2016 DEVELOPMENTS IN NEW MEXICO CONSTRUCTION LAW. The Legislature made revisions to the resident veteran and resident veteran contractor

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1 2016 DEVELOPMENTS IN NEW MEXICO CONSTRUCTION LAW 2016 LEGISLATIVE SESSION The Legislature made revisions to the resident veteran and resident veteran contractor preferences. NMSA and The preferences are available for resident veteran businesses/contractors with annual gross revenues of up to $3,000,000 per year. The preference as applied to bids is evaluated at 10% lower than the bid actually submitted. In the case of requests for proposals the proposal is entitled to an additional total weighting factor of 10% or an additional 10% of the total possible points. The preference is available for a maximum of 10 consecutive years. There are some safe guards for the application to a single business and the length of time an individual can qualify NEW MEXICO SUPREME COURT AND NEW MEXICO COURT OF APPEALS CASE LAW Three decisions from our appellate courts this year have dealt with interpretation of contracts, consequential damages the statute of repose and the application of contractual and traditional indemnity to tort claims for negligent construction. Centex/Worthgroup, LLC v. Worthgroup Architects, L.P., 2016-NMCA-013. Centex and Worthgroup formed an LLC to perform a design/build contract for the Inn of the Mountain Gods. Worthgroup was the architectural subcontractor to the LLC which we ll call Centex for convenience. Part of the project was a mechanically stabilized earth (MSE) wall. After construction was complete the MSE wall failed. Centex expended approximately $6,000,000 to redesign and reconstruct the MSE wall and repair damages to adjacent structures. The subcontract between Centex and Worthgroup required Worthgroup to provide a $3,000,000 1

2 project policy for design liability. Centex made demand on Worthgroup s insurer and received the full policy limits. There was a fairly standard flow down clause (where the subcontractor assumes contractor s duties to owner for subcontractor s scope of work and obtains rights against owner to the same extent) in the subcontract. The issue in the case was whether the flow down clause in the design subcontract between Centex and Worthgroup meant that the limitation of liability clause in the prime contract also capped Worthgroup s liability to Centex for the MSE wall failure at $3,000,000. The subcontract itself did not contain a limitation of liability clause. It provided that Worthgroup would be liable for redesign costs and additional construction costs required to correct Worthgroup s errors and omissions. The trial court found in favor of Worthgroup. On appeal, the New Mexico Court of Appeals reversed, holding that the language of the subcontract controlled. The Court of Appeals found that the except as otherwise provided herein language of the subcontract combined with the subcontract s language providing unlimited liability for redesign and reconstruction costs created a specific allocation of responsibility. The Court of Appeals went on to state that in the event of conflicts between the subcontract and the flow down provision the subcontract terms prevail. Finally, the Court of Appeals determined that the order of precedence clause in the subcontract supported its decision because it dictated that the subcontract controlled unless the prime contract imposed a higher standard or greater requirements. Since the subcontract imposed higher requirements for liability, its unlimited liability provision prevailed. Note: The main take away from the Centex/Worthgroup case is that contract terms matter. Here, a boilerplate order of precedence clause had a significant impact on a $3,000,000 2

3 dispute. It also highlights the importance of understanding the limited impact of the flow down clause where the subcontract and prime contract are inconsistent. National Roofing, Inc. v. Alstate Steel, Inc., 2016-NMCA-020. National Roofing s employees were injured while repairing the deck of a canopy at a cabinet manufacturing facility. National sued the other entities involved for its damages resulting from the injuries to its employees, which consisted on increased worker s compensation premiums, amounts paid to reduce its insurance modifier and loss of future income due to its new deficient safety record. The trial court dismissed National s claims and the New Mexico Court t of Appeals affirmed. The court determined that National could not recover purely economic losses (premiums, buy down costs and future damages) where National had not suffered any direct personal injury or property damage. The court noted that this was the universal rule and was supported by sound public policy because allowing suits for downstream losses would greatly increase the number, complexity and expense of potential lawsuit arising from many accidents. Note: The court s rationale in rejecting National s argument was made more complex because of the New Mexico Supreme Court s 2014 decision in Rodriguez v. Del Sol Shopping Center Associates case (2014-NMSC-014) where the court abolished foreseeability as a factor for courts to consider in determining the existence of a duty from one party to another. Since the New Mexico Supreme Court had created an exception to the rule for public policy reasons unrelated to foreseeability, the Court of Appeals rested its decision on a public policy argument. 3

4 Damon v. Vista del Norte Development, LLC (N.M. Ct. App. 7/12/16). Vista developed the Estates at Vista del Norte: subdivision. The Damons filed suit on December 7, 2012, against Vista and others for damages resulting from structural failure of their home. Vista moved to dismiss the claims against it based on the argument that the New Mexico statute of repose (NMSA ), barred the lawsuit. The statute of repose bars lawsuits which are commenced more than 10 years after substantial completion of the improvement. The trial court dismissed the suit and the Court of Appeals affirmed. The Court of Appeals looked to the definitions of substantial completion in which is the latest of: (1) the date when the construction is sufficiently complete so the owner can occupy or use the improvement for its intended purpose; (2) the date on which the owner occupies or uses the improvement; or (3) the date established by the contractor as the date of substantial completion. The homeowners argued that the correct date was the date their predecessors in interest had purchased the home in Vista argued that it was the date on which the City of Albuquerque accepted the infrastructure and improvements. The City had issued its certificate of acceptance on February 26, The Court determined that the relevant date was when Vista received its certificate from the City. The court recognized that there are many different physical improvements made to a parcel and that the only improvements Vista made were the infrastructure improvements. The date of occupancy of the home (which was constructed by Stillbrooke) was not relevant for Vista s liability. Since the certificate of acceptance was issued more than 10 years before the Damons filed suit, their claims against Vista were barred by the statute of repose. 4

5 Note: This may not be the last word on this subject. The New Mexico Supreme Court has accepted the case for review and may ultimately come to a different conclusion. The case is a very important one for developers and contractors who do subdivision improvements. Safeway, Inc. v. Rooter 2000 Plumbing and Drain (N.M. Sup. Ct. 2/18/2016). This case involves a claim by Safeway against Rooter for indemnification for damages suffered by a customer when a baby changing table installed by Rooter collapsed. Plaintiffs alleged negligence against both Safeway and Rooter. Safeway sought defense and indemnity from Rooter under their contract and under traditional (non-contractual) indemnity principles. The trial court dismissed Safeway s claims against Rooter. Rooter settled with the plaintiffs and the case went to trial against Safeway. The jury found Safeway 40% responsible for the injuries. On appeal, the New Mexico Court of Appeals reversed holding that Rooter had a duty to defend under the 1971 version of New Mexico s anti-indemnity statute (NMSA ) and that there were issues of fact whether traditional common law indemnity applied. On appeal to the New Mexico Supreme Court, it reversed the Court of Appeals, reinstating the trial court s decision. On the issue of traditional common law indemnity, the New Mexico Supreme Court found that traditional indemnity involved situations where there was an all or nothing right of recovery. Because Safeway was found to have been partially negligent under New Mexico s system of comparative fault.it did not have a right to traditional indemnity. The Court also found that Safeway could not claim proportional indemnity because Safeway s negligence was active and the jury verdict against it was not based solely on its responsibility for Rooter. 5

6 The Court also found that the contractual requirement that Rooter defend, indemnify and hold Safeway harmless was void and therefore the duty to provide insurance and a defense to Safeway was also unenforceable. This decision turned on the fact that Safeway s indemnity provision required Rooter to defend and indemnify Safeway in all cases except where the injury was caused by Safeway s sole negligence. The Court found that this violated the anti-indemnity statute s prohibition on agreements which require the indemnitor (Rooter) to indemnify Safeway from injuries resulting from in whole or in part the negligence of Safeway. Because Safeway s contract provision arguably required Rooter to defend and indemnify for actions where Safeway was in part negligent, it was void and unenforceable. Note: This case is important because it emphasizes the importance of making sure that contractual indemnity provisions are drafted to strictly conform to New Mexico s anti-indemnity statute. From a practical standpoint it also means that in situations where a plaintiff alleges negligence of both an indemnified party and the party who is supposed to indemnify it, insurance companies for the indemnifying party will probably be unwilling to provide a defense to the indemnified party and no defense costs or indemnity will be paid if any negligence is found on behalf of the indemnified party. This will transfer the defense costs back onto the indemnified party and, potentially, its insurer. 6