A Supplemental Whitepaper Addressing Sandy's Impact On Commercial And Residential Property Owners And Construction Companies

Superstorm Sandy, which made landfall near Atlantic City, N.J. on October 29, 2012, brought virtually unprecedented destruction to a large swath of the northeastern United States including, in particular, coastal New Jersey, New York City and nearby Long Island. Hundreds if not thousands of structures, many of them private homes, were completely destroyed or substantially damaged, most by flooding and record storm surges, some by wind. Millions were left without electric power for days and in some cases for weeks. Businesses throughout the region and beyond were severely impacted, and more than 130 people were killed. Total losses, while still speculative, have been estimated to be in excess of $50 billion.

This whitepaper represents an overview of some of the legal issues that unquestionably will arise as a result of the storm, and is intended, among other things, to act as a guide for parties affected by the storm in addressing these issues at the present time, and also in the future. Although the nature and identity of the claims - and claimants - are seemingly endless, we concentrate herein on several different categories of damage claims that might be asserted by and against affected persons and businesses including building and structural claims, construction delay claims, toxic and environmental claims, and climate change/global warming-based claims.

BUILDING/STRUCTURAL CLAIMS

Introduction

Superstorm Sandy brought torrential downpours, record storm surges and tidal flooding, and significant winds to the East Coast, causing substantial property damage, especially in New York and New Jersey. This natural disaster will likely give rise to claims by property owners in both tort and property insurance. The following is a discussion of some of the potential tort claims property owners might assert against municipalities, contractors and design professionals for the damages sustained in the storm allegedly due to negligent design or construction.

The purpose of this discussion is not to give legal advice or to comment on the strength or weakness of the various claims, or on the potential defenses to such claims, but, rather, to identify the issues for consultation by the affected parties with their respective legal and insurance advisors.

Municipality Liability

Municipalities have a duty to maintain the public systems they build. New Jersey specifically imposes such a duty on municipalities.1 In New York, property owners cannot recover from municipalities on the basis that a municipality negligently designed such a system, but they can claim a municipality negligently inspected and maintained systems such as sewer lines and storm drainage systems.2 To prevail on such a claim in New York, a property owner must show: (1) the municipality "had notice of a dangerous condition ... likely to cause injury," (2) the municipality failed to "make reasonable efforts to inspect and repair the defect," and (3) "such failure caused the plaintiffs' injuries."3 Property owners who can show that the negligent maintenance of sewer systems or other public systems caused them to sustain greater losses in the storm than they would otherwise have sustained may have a basis for a claim under these theories.

Liability of Design Professionals

Architects and builders4 have a duty to perform their contractual obligations with reasonable care.5 Property owners may have a claim that they suffered greater losses in Sandy than they should have suffered because of negligent work by the architect, designer or builder. Such claims have the same elements as other negligence claims, namely: (1) a duty by the defendant, (2) a breach of that duty, (3) that caused plaintiff's injuries. In the case of an architect, a property owner would have to show the design professional violated its duty of care to perform as a reasonable design professional would have, perhaps with evidence that subpar materials were called for, or the structure failed to comply with applicable building codes or otherwise failed to reasonably anticipate the nature of the conditions the building was exposed.

The owner must also show that the action that breached the duty of care caused the harm that was sustained. Evidence, likely including expert testimony, will be needed to show, absent the negligence of the architect or builder, the owner would have sustained less damage from Superstorm Sandy than it did. If a property owner seeks recovery on the basis that the structure's design should have accounted for a storm with Sandy's force, the owner will have to show either a contractual obligation to prepare the building in such a manner, or that a reasonable design professional would have built the structure to withstand a storm like Sandy.

Construction Delay Claims

In the wake of a natural disaster, the cost of a construction project will be drastically increased. There will be costs associated with any damage on-site resulting from flooding or high winds. This includes the cost of purchasing replacement equipment and supplies as well as any costs associated with cleanup efforts, including dewatering the site.6 It is also likely the cost of supplies will increase as a result of transportation difficulties and gas shortages.

Of critical importance, in addition to all of the above issues and associated costs, are the costs associated with unforeseen delays resulting from the storm. These delays include not only the period of time during the storm itself, but also ensuing delays in its aftermath. As was the case with Superstorm Sandy, there will be a period of time where the construction site and equipment may be inaccessible and/or unstable, due to damage, flooding or loss of power on-site. Delays will also result from the period of time needed to clean up and de-water the site and prepare it for the resumption of work, and to obtain replacement parts and materials for those that have been damaged as a result of the storm. As an example, if proprietary items have been lost or damaged, there could be a substantial period of time needed to order and obtain suitable replacements.

These circumstances lead to one central question - who is responsible for these additional costs? Does the burden fall on the project owner or the contractor? As explained below, the answer to this inquiry will depend largely on the language of the construction contract itself,7 specifically, its provision governing damages for delay and force majeure. In addition, the parties to the contract may find support for their often opposing positions in common law theories of physical impossibility, commercial impracticability or frustration of purpose.

This section of the whitepaper will address these issues and explore the applicable law in those jurisdictions hit hardest by Superstorm Sandy. This guidance should provide owners and contractors with some foundation for dealing with construction contract claims resulting from Sandy and should be instructive as to how to deal with these issues in the future.

No Damages for Delay Clauses

As stated above, Superstorm Sandy caused unanticipated and hard to quantify delays at construction sites. Often, contractors will be required to expend additional time and money dealing with these delays. In doing so, they may try to seek additional compensation from the project owner. Whether they can recover depends largely on the contract's "no damages for delay" clause and other similar clauses.

A "no damages for delay" clause is a provision found in most construction contracts that gives a contractor the specific right to seek an extension of time for its performance in the event of a justifiable delay not within the contractor's reasonable control, in return for an agreement by the contractor not to seek damages for such delay.8 Stated differently, these clauses provide an extension of time, as opposed to the recovery of damages, is the contractor's sole remedy in situations where delays not caused by the contractor occur on construction projects.9 As a general rule, no-damages-for-delay clauses are valid and enforceable and not contrary to public policy.10

However, the rule that no-damages-for-delay clauses are enforceable is not without exceptions. In New York, for example, the Court of Appeals has enumerated four exceptions to the general rule that no-damages-for-delay clauses must be enforced. Damages may be recovered for: (1) delays caused by the contractor's bad faith or its willful, malicious, or grossly negligent conduct; (2) uncontemplated delays; (3) delays so unreasonable they constitute an intentional abandonment of the contract by the contractor; and (4) delays resulting from the contractor's breach of a fundamental obligation of the contract.11

Under these circumstances, a contractor may try to argue that a hurricane, or other natural disaster, including Sandy, falls within the "uncontemplated delays" exception. This exception applies where the claimant can demonstrate the delays, or their causes, "were wholly...