (D. Or. June 11, 2015),
plaintiff suffered a work place injury, sued the distributor for negligence and strict liability,
and the distributor sought indemnity from the suppliers. After Eclectic was issued, the
suppliers moved for summary judgment, arguing that Eclectic precluded recovery on the
theory of common-law indemnity. The court agreed as to negligence but not strict liability
because it is not based on fault. Further, Oregon courts typically hesitate to apportion
fault in a strict liability case.
Contractual indemnity claims in the construction context are generally allowed
where the contract is clear, but provisions which require indemnity for the fault of
another are prohibited. ORS 30.140 provides:
30.140 Certain indemnification provisions in construction agreement
void. (1) Except to the extent provided under subsection (2) of this section,
any provision in a construction agreement that requires a person or that
11
person’s surety or insurer to indemnify another against liability for damage
arising out of death or bodily injury to persons or damage to property
caused in whole or in part by the negligence of the indemnitee is void.
(2) This section does not affect any provision in a construction
agreement that requires a person or that person’s surety or insurer to
indemnify another against liability for damage arising out of death or
bodily injury to persons or damage to property to the extent that the death
or bodily injury to persons or damage to property arises out of the fault of
the indemnitor, or the fault of the indemnitor’s agents, representatives or
subcontractors.
(3) As used in this section, “construction agreement” means any
written agreement for the planning, design, construction, alteration,
repair, improvement or maintenance of any building, highway, road
excavation or other structure, project, development or improvement
attached to real estate including moving, demolition or tunneling in
connection therewith.
(4) This section does not apply to:
(a) Any real property lease or rental agreement between a landlord and
tenant whether or not any provision of the lease or rental agreement
relates to or involves planning, design, construction, alteration, repair,
improvement or maintenance as long as the predominant purpose of the
lease or rental agreement is not planning, design, construction, alteration,
repair, improvement or maintenance of real property; or
(b) Any personal property lease or rental agreement.
(5) No provision of this section shall be construed to apply to a
“railroad” as defined in ORS 824.200. [1973 c.570 §§1,2; 1987 c.774 §25;
1995 c.704 §1; 1997 c.858 §1; 2007 c.413 §1]
In Walsh Const. Co. v. Mutual of Enumclaw, 338 Or 1, 10, 104 P3d 1146 (2005), the
court held that a contractual provision which required the subcontractor to purchase
additional insurance covering the contractor for the contractor’s negligence was void
under ORS 30.140.
However, an indemnity clause that offends ORS 30.140(1) because it requires a
subcontractor to indemnify a contractor for the contractor’s own negligence remains
enforceable to the extent that it also requires the subcontractor to indemnify the
12
contractor for the subcontractor’s negligence. Montara Owners Association v. La Noue
Development LLC et al., 357 Or, 333 (2015).
Finally, the duty to indemnify is independent from the duty to defend. Ledford v.
Gutoski, 319 Or. 397, 403, 877 P.2d 80, 84 (Or. 1994). Oregon courts note that the
failure to defend does not create a duty to indemnify the insured by estoppel. Nw.
Pump & Equip. Co. v. Am. States Ins. Co., 144 Or. App. 222, 227, 925 P.2d 1241, 1243
(Or. Ct. App. 1996). See discussion infra Duty to Defend. The duty to defend under an
indemnity agreement is triggered in the same manner and to the same extent as the
duty to defend under an insurance policy. St. Paul Fire & Marine v. Crosetti Bros., 256
Or 576, 580 (1970); National Union Fire Ins. Co. v. Starplex Corp., 220 Or App 560, 572-
74 (2008). Thus, the “defend-one defend-all” rule generally applies. However, ORS
30.140’s restrictions on provisions that require one person to “indemnify” another for
that person’s own negligence apply equally to agreements requiring a person to defend
another. Sunset Presbyterian Church v. Andersen Construction Company, 286 Or App
309 (2014). Thus, a general contractor seeking post-resolution defense fees from a
subcontractor pursuant to an agreement to “indemnify and hold harmless” bears the
burden of allocating its defense costs in accordance with ORS 30.140. Id.
Rains v. Stayton Builders Mart, Inc., 264 Or. App. 636, 336 P.2d 483 (2014), rev
allowed, 357 Or. 111 (2015), held that a claim remains justiciable even after the plaintiff
and one of the defendants agreed to a floor and ceiling amount of damages if the
defendant was found liable. On appeal, the other defendant argued that there was no
longer a controversy because the co-defendant had an incentive to be found liable and
then pursue indemnity. The court disagreed because the agreement between that co-
defendant and plaintiff did not establish exposure. Unless or until a party has “’no
interest’ in the outcome of a case because it could ‘neither gain nor lose anything as a
result of trial,’” a justiciable controversy remained. Id. at 646.
X. STATUTE OF LIMITATIONS
The statute of limitations for contract actions is six years from the time the cause
of action accrues. ORS 12.080(1). A breach of contract claim accrues from the time of the
breach (usually occurring when construction is completed), even if the breach is not
discovered until much later. Waxman v. Waxman & Associates, Inc., 224 Or App 499, 510,
198 P 3d 445 (2008). However, based on a case construing an adjacent sub-section of
ORS 12.080, some trial courts have held that the six year period for breach of contract
claims runs from the discovery of the breach. See Rice v. Rabb, 354 Or 721 (2014).
Tort claims alleging property damage resulting from faulty construction must be
brought within two years of the date that the cause of action accrues, ORS 12.110, subject
to the statute of ultimate repose. Goodwin v. Kingsmen Plastering, 359 Or 694 (2016).
Such claims accrue when the plaintiff discovers or should have discovered damage caused
13
by the defendant’s negligent act. Id. Generally, the question of when a plaintiff
discovered damages is a question for the jury. However, if plaintiff has discovered some
damage, then his entire claim arising from that specific conduct is barred, even in a
continuing damage situation. Dunn v. City of Milwaukie, 270 Or App 478 (2015).
All claims against design professionals must be brought within two years of
discovery. ORS 12.135(3)(A)(a).
Claims for misrepresentation which allege economic damages are governed by a
two-year statute of limitations. ORS 12.110(1); Id. at 606. A discovery rule applies to
these claims as well. Id. Misrepresentation claims which allege an interference with an
interest to property may be subject to a six year period of limitations. Id.
XI. STATUTE OF REPOSE
Parties may decide by contract when the statutes of limitation and repose accrue.
See Sunset Presbyterian Church v. Brockamp & Jaeger, Inc., 355 Or. 286, 291 (2014).
The statute of ultimate repose for construction claims is found in ORS 12.135,
which provides:
12.135 Action for damages from construction, alteration or repair of
improvement to real property; “substantial completion” defined;
application. (1) An action against a person by a plaintiff who is not a
public body, whether in contract, tort or otherwise, arising from the
person having performed the construction, alteration or repair of any
improvement to real property or the supervision or inspection thereof, or
from the person having furnished design, planning, surveying,
architectural or engineering services for the improvement, must be
commenced before the earliest of:
(a) The applicable period of limitation otherwise established by law;
(b) Ten years after substantial completion or abandonment of the
construction, alteration or repair of a small commercial structure, as
defined in ORS 701.005, a residential structure, as defined in ORS
701.005, or a large commercial structure, as defined in ORS 701.005, that
is owned or maintained by a homeowners association, as defined in ORS
94.550, or that is owned or maintained by an association of unit owners,
as defined in ORS 100.005; or
(c) Six years after substantial completion or abandonment of the
construction, alteration or repair of a large commercial structure, as
14
defined in ORS 701.005, other than a large commercial structure
described in paragraph (b) of this subsection.
(2) An action against a person by a public body, whether in contract, tort
or otherwise, arising from the person having performed the construction,
alteration or repair of any improvement to real property or the
supervision or inspection thereof, or from the person having furnished
design, planning, surveying, architectural or engineering services for the
improvement, must be commenced not more than 10 years after
substantial completion or abandonment of such construction, alteration
or repair of the improvement to real property.
(3)(a) Notwithstanding subsections (1) and (2) of this section, an action
against a person registered to practice architecture under ORS 671.010 to
671.220, a person registered to practice landscape architecture under
ORS 671.310 to 671.459 or a person registered to practice engineering
under ORS 672.002 to 672.325 to recover damages for injury to a person,
property or to any interest in property, including damages for delay or
economic loss, regardless of legal theory, arising out of the construction,
alteration or repair of any improvement to real property must be
commenced before the earliest of:
(A) Two years after the date the injury or damage is first discovered or in
the exercise of reasonable care should have been discovered;
(B) Ten years after substantial completion or abandonment of the
construction, alteration or repair of a small commercial structure, as
defined in ORS 701.005, a residential structure, as defined in ORS
701.005, or a large commercial structure, as defined in ORS 701.005, that
is owned or maintained by a homeowners association, as defined in ORS
94.550, or that is owned or maintained by an association of unit owners,
as defined in ORS 100.005; or
(C) Six years after substantial completion or abandonment of the
construction, alteration or repair of a large commercial structure, as
defined in ORS 701.005, other than a large commercial structure
described in subparagraph (B) of this paragraph.
(b) This subsection applies to actions brought by any person or public
body.
(4) For purposes of this section:
(a) “Public body” has the meaning given that term in ORS 174.109; and
15
(b) “Substantial completion” means the date when the contractee
accepts in writing the construction, alteration or repair of the
improvement to real property or any designated portion thereof as
having reached that state of completion when it may be used or occupied
for its intended purpose or, if there is no such written acceptance, the
date of acceptance of the completed construction, alteration or repair of
such improvement by the contractee.
(5) For purposes of this section, an improvement to real property is
considered abandoned on the same date that the improvement is
considered abandoned under ORS 87.045.
(6) This section:
(a) Applies to an action against a manufacturer, distributor, seller or
lessor of a manufactured dwelling, as defined in ORS 446.003, or of a
prefabricated structure, as defined in ORS 455.010; and
(b) Does not apply to actions against any person in actual possession and
control of the improvement, as owner, tenant or otherwise, at the time
such cause of action accrues. [1971 c.664 §§2,3,4; 1983 c.437 §1; 1991
c.968 §1; 2009 c.485 §3; 2009 c.715 §1; 2013 c.469 §1]
Substantial completion under ORS 12.135(4)(b) may be established in two ways.
PIH Beaverton, LLC v. Super One, Inc., 355 Or 267, 283 (2014). First, a contractee may
execute a writing accepting the construction as substantially complete. Written
acceptance does not occur through any unilateral action of the builder, such as posting
a “completion notice” . Rather, the facts must show clearly that the owner received the
writing consenting to the statement therein of completion. Second, Where there is no
written acceptance, substantial completion can occur only after construction is 100%
complete—this might not be proven even if the building is being used for its intended
purpose. Id. at 284.
ORS 12.135 is unique in that it encompasses all claims, under whatever theory.
Thus, indemnity and contribution claims against third parties must be brought within
the ten year period established by that statute. PIH Beaverton LLC, 254 Or App 486,
500-506 (2013). ORS 12.135 does not apply to claims against material suppliers,
because it only applies to claims against persons who actually perform, supervise,
inspect, or design improvements to real property. Where ORS 12.135 does not apply,
indemnity and contribution claims may be brought for years after a party discharges the
underlying legal obligation (two years for contribution, six years for indemnity). Huff v.
Shiomi, 73 Or App 605 (1985).
Finally, the rule changes when there is no “contractee” who could accept the
construction, the repose period becomes ten years from the date of the alleged
16
negligent act. Shell v. Schollander Cos., 358 Or. 552 (2016). There, the general
contractor owned the property on which the building was being constructed; because
ORS 12.135 could not possibly be triggered, the court held that the general statute, ORS
12.115, applies.
XII. ECONOMIC LOSS DOCTRINE
In an arm’s-length transactions, purely economic losses arising from a tort are not
actionable. Onita Pac. Corp. v. Trustees of Bronson, 315 Or 149, 165, 843 P2d 890 (1992),
Hale v. Groce, 204 Or 281, 283-84, 744 P2d 1289 (1987); Roberts v. Fearey, 162 Or App
546, 549, 986 P2d 690 (1999). Onita was a non-construction case that prohibited recovery
of economic loss based on negligent misrepresentation, absent a “duty of care” that goes
beyond that general duty to exercise reasonable care. Courts have noted that architects
and engineers are among those who would owe such a duty of care. See Jones v. Emerald
Pac. Homes, Inc., 188 Or App 471, 478-479, 71 P3d 574, rev den, 336 Or 125 (2003).
Economic loss refers to “financial losses such as indebtedness incurred and return
of monies paid, as distinguished from damages for injury to person or property.” Onita,
315 Or at 159 n. 6. Generally, this doctrine does not preclude construction defect claims,
even by non-privity owners, because the loss is, at bottom, founded upon actual damage
to property. Harris v. Suniga, 209 Or App 410, 423, 149 P3d 224 (2006) (holding a
purchaser may maintain a negligent construction claim against a builder for damage to
the building absent any showing of a special relationship between the purchaser and the
builder because damage to a building is property damage, not economic loss); Bunnell v.
Dalton Construction, Inc., 210 Or App 138, 149 P3d 1240 (2006).
The court in Benson Tower Condominium Owners Association v. Victaulic Co., No.
3:13-cv-01010-SI (D. Or Oct. 15, 2014)(Benson Tower I) denied summary judgment in
favor of the contractor and held that damage to a building’s water system may be
considered property damage in addition to economic loss. The court agreed with the
plaintiff that contamination of water is considered property damage. The defective
plumbing damaged more than just itself, which was introduced via expert testimony.
XIII. ECONOMIC WASTE
If the cost of repair would generate undue economic waste, the owner may only
recover diminished value – the difference between the actual value of building as
constructed and what its value would have been had it been constructed as required by
the contract. Newlee v. Heyting, 167 Or 288, 293, 117 P2d 829 (1941).
Economic waste is based on several considerations, including the relationship
between the cost of repairs and the contract price, the amount of money that the
contractor saved as a result of the breach, the nature of the repairs required, the
17
usefulness of the building as constructed, and a comparison of the result that would be
received under the diminished value rule. See, e.g., Schmauch v. Johnston, 274 Or 441,
446-47, 547 P2d 119 (1976). An example where economic waste was not found is in
Bhattarai v. Stein, 119 Or App 133, 135-37, 849 P2d 1153 (1993), where the court upheld
an award of $21,250 for replacement or repair of an overly steep driveway in a home
costing $124,618.
XIV. DELAY DAMAGES
A contractor’s breach resulting in inexcusable delay entitles the owner to the
interest on the capital invested in a project during the period of delay. However, in place
of interest, the owner can recover the reasonable rental value of the completed project
or the anticipated profits lost due to the breach if it is shown with reasonable certainty
that but for the delay a commercial project would have been completed and usable.
Stubblefield v. Montgomery Ward & Co., 163 Or 432, 454, 96 P2d 774 (1939).
For delays in residences, rental value is the proper damage, even if rental was not
intended. Gregory v. Weber, 51 Or App 547, 552, 626 P2d 392 (1981). Lost profits are
proper only if shown with reasonable certainty that defendant’s breach caused the
damage, lost profits were foreseeable, and profits would have been earned. Randles v.
Nickum & Kelly S. & G. Co., 169 Or 284, 286, 127 P2d 347 (1942).
An owner-caused delay entitles the contractor to costs incurred because of the
delay, such as the costs of extended project duration and increases in labor and material
costs. Northeast Clackamas C.E. Co-op. v. Continental Cas. Co., 221 F2d 329, 335 (9th Cir.
1955). If the contractor is forced to accelerate construction because the owner delayed
but refused to extend the deadline for completion, a contractor can get additional
compensation for such damages as overtime, reduced labor productivity, or additional
items of equipment.
In the case of concurrent delay, the owner can recover only for the delay period
proven to be entirely the contractor’s fault. Valley Inland Pac. Constructors v. Clack.
Water Dist., 43 Or App 527, 537, 603 P2d 1381 (1979).
No-damages-for-delay clauses are generally enforceable in private construction
contracts, but they are void as against public policy in public construction contracts. ORS
279C.315 (formerly ORS 279.063).
XV. RECOVERABLE DAMAGES
A. Direct and Indirect Damages
18
From a contractor’s breach of contract, an owner can recover either (1) the cost
of repair, or (2) diminished value. The cost of repair is awarded only when it is prudent.
Turner v. Jackson, 139 Or 539, 560, 4 P2d 925 (1931), adhered to on reh’g, 139 Or 539
(1932). That is, if the cost of repair would generate undue economic waste, the owner is
limited to diminished value. Newlee v. Heyting, 167 Or 288, 293, 117 P2d 829 (1941).
From an owner’s breach of contract, a contractor can recover the actual costs of
performing or preparing to perform, along with any profit that would have been made if
the project had been completed. Verret v. Leagjeld, 263 Or 112, 115, 501 P2d 780 (1972);
Pac. Bridge Co. v. Oregon Hassam Co., 67 Or 576, 580, 134 P 1184 (1913).
Compensatory damages are recoverable only if they were reasonably foreseeable
by parties at time of contracting. Cont. Plants v. Measured Mkt., 274 Or 621, 625-26, 547
P2d 1368 (1976). For example, a plaintiff may be able to recover lost profits, costs,
expenses, interest, taxes, and losses on collateral contracts. See, e.g., Siegner v. Interstate
Production Credit Assn., 109 Or App 417, 436, 820 P2d 20 (1991); Senior Estates v. Bauman
Homes, 272 Or App 19, 23, 799 P2d 180 (1990). Speculative damages, which are not
recoverable, might include insurance costs not contemplated at time of contracting.
Senior Estates, 272 Or App at 590).
B. Loss of Use
Generally, loss of use of the project can be recovered by an owner for a
contractor’s unexcused delay. Loss of use is an appropriate award when the injury is
temporary or can be repaired; for permanent injuries, diminution in property value is a
more appropriate award. Millers Mut. Fire Ins. Co. v. Wildish Constr. Co., 306 Or 102, 116,
758 P2d 836 (1988).
C. Punitive Damages
Oregon allows for punitive damages upon a showing that the defendant acted
with malice or reckless indifference to the safety of others. O.R.S. §§ 18.537 and 30.925.
There is no recovery of punitive damages for breach of contract. Farris v. United States
Fidelity & Guaranty Co., 284 Or 453, 466, 587 P2d 1015 (1978). Punitive damages can be
recovered in some tort actions, for example fraud.
In order to get punitive damages in Oregon, a party must file a motion to amend
to include a claim for such damages -- they cannot simply plead punitive damages in the
original complaint. The plaintiff must then prove by clear and convincing evidence, that
the party against whom punitive damages are sought “has acted with malice or has shown
a reckless and outrageous indifference to a highly unreasonable risk of harm and has
acted with a conscious indifference to the health, safety and welfare of others.” ORS
18.537(1).
19
In punitive damage cases resulting in economic harm, courts will limit such
damages to single digit ratios on constitutional grounds. Goddard v. Farmers Ins. Co. of
Or., 344 Or. 232, 275-76, 179 P.3d 645, 670-71 (Or. 2008). For example, in Goddard, the
court limited the ratio to 4:1. To obtain higher ratios, courts consider the following
factors: “(1) when a particularly egregious act causes only a small amount of economic
injury; (2) when the injury is hard to detect; (3) when it is difficult to place a monetary
value on noneconomic harms; and (4) in cases of ‘extraordinary reprehensible’
conduct…” Id., 344 Or. at 270, 179 P.3d at 667. The Goddard court listed the factors for
determining the insurer’s reprehensible conduct, including:
“(1) the harm caused was physical as opposed to economic;
(2) the tortuous conduct evinced an indifference to or a reckless disregard for
the health and safety of others;
(3) the target of the conduct had financial vulnerability;
(4) the conduct involved repeated actions or was an isolated incident; and
(5) the harm was a result of intentional malice, trickery, deceit, or mere
accident.”
Id., 344 Or. at 253, 179 P.3d at 658 (citing State Farm Mut. Auto. Ins. Co. v.
Campbell, 538 U.S. 408, 419 (2003)) (numbers added).
E. Emotional Distress
Damages for purely psychic or emotional loss are not recoverable in contract.
Hammond v. Central Lane Communications Center, 312 Or 17, 24, 816 P2d 593 (1991).
F. Attorney's Fees
Generally, attorney’s fees can only be recovered if authorized by statute or by the
terms of the contract. Brookshire v. Johnson, 274 Or 19, 21, 544 P2d 164 (1976). Several
statutes in Oregon provide for awards of attorney fees in contract cases. See, e.g., ORS
20.082; ORS 20.083; ORS 20.096; ORS 20.097. Attorney fee awards may also be made in
breach of warranty cases. ORS 20.098. Aside from statutes, attorney fees may be
recoverable if the party’s breach caused the nonbreaching party to become involved in
litigation with a third party. Raymond v. Feldmann, 124 Or App 543, 546, 863 P2d 1269
(1993).
In actions brought under Oregon’s prompt-payment statutes, prevailing parties
are entitled to reasonable costs and attorney fees. For private contracts, costs and fees
are recoverable in actions to collect payments or interest. ORS 701.625(13), ORS
701.630(6). For public works, costs and fees are recoverable in actions to recover interest.
ORS 279c.570(6) (formerly 279.435(6)). Cases have excluded from such recovery fees
20
incurred in seeking other claims. See RL Coats v. St. of Or., 144 Or App 449, 455, 927 P2d
108 (1996).
In actions brought on any insurance policy, the plaintiff can recover attorney fees
if (1) the plaintiff’s settlement is not made within six months from filing proof of with the
insurer, (2) the action is brought in state court, and (3) the plaintiff’s recovery exceeds
any amount offered by the defendant. If the action was brought on a contractor’s bond
under one of several statutes, and the plaintiff’s recovery does not exceed any settlement
offer by the defendant, the surety can recover attorney fees. ORS 742.061(1). Attorney
fees awarded against an insured are “costs . . . taxed against the insured” and may be
covered by liability insurance. Hunters Ridge Condo Association v. Sherwood Crossing,
285 Or App 416 (2017).
Attorney fees are discretionary per ORS 34.210(2) and prevailing parties are not
automatically entitled to them. They are “permissive, predicated on the trial court’s
exercise of discretion.” State ex rel Stewart v. City of Salem, 268 Or. App. 491, 497, 343
P.3d 264 (2015).
“Recovery” means when a money judgment is granted against an insurer. It does
not mean when the insured accepted a settlement payment and summary judgment was
entered in favor of the insurer. The claim was moot. In Triangle Holdings, II, LLC, v.
Stewart Title Guaranty Co., 266 Or. App. 531, 337 P.3d 1013 (2014), the plaintiff-lender
argued that it was entitled to attorney fees under ORS 742.061(1). The title company-
defendant argued that the plaintiff did not recover an award. The court agreed; the
lender accepted payment instead of negotiating attorney fees or requesting a stipulated
judgment as part of acceptance.
Article I. G. Expert Fees and Costs
Article II.
Article III. In general, ORCP 68 allows for costs and disbursements to be
awarded to a prevailing party. However, “costs and disbursements” under ORCP 68A
does not include expert witness fees. It does allow for “fees for officers and witnesses”;
the fees for witnesses are provided by statute. Hancock v. Suzanne Properties, Inc., 63 Or
App 809, 815, 666 P2d 857 (1983). In breach of warranty cases involving claims under a
certain amount, the statute explicitly allows for compensation of expert witnesses. ORS
20.098. The statutes governing attorney fee awards in contract suits do not have any
provision concerning expert fees. See, e.g., ORS 20.096; ORS 20.097.
XVI. INSURANCE COVERAGE FOR CONSTRUCTION CLAIMS
A. Insurance Requirements for Contractors; the “typical” Policy
21
ORS 701.073 requires that all licensed contractors be insured. Specifically,
contractors must have in effect public liability, personal injury and property damage
insurance covering the work of the contractor … including the covering of liability for
products and completed operations according to the terms of the policy and subject to
applicable policy exclusions, for an amount not less than the applicable amount set forth
in ORS 701.081 or 701.084.
The typical insurance policy does not cover defective workmanship, but only
personal injury or property damage resulting from the contractor’s work. Exclusions for
liability arising from specific kinds of construction projects (e.g., multi-family dwellings or
tract home projects) are common, and the insured should consult his own policy to
determine which exclusions apply.
B. “Occurrence-based” Policies Versus “Claims-made” Policies
Construction liability policies come in two forms: an “occurrence-based” policy
and a “claims-made” policy. An occurrence-based policy covers liability that results from
work performed during the effective term of the policy, regardless of whether the policy
is in effect when the damage is discovered or reported to the insurer. A claims-made
policy, on the other hand, covers claims that are reported while the policy is in force.
While the former emphasizes the time of the act from which the insured’s liability
ultimately arose, the latter looks to the time that the insured’s potential liability was
reported to the insurer. Understanding the difference between an occurrence-based
policy and a claims-made policy is essential to ensuring complete coverage over time
among multiple policies.
To describe the event that gives rise to liability, occurrence based policies will
usually use either the term “occurrence” or the term “accident.” The meanings of those
terms are discussed below.
An occurrence generally takes place when damage due to an unexpected event
occurs during the policy period. St. Paul Fire & Marine Insur. Co., Inc. v. McCormick &
Baxter Creosoting Co., 324 Or 184, 196, 923 P 2d 1200 (1996).
In St. Paul, the insured’s regular business operations caused severe soil and
groundwater contamination. Several of the policies at issue defined an “occurrence” as
“a happening or a continuous or repeated exposure to the same general conditions,
which, unexpected by the insured, causes injury to or destruction of corporeal property
during the policy period.” The insurers whose policies had expired before the insured
actually cleaned up the contamination argued that no “occurrence” had taken place until
the insured was forced to spend money to clean-up the contamination, which was the
time of the “injury,” so their policies did not cover the claim. Id. at 200.
22
The court rejected this argument, stating that the “clear words” of the policy
contradicted this interpretation and that “[t]he policies do not make an ‘occurrence’
depend on the fixing of financial responsibility, or damages.” Id. at 201. As long the
surrounding land and water was physically contaminated “at some point in the course of
the policy period,” coverage existed.
C. Duty to Defend and Duty to Indemnify
Every insurance policy includes two separate and distinct duties respecting
covered claims – the duty to defend and the duty to indemnify. City of Burns v.
Northwestern Mutual, 248, Or 364, 368, 434 P 2d 465 (1967). The duty to defend is
broader, requiring the insurer to defend the insured if the claim against the insured, as
stated in the complaint, could potentially impose liability for conduct covered by the
policy. Ledford v. Gutoski, 319 Or 397, 399-400, 877 P 2d 80 (1992). Conversely, even if
it does not appear that the insurer has a duty to defend based on the allegations in the
complaint, a duty to indemnify may later arise if it appears that coverage exists from facts
actually proved at trial. Id. at 401.
On the other hand, extrinsic evidence can be considered to determine a threshold
issue as to whether a particular person or entity qualifies as an insured under the policy,
e.g., in circumstances involving a possible additional insured. Fred Shearer & Sons, Inc. v.
Gemini Ins. Co., 237 Or App 468, 477-78, 240 P3d 67 (2010), rev den 349 Ore. 602, 249
P3d 123, 2011 Or LEXIS 68 (2011).
A duty to defend exists even if the complaint alleges events that occurred outside
the policy period. A proper denial can only occur when the allegations conclusively
demonstrate no coverage. Seneca Insurance Co. v. James River Insurance Co., 2014 US.
Dist. LEXIS 97156, 2014 WL 3547376 (D. Or. July 14, 2014), involved a declaratory action
involving two insurance companies and their duties. Seneca defended a contractor in a
construction defect case; James River did not. The district court held that “James River
could not eliminate the possibility that the alleged damage occurred during the policy
period based on the allegations of the Complaint. Accordingly, the court finds James
River’s duty to defend was triggered by the allegations…” Id. at 20-21.
The duty to defend arises even where the complaint is entirely silent upon key
factual issues which an insured might otherwise be required to establish in order to
trigger coverage. West Hills Dev. Co. v. Chartis Claims, Inc., 360 Or 650 (2016). The
plaintiff in West Hills was a general contract who was a named additional insured under
a policy issued to one of its subcontractors by Chartis. That policy only provided coverage
for losses arising out of the ongoing operations of the subcontractor. The court held that
Chartis had to presume (1) that the subcontractor worked at this project, (2) that the
subcontractor’s work was implicated by the complaint, and (3) that damage might have
23
occurred before that subcontractor’s work was complete, even though the underlying
complaint was completely silent on these issues.
The duty to defend does not extend to a known-loss. The plaintiff in Alkemade v.
Quanta Indemnity Co., 28 F. Supp. 3d 1125 (D. Or. 2014) knew that his home experienced
recurring damage due to the home being built on expanding clay soils. The contractor
made several unsuccessful attempts to stabilize the home before it and the homeowners
entered into a settlement that included assigned rights against the contractor’s insurers.
The owner then sued the insurer. The district court found no duty to defend and granted
summary judgment to the insurer as the contractor knew of the underlying problems
prior to the effective dates of the policy.
A similar case held differently. The Ninth Circuit found that a policy that lacked
definitions will have ordinary definitions applied. Thus, the policy allowed for known
damage prior to the policy’s effective date without precluding indemnity for other
damage found during the effective dates. Kaady v. Mid-Continent Casualty Co., 790 F.3d
995 (9
th
Cir. 2015).
In Sunset Presbyterian Church v. Anderson Construction, 2658 Or. App 309, 341
P.3d 192 (2014), following assignment of rights, the church sought full attorney fees
damages from the subcontractor that the general contractor accrued during litigation.
The church failed to allocate costs associated with the subcontractor’s work as against
other claims. Therefore, the court did not award any damages. While the subcontractor
was liable under the indemnity provision of its subcontract, its liability did not extend
beyond its scope of work.
Oregon does not have a bad faith rule when considering a denial of the duty to
defend. However, acceptance of the duty to defend, and providing a defense, imposes
upon the insurer a duty to defend and to settle if reasonable, and failure to properly
discharge either may subject the insurer to enhanced liability. Georgetown Realty, Inc. v.
The Home Ins. Co., 313 Or 97 (1992).
Generally, the duty to indemnify is based upon the actual facts of the matter,
unlike the duty to defend. If defense has been accepted, an insurer cannot build its case
and develop evidence for a declaratory judgment proceeding to determine if the claim is
covered. N. Pac. Ins. Co. v. Wilson’s Distrib. Serv., Inc., 138 Or. App. 166, 173, 908 P.2d
827, 831 (Or. Ct. App. 1995). When an insurer defends under a reservation of rights, the
duty to indemnify may be litigated in a separate action. Ferguson v. Birmingham Fire Ins.
Co., 254 Or 496, 509 (1969). Historically, the litigants in the separate action generally
have not been bound, through estoppel or rpeclusion, by any findings in the underlying
tort action. Id. However, in 2016 the Oregon Supreme Court modified this rule in its
FountainCourt decision. FountainCourt Homeowners Association v. American Family Ins.,
360 Or 341 (2016). There, a plaintiff who successfully obtained a judgment against a
24
contractor immediately began a garnishment action against that contractor. The court
clarified that the insurer is not “collaterally estopped” from litigating factual issues
relating to coverage, but the scope of those issues are limited. Id. at 355. The question
of indemnity for the judgment was limited to the nature of the sums which “the insured
[became] legally obligated to pay as damages.” Id. at 358. The court resolved this
question simply by looking at the jury instructions and evidence in the underlying
proceeding and comparing it to the insurance contract.
D. Property Damage (Covered) vs. Defective Workmanship (Not Covered)
Generally speaking, property damage involves loss arising from physical damage
to tangible property, such as where a defective product explodes, causing physical
damage to other property. On the other hand, purely economic damages, which are not
covered, involve money spent or profits lost as a result of defective work or products,
such as money spent on additional labor necessary to cure the defect, or profits lost
because the opening of a business is delayed by a construction defect.
Wyoming Sawmills, Inc. v. Transportation Insurance Co., 228 Or 401, 578 P 2d 1253
(1978) illustrates the distinction between “property damage” caused by the insured’s
defective product (covered) and consequential or economic damages resulting from that
defective product (not covered). There, the plaintiff-insured sold defective 2 X 4 studs to
be used in constructing buildings. The purchaser of the studs sued the insured for the
cost of new studs and the cost of labor to remove and replace the studs. The insured
acknowledged that the policy did not cover the cost of replacement studs, because the
policy specifically excluded from coverage the insured own defective work or materials.
The court held that the diminution in the value of the building was not a “physical
injury” to “tangible property,” but rather, “consequential or intangible” damages flowing
from the insured’s own defective material. The court made clear that the policy would
have covered physical damage to other parts of the buildings resulting from the need to
replace the defective studs – which would constitute “physical injury” to “tangible
property” - but not the labor to replace the defective studs themselves, which is a purely
economic loss that does not involve property damage.
A standard form liability insurance policy may be found to provide coverage for all
adjudicated construction defect claims so long any “property damage” for which the
insured is responsible took place during the policy period. FountainCourt Homeowners’
Association v. FountainCourt Development, LLC, et al., 264 Or. App. 468 (2014). In
Fountaincourt, a homeowner’s association sued a contractor’s insurance company to
collect as judgment creditors on a contractor’s insurance policy. Id. at 480. The
homeowners had previously obtained a judgment that the contractor was negligent in
installing defective siding, windows, caulking and flashing, which had led to water
intrusion damaging the contractor’s work and other parts of the structures. Id. at 480. In
25
a subsequent garnishment proceeding against the subcontractor’s insurance company,
the court held that it was the insurer’s burden to prove how much of the underlying
damages was attributable to the contractor’s work. Id. at 485. The court also held that
because some of the damage occurred during the insurance company’s policy period, the
insurance company had to pay for all of it unless it could prove that specific costs were
for damage occurring solely outside its year of coverage. Id. at 488.
E. Indemnity and “Additional Insured” Endorsements
ORS 30.140 prohibits construction contracts from requiring one person (a
contractor, sub-contractor, etc.) to indemnify another person against liability caused by
the indemnitee’s own negligence. The Oregon Supreme Court has interpreted this statute
broadly, holding that a provision in a construction contract requiring one person to insure
a second person (as an “additional insured”) against that second person’s own negligence
is also unenforceable under ORS 30.140. Walsh Construction Co. v. Mutual of Enumclaw,
388 Or 1, 10, 104 P 3d 1146 (2005). The court reasoned that, whether a subcontractor is
itself required to indemnify a contractor (or vice versa) or is only required to purchase
insurance that covers the contractor for the contractor’s own negligence, “the ultimate -
and statutorily forbidden - end is the same.” Id. However, the same principle that allows
overbroad indemnity provisions to be enforced applies to allow otherwise overbroad
additional insurance requirements to be enforced to the extent allowed by law. Security
National Insurance Co. v. Sunset Presbyterian Church¸289 Or App 193 (2017).
Additionally, the failure to prove damages or otherwise succeed on a contractual
indemnity claim does not preclude such proof in a subsequent action to recover from a
subcontractor’s carrier under an additional insured provision. Id. Additional insurance
coverage can be found even where the complaint does not name the specific
subcontractor (named insured), so long as the complaint can be read to implicate the
subcontractor’s scope of work. Id.
F. Reformation
In the underlying case of A&T Siding, Inc. v. Capital Specialty Ins. Corp., 358 Or. 32,
359 P.3d 1178 (2015), an owner and contractor agreed to a settlement with an
unconditional release and agreement not to execute. The agreement was later modified
to eliminate these two clauses. Additional litigation ensued between the contractor and
insurer, which was removed to federal court. There, the insurer was found not liable
because the contractor attempted to create additional insurance obligations through the
amendment of the settlement. The contractor appealed, and the Ninth Circuit certified
the case to the Oregon Supreme Court, which held that the reformation attempt by the
contractor and owner failed. The “mistake” the owner and contractor attempted to cure
was a mistaken assumption about interpretation. The legal consequences were the
mistake, not the agreement.
26
A general contractor sued for reformation of its insurance policy and for negligent
procurement of insurance in 5 Star, Inc. v. Atlantic Casualty Insurance Co., 269 Or. App.
51, 344 P.3d 467 (2015). A subcontractor’s employee was injured on the job and filed
suit; the general contractor settled and agreed to pursue its claim against the insurer on
behalf of the plaintiffs. The claim was initially denied as the insurer cited policy exclusions
for coverage of claims arising out of the actions of subcontractors. This suit followed.
The trial court granted summary judgment to the insurer and the Court of Appeals
affirmed. The contractor argued that Oregon law mandated contractors carry insurance
that covered acts by subcontractors; since it was sold a policy that did not meet the
requirements, it should be reformed. The Court did not agree and held that the law
placed the obligation on the contractor, not the insurer.
G. Policy Interpretation
Who bears the burden of proving or disproving coverage? In QBE Insurance Corp.
v. Creston Court Condo., Inc., 58 F. Supp 3d 1137 (D. Or. 2014), the developer’s insurance
company accepted the tender under a reservation of rights and filed a declaratory action
that it had no duty to defend. The primary contention was who must prove or disprove
coverage. The general rule in Oregon is that the insured bears the initial burden of
proving coverage. Here, the court held that the insurer must prove the lack of coverage
as it filed the declaratory action.
Additionally, there was a question whether the developer was named under the
policy. The insurer attempted to use extrinsic evidence to show that the developer was
not, in fact, a named defendant. The court held that if the insured’s identity can be
determined by the face of the policy, “it is one of the contract interpretation and,
consequently, extrinsic evidence is not permitted.” Id. at 1147-1148. Ultimately, the
court held that the developer was not a named insured. But due to allegations in the
complaint that the developer acted as the named insured’s real estate manager, a duty
to defend existed.
Oregon adheres to the rule of construing ambiguous provisions against the
insurer. Hunters Ridge Condo Association v. Sherwood Crossing, 285 Or App 416 (2017).
For example, a policy exclusion for damages to a “multi-unit residential building” (defined
as “a condominium, townhouse, apartment or similar structure, each of which has greater
than eight units built or used for the purpose of residential occupancy) does not apply to
a building with both residential and commercial units, even though it had more than eight
residential units. Id. The Hunters Ridge court also applied this rule of construction to
determine that attorney fees and costs awarded against a defendant are “damages
because of . . . property damage,” as the first “damages” could mean either physical
damages or legally obligations to pay. Id. Further, the attorney fees incurred by a general
27
contractor in a suit against a subcontractor for negligent construction, and taxed against
the subcontractor by the court, were covered under the policies supplementary payments
section obligation pertaining to “all costs taxed against the insured in the suit.” Id. The
court held that the word “costs” was ambiguous and could reasonably be interpreted to
include all non-damage amounts awarded by a court, including attorney fees.
XVII. OTHER STATUTES
A. Notice of defects ORS 701.560 – 701.595
Residential homeowners must now provide contractors, subcontractors, and
suppliers with a notice of defect before they can commence litigation or compel
arbitration. The “notice of defect” procedure begins with a written notice describing each
defect, detailing the remediation the owner thinks is necessary, and stating that the
owner may seek court action or arbitration. The notice, which must be sent by registered
mail to each party intended as a defendant, must include any documents that evidence
the defects. Within 14 days of receiving notice, the contractor may make a written
request for a visual examination; within 14 days of visual examination, the contractor may
make a written request for inspection. Additionally, the contractor must respond in
writing within 90 days of the notice. The response can include an offer to work or pay
compensation to the owner. The owner can begin legal action only if the contractor does
not perform in accordance with any offer, the contractor fails to respond or fails to
provide an offer, or the owner rejects any offer in the contractor’s response. Statutory
periods of repose and limitation are tolled during this process. ORS 701.560 – 701.595.
B. Prompt Payment
The Prompt Payment Act, ORS 701.620 – 701.645, requires progress payments to
contractors and subcontractors on private construction projects anticipated to last 60
days or longer. This is in addition to the prompt payment policy already in place for public
works projects.
C. Little Miller Act
A claimant can recover on a bond under the Little Miller Act as long as it pleads a
claim for the bond under ORS 279C.600 and obtains a recovery against the contractor. In
State v. Ross Bros. & Co. Inc., 268 Ore. App. 438, 342 P.2d 1026 (2015), a subcontractor
sued the general contractor and its bond surety for uncompensated services under the
Little Miller Act. The trial court ruled in favor of the subcontractor on a theory of quantum
meruit as against the contractor, but not the surety. As to the surety, the Court of Appeals
held that the subcontractor did not have to incorporate a theory of quantum meruit into
its bond claim. The subcontractor merely has to plead a claim under ORS 279C.600 to
recover on the bond
28
If there is an assignment of Little Miller Act claims from a primary subcontractor
down to a secondary subcontractor, notice must also be made up to the general
contractor that the claim is for a secondary subcontractor. Additionally, the notice must
be made within 90 days. “[T]he Court finds that the notice requirement is a condition
precedent to recovery under the Miller Act….” United States ex. rel. Northwest Cascade
Inc. v. Colamette Constr. Co., 2014 U.S. Dist. LEXIS 143662 (D. Or. Oct. 8, 2014).
D. Retainage
Oregon law limits the maximum amount of retainage to 5% withholding for both
public and private contracts. ORS 279C.570(7) (public contracts); ORS 701.420(1) (private
contracts). Certain requirements are applicable to both public and private contracts, and
ORS 701.420 sets forth the standard that all qualifying contracts must comply with. ORS
701.420 (retainage procedures); ORS 279C.555 (requiring public contracts to comply with
ORS 701.420). Retainage requirements are applicable to owners, contractors, and
subcontractors. ORS 701.420. Securities may be substituted in lieu of retainage. ORS
701.430; ORS 279C.560
Recent amendments to ORS 279C.570 and ORS 701.420 create new requirements
for retainage withheld on public and private construction contracts. Effective January 1,
2020, if the contract price exceeds $500,000, the contracting agency, private owner,
contractor, or subcontractor must place amounts deducted as retainage into an interest-
bearing escrow account. Interest on the retainage amount accrues from the date the
payment request is approved until the date the retainage is paid to the contractor to
which it is due.
The amendments provide no guidance on a number of issues, however, likely
leaving clarification to the courts or further legislation. As of February 2021, the statutes
have not been amended for clarification, but future changes are likely given the opacity
of what is or is not required.
Prior to the amendments, a contracting agency, owner, contractor, or
subcontractor was required to pay interest on the final payment due the contractor or
subcontractor. However, interest was not required to be paid on amounts withheld as
retainage. Under the recent changes, those retainage amounts must be placed into an
interest-bearing escrow account rather than remaining in the other contracting party’s
general operating account.
No guidance has yet been provided regarding how the escrow account should be
established, how it should be managed, the extent of control an owner has over the funds
while construction is in progress, or whether the funds can be used to cure a contractual
default.
29
States with similar laws typically require that the parties enter a written escrow
agreement; that the party withholding the retainage amount is responsible for the costs
associated with establishing and administering the account; that the funds must be
deposited in a federally insured account designated as an escrow trust account and kept
separate, distinct and apart from funds belonging to the escrow agent; that the
accumulated interest is payable to the contractor; and that failure to place the money
into an interest bearing escrow account can result in criminal penalties and/or payment
of damages to the party that is owed money.
The approaches elsewhere are not uniform. For example, in some states, the
deposit, withdrawal, and/or disbursement of the subject funds may be subject to written
approval of any party with an interest in the subject funds. Some states require monthly
reporting or other notice requirements to the party performing the work. But, in at least
one state, Alabama, the escrow agent is authorized to release subject funds upon default
as determined by the party paying for the work. Nor is there consensus on whether
amounts can be combined for cost and administrative efficiency. Two states sometimes
allow retainage for multiple contractors to be held in a combined account, but at least
one state requires each retention sum to be placed into its own escrow account.
XVIII. CONSTRUCTION LIENS
A. Laying the Groundwork for a Construction Lien
i. Classes of Lien Claimants
ORS 87.010 entitles five classes of persons involved in the “construction of any
improvement” to real property to claim a lien: (1) persons performing labor, (2) persons
transporting materials, (3) persons furnishing materials, (4) persons renting equipment,
or (5) professionals who prepare construction plans or specifications, or supervise
construction, such as architects, landscape architects, land surveyors, or engineers. ORS
87.010.
Notably, an “improvement” need not be made to a structure. For example, the
improvement may be to a street or related to landscaping. ORS 87.010(1), (6).
ii. Notices to be provided by prime contractor to owner of
residential home
On a residential project, a prime contractor must provide an owner with three
notices: A Consumer Protection Notice, Notice of Procedure, and Information Notice to
Owners About Construction Liens (the “Information Notice”). The first two notices
apprize an owner of how to select a contractor and the procedure for asserting a claim in
30
the event the work is defective. The Information Notice provides information about
construction liens. If a prime contractor fails to provide the Information Notice at the
time of contracting, the right to assert a lien is lost. The forms for these notices can be
found at the Oregon Construction Contractors Board website, www.CCB.state.or.us.
iii. Notice of Right to a Lien
In the residential construction context, for a subcontractor-lien claimant to secure
a lien covering all work performed and/or materials supplied, the lien claimant must have
provided a “Notice of Right to a Lien” to the owner not more than eight weekdays (as
defined by ORS 187.010) after commencing work and/or providing materials. ORS 87.021.
The notice must substantially follow the form set forth in ORS 87.023.
Attaching a blank ‘Notice of Right to Lien’ form to a construction contract fails to
satisfy the requirements of ORS 87.021. The exception under ORS 87.021(3) for work
performed on-site did not apply to the plaintiff, an engineering firm, because its on-site
work consisted of measurements and sampling. The bulk of engineering services were
done at plaintiff’s office. Multi/Tech Eng’g Servs. V. Innovative Design & Constr., LLC, 274
Ore. App. 389, 360 P.3d 701 (2015).
If this notice is given to the owner more than eight days after the claimant began
work, the claimant’s lien will cover only the portion of work performed and/or labor
provided after the date that is eight weekdays before the “Notice of Right to a Lien” was
provided.
No similar notice requirement normally exists in the commercial construction
context, but one exception exists. A materials supplier whose contract is with the general
contractor – not the owner - must provide a Notice of Right to a Lien to the owner in both
the residential and commercial contexts.
Notably, a construction lien only has priority over other interests in the subject
property to the extent that the holders of those interests received a Notice of Right to a
Lien before the lien claimant provided labor and/or supplies. ORS 87.025(3). To ensure
priority, on tractors, sub-contractors and materials-suppliers should therefore always
provide notice to any mortgagee of the subject property within eight days of providing
labor and/or materials.
B. The Mechanics of Filing (Perfecting) a Lien; Notice to Property Owner
Any person claiming a lien for furnishing labor or equipment (including rented
equipment) must record the lien within 75 days after (1) furnishing labor or equipment,
or (2) completion of construction (as defined by ORS 87.045), whichever is earlier.
31
Professionals who prepare plans or specifications, or supervise construction, must file the
lien within 75 days after completion of construction.
The lien must be recorded with the recording office of the county where the
improved land is situated. ORS 87.035(2). The claim of lien must include the amount
demanded as payment, the name of the real property owner, the name of the person
with whom the person filing the lien contracted (whether he be the property owner or
his agent), and a description of the subject property. ORS 87.035(3). In addition, the lien
claim must be “verified by the oath of the person filing or some other person having
knowledge of the facts,” who must describe the circumstances giving rise to the lien and
the basis of his personal knowledge of those circumstances, in a signed and notarized
statement. ORS 87.035(4).
Within 20 days after filing the lien, notice of the lien, including a copy of the claim
of lien, must be mailed to the property owner and any mortgagee(s). ORS 87.039(1).
C. Owner’s Right to a Detailed Written Justification of Amounts Claimed by
Lien Claimant
A landowner who has received notice of the filing of a lien may demand a written
justification of the claimed balance owed, including a list of materials supplied or labor
furnished, as well as a statement of the contractual basis for supplying materials or labor.
ORS 87.027. The lien claimant must respond to this demand within 15 days, not including
weekends or holidays. A failure to respond within 15 days results in a loss of attorney’s
fees and costs, which are normally allowable to a party successfully foreclosing a lien.
ORS 87.060.
D. Use of a Bond to Release a Lien
To release a perfected lien (i.e., a lien that is filed and recorded), a landowner may
file a bond in the recording office where the lien is recorded. ORS 87.076. The bond must
be issued by a corporation authorized to issue surety bonds in the State of Oregon, in an
amount not less than 150 percent of the amount claimed under the lien or $1000,
whichever is greater.
E. Foreclosing the Lien
i. 120 Day Requirement
Normally, suit must be brought to enforce a construction lien within 120 days of
its filing. ORS 87.055. If extended payment terms are agreed on, however, the validity of
the lien may be extended to 120 days from the date on which such extended payment is
32
to be completed (not to exceed two years from the date the lien was initially filed) by
stating the extended payment terms in the claim of lien.
ii. Notice of Intent to Foreclose
At least 10 days before filing suit, the lien claimant must notify the owner and any
mortgagee of his intent to file suit to foreclose the lien. ORS 87.057. The owner may
again demand a written justification of the amount claimed under the lien, which must
be provided within five days of the demand. The failure to provide this written
justification of amounts claimed will result in loss of otherwise available attorney’s fees
and costs.
iii. Proper Parties and Venue
Suit should be brought in the circuit court of the county in which the improved
property is located. ORS 87.060(1). The lien claimant must name as parties persons
against whom a personal judgment is sought, other construction lien claimants, and the
owners whose interests are subject to the claim of lien. ORS 87.060(7). No judgment is
effective against persons not named in the action, so any other person who may allege
priority over the perfected lien should also be made a party. The priority of construction
liens as against other encumbrances is outlined in ORS 87.025, but is beyond the scope of
this article.
iv. Pleading Requirements and Damages
The lien claimant must plead and prove both the validity of the lien and
compliance with notice and other procedural requirements of the lien statute. A party
who successfully forecloses a lien is generally entitled to attorney’s fees in the foreclosure
action, as well recovery of the cost of recording the lien and obtaining title reports
required for preparing and foreclosing the lien. ORS 87.060, Hooker Creek Co. v. Central
Or. Land Dev., 279 Or App 117 (2016) (Party who prevails upon (1) validity of lien or (2)
foreclosure of the lien is entitled to fees). But, as noted above, a lien claimant should be
sure to comply with the lien statute’s strict procedural requirements to ensure eligibility
to recover attorney’s fees and other costs of pursuing the foreclosure action.
This Compendium outline contains a brief overview of certain laws concerning various
litigation and legal topics. The compendium provides a simple synopsis of current law
and is not intended to explore lengthy analysis of legal issues. This compendium is
provided for general information and educational purposes only. It does not solicit,
establish, or continue an attorney-client relationship with any attorney or law firm
identified as an author, editor or contributor. The contents should not be construed as
legal advice or opinion. While every effort has been made to be accurate, the contents
33
should not be relied upon in any specific factual situation. These materials are not
intended to provide legal advice or to cover all laws or regulations that may be
applicable to a specific factual situation. If you have matters or questions to be resolved
for which legal advice may be indicated, you are encouraged to contact a lawyer
authorized to practice law in the state for which you are investigating and/or seeking
legal advice.
