U.S. District Court in New York Draws Distinction Between Damages Recoverable for Defective Work in Tort and for Breach of Contract – Where Tort Claim Barred By Statute of Limitations, Owner Could Not Recover for Cost of Replacement of Structure Destroyed By Fire Allegedly Resulting From Defective Work of Renovation Contractor

Regent Ins. Co. v. Storm King Contr., Inc.
2008 U.S. Dist. LEXIS 16513 (S.D.N.Y. Feb. 26, 2008)

In June 1999, the owner of The Emerson Inn hired Storm King to act as its general contractor in the remodeling and rebuilding of the Inn. Under their agreement, Storm King was not responsible for the design of the project or for compliance with applicable law, building codes, or regulations, and it was agreed that the remedy for any defective work would be limited to correction of the defects. Storm King entered into a subcontract with Sullivan Fire Protection for the installation of a fire sprinkler system. The subcontract incorporated the terms of the agreement between the owner and Storm King. Its scope of work section provided that Sullivan’s work was to be performed in accordance with the plans and specifications prepared by the design professional.

In April 2005, the Inn was completely destroyed by a fire originating in an outdoor garage enclosure located near the kitchen that spread rapidly and unimpeded throughout the building. In April 2006, the owner’s insurer filed a complaint against Storm King, Sullivan, and the design professional alleging the work had been performed in an improper and un-workmanlike manner, seeking the reconstruction value of the Inn. The defendants moved for summary judgment contending, among other things, that the plaintiff’s claim sought tort damages which were barred by the applicable three-year statute of limitations.

The plaintiff conceded the project was completed in May of 2000. Accordingly, the court held that the plaintiff’s right to seek recovery in tort had expired in May 2003 and plaintiff was limited to contract damages. The more complicated issue became identifying whether the damages plaintiff sought were tort or contract damages.

In making its analysis, the court noted that in determining whether a loss is in tort or in contract, the New York Court of Appeals has considered the nature of the injury, the manner in which the injury occurred, and the resulting harm. The court reviewed applicable precedent, observing that where a plaintiff seeks enforcement of the bargain, the action should proceed in contract, but where there is an “abrupt cataclysmic occurrence” resulting in injury to person or property, claims may also sound in tort. The court determined that the key consideration in the cases reviewed to have been that in personal injury or injury to property cases damages are recoverable only in tort and benefit of the bargain or general damages underlie a contract action. Plaintiff argued that by seeking the replacement value of the Inn, it was seeking only the value of its original bargain and therefore its damages were recoverable under a contract theory. The court disagreed, holding that some of the damages plaintiff sought were extraordinary damages caused by a fire, relief only available in tort, and a relief unavailable to plaintiff because the tort statute of limitations had expired.

Further, the court found New York had adopted the rule that the appropriate measure of damages for a breach of contract action in a construction case is the cost to replace or repair the alleged defect, or, the diminution in value attributable to the defect as of the date of completion. Although recognizing the power of parties to define the scope of their respective liability through contract so as to alter the default rule, the court found that the parties had not done so here. Plaintiff failed to show the parties had contemplated the “abrupt cataclysmic occurrence” of a fire at the Inn related to Storm King’s work. In fact, the parties had specifically waived consequential damages. The court found the waiver did not foreclose all remedies for breach, and furthermore that such a waiver was not barred by sections 5-322.1 or 5-323 of New York’s General Obligations Law which applied only to tort actions. Additionally, the contract language reflected the parties’ intent to limit the owner’s recovery to general construction contract damages, and the court held the insurer’s rights as subrogee to be derivative and likewise limited.

After a detailed analysis, the court concluded replacement value sought by plaintiff was recoverable only in tort and barred by the three-year tort statute of limitations. As a result, plaintiff was entitled to seek only the cost of repairing the alleged defects as of the date of project completion.

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