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UNDERSTANDING THE TEXAS RESIDENTIAL CONSTRUCTION LIABILITY ACT
I. History of the Residential Construction Liability Act (“RCLA”)
A. DTPA - Too much of a good thingBy the mid 1980's, Texas residential builders and remodelers had become frequent targets in civil litigation. This was due, in part, to the increasing amounts of money involved in residential construction transactions. It was also due to the way that the Texas Deceptive Trade Practices Act (“DTPA”) was being applied to litigation in this area. The DTPA gave plaintiffs and their counsel a statutory “weapon” that was almost too good to be true. It afforded the plaintiffs a variety of non-exclusive options for establishing liability. For example, a plaintiff could plead a DTPA case against a builder and allege violations of the “laundry list”, unconscionability, breach of any express or implied warranty, or breach of a related statute. The builder's DTPA defenses, on the other hand, were virtually non-existent. Added to this situation was the 1968 decision by the Texas Supreme Court in Humber v. Morton, which created, in a new home sales transaction, the implied warranties of habitability and good and workmanlike construction. As additional incentives for filing suit, the DTPA allowed actual damages to be calculated on a liberal basis and then permitted doubling, and sometimes trebling, of these damages. The causation standard in DTPA was “producing cause” which contained no foreseeability requirement and the DTPA virtually guaranteed the plaintiff's attorney an award of attorney's fees. All of this contributed to the creation of an environment where the builders were being sued more frequently and where the cost of defending against a DTPA suit was escalating. In actual practice, by 1989, the DTPA was frequently being wielded in residential construction disputes more as a sword to procure economic windfalls than as a shield to protect consumers.
B. Legislative ResponseThis situation was brought to the attention of the Texas Legislature in 1989 by the Texas Association of Builders, other industry groups and individual builders from across the State. In response, the Legislature enacted the RCLA in 1989 and subsequently amended it in 1993, 1995 and 1999. The statute was enacted “to provide a fair and appropriate balance with respect to the resolution of construction disputes between a residential contractor and an owner”.
II. Analysis of the RCLA
A. OverviewThis analysis will focus on the current version of the RCLA which was amended effective September 1, 1999. However, the prior version of the RCLA still applies to residences constructed pursuant to a contract entered into before September 1, 1999. Note that the current version of the RCLA contains several important amendments to the prior version, including: applicability to repairs to existing residences; applicability to subsequent purchasers; provision for a defense to claims of assignees/subrogees (i.e. homeowners’ insurers) that perform repairs without first notifying the contractor of the construction defect; a counterclaim for a frivolous suit; the raising of the damages cap to an amount equal to the owner’s original purchase price or the fair market value without defect, whichever is greater; fact-finder determination of the reasonableness of the contractor’s offer of settlement/repairs rather than the reasonableness of the owner’s rejection of such offer; protection of contractor’s contribution rights against subcontractors after settlement with owners if contractor provided written notice beforehand; a mediation provision; recognition that the RCLA does not create a cause of action; and a required contractual disclosure statement.
B. DefinitionsFive terms are defined in Section 27.001 of the RCLA. These terms are: “appurtenance”, “construction defect”, “contractor”, “residence”, and “structural failure”. Since these definitions are relatively self-explanatory, this article will only touch briefly on the definition of “construction defect” and “contractor”. The term “construction defect” means a matter concerning the design, construction, or repair of a new residence, of an alteration of or repair or addition to an existing residence, or of an appurtenance to a residence, on which a person has a complaint against a contractor. By definition, the term includes any defects in the residence, any appurtenance affixed to the residence, or physical damage to the real property on which the residence and appurtenances are affixed, which was proximately caused by a construction defect. Thus, the RCLA also potentially applies to claims regarding such things as swimming pools, landscaping, site drainage, settlement, underground improvements, unsuitable site selection, improper septic system operation, etc. In Section 27.001(3) the term “contractor” is defined, in part, as follows:
a person contracting with an owner for the construction or sale of a new residence constructed by that person or of an alteration of or addition to an existing residence, repair of a new or existing residence, or construction, sale, alteration, addition or repair of an appurtenance to a new or existing residence. The term includes: (A) an owner, officer, director, shareholder, partner, or employee of the contractor; . . .
Under this definition, “contractors” include builders, remodelers and others involved in residential construction and repair. The term “contractor” also includes an owner, officer, director, shareholder, partner or employee of the contractor.
C. Application of the RCLASection 27.002 of the RCLA is entitled “Application of Chapter” and defines the broad application of the statute. It confirms the Legislature's clear intent that the provisions of the RCLA apply to any action to recover damages from a contractor resulting from a construction defect including actions brought by any subsequent purchaser of a residence and will prevail over any other conflicting law. As stated by the Houston Court of Appeals in In re: Kimball Hill Homes Texas, Inc., “A claim that exists solely by virtue of alleged construction defects clearly falls within the RCLA.” Section 27.002 of the RCLA states that the statute applies to any “action” to recover damages resulting from a construction defect. This same section goes on to clearly state that to the extent of conflict between the RCLA and any other law, including the DTPA, the RCLA prevails. Although this preemptive language is clear, some appellate courts have struggled to qualify the RCLA’s restraints on other causes of action. For example, in Bruce v. Jim Walters Homes, Inc., the San Antonio Court of Appeals held that common law fraud did not conflict with the RCLA, thus the RCLA did not preempt an action for common law fraud. Additionally, in Perry Homes v. Alwattari, the Fort Worth Court of Appeals held that the RCLA did not preempt a DTPA claim of unconscionable conduct because there is no conflict between the DTPA and RCLA when the contractor fails to make a reasonable settlement offer. And, most recently, in Sanders v. Construction Equity, Inc., the Beaumont Court of Appeals held that the RCLA controlled but did not necessarily preempt claims for negligence, fraud, DTPA violations, breach of contract and breach of warranty.
D. LiabilityThe RCLA's liability limitations excuse the contractor from responsibility for any damages caused by the owner's failure to maintain the residence. The contractor may also benefit from the “third party information” defense, which is similar to a defense currently contained in Section 17.506 of the DTPA. Therefore, if a contractor passes on to the homeowner any information about the residence, appurtenances or the underlying property that later proves to be false, the contractor cannot be held responsible for the consequences of that false information if he did not know and could not have known of the falsity at the time he communicated it. Section 27.003(a)(2) was added by the 1999 legislature to address the situation where a homeowner’s insurance company performs repair work on a residence and then brings a subrogation action against the contractor without ever having given the contractor any prior notice of the alleged construction defect or an opportunity to inspect it. This new section provides that if an assignee of the homeowner or a person subrogated to the rights of the homeowner fails to provide the required RCLA notice to the contractor before performing repairs, the contractor is not liable for the cost of the repairs.
E. Notice and Offer of SettlementPursuant to Section 27.004(a), a construction defect claim can only be initiated by delivery of a written notice to the contractor at least sixty (60) days prior to initiation of a lawsuit. This notice must be delivered to the contractor's last known address by certified U.S. mail, return receipt requested. Within 35 days following the receipt of the certified notice of defect, the contractor may make a written request for inspection of the property. If the contractor makes such written request, the statute provides that he “shall be given a reasonable opportunity to inspect and have inspected the property that is the subject of the complaint to determine the nature and cause of the defect and the nature and extent of repairs necessary to remedy the defect.” Within 45 days following his receipt of the required notice of defects, the contractor may submit a written offer of settlement to the claimant. This offer must be sent to the claimant or the claimant’s attorney by certified mail, return receipt requested and may include either an agreement to repair the claimed defects, an offer to have the claimed defects repaired by independent contractors at the contractor's expense, or an offer to make a monetary settlement. If the contractor offers to make the repairs or have them made by an independent contractor, then the offer must describe the repairs being offered in “reasonable detail.” The parties may agree in writing to extend the period for conducting an inspection or making an offer of settlement. If the offer to make repairs is accepted in writing by the claimant, then the contractor must complete the accepted repairs in a good and workmanlike manner within 45 days after acceptance unless completion is delayed by the claimant or by other events beyond the control of the contractor. If the claimant does not accept the contractor's written offer of settlement within 25 days after it is received, then the offer is deemed rejected as a matter of law. Under Section 27.004(f), if a claimant unreasonably rejects an offer of settlement made by the contractor or does not permit the contractor or independent contractor a reasonable opportunity to perform repairs pursuant to an accepted offer of settlement,
the claimant: (1) may not recover an amount in excess of: (A) the reasonable cost of the offered repairs which are necessary to cure the construction defect and which are the responsibility of the contractor; or (B) the amount of a reasonable monetary settlement offer made under Subsection (n); and (2) may recover only the amount of reasonable and necessary attorney's fees and costs incurred before the offer was rejected or considered rejected.
On the other hand, if the contractor fails to make a reasonable offer of settlement or fails to make a reasonable attempt to complete repairs specified in an accepted offer of settlement or fails to complete the repairs in a good and workmanlike manner, the limitation provided in Section 27.004(f) does not apply. Section 27.004(p) was added in 1999 to provide that if a contractor provides written notice of a claim for damages arising from a construction defect to a subcontractor, the contractor retains all rights of contribution from the subcontractor if the contractor settles the claim with the claimant.
F. Disclosure Statement RequiredIn order to increase awareness of the RCLA and its provisions, Section 27.007 was added in 1999. This new Section is entitled “Disclosure Statement Required” and specifies certain language that must be included in all contracts subject to the RCLA.
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