In many ways, the COVID-19 pandemic resembles the movie, Groundhog Day.  The endless stay-at-home days that blend together anonymously aside, one déjà vu legal issue is the prospect of increased claims relating to not-yet-completed as well as completed projects.  The proliferation of the use of novel and proprietary construction building materials assures that product liability claims will be part of many construction disputes.

In Texas, product liability claims are governed by case law and a statute, Chapter 82 of the Texas Civil Practice & Remedies Code (Chapter 82).  As we enter uncertain economic times, some of the provisions in Chapter 82 may provide valuable and often overlooked risk management tools.  Among those tools are classes of manufacturers who are or are not liable for product defects, and indemnity for attorney’s fees, experts’ fees and settlement amounts.

1.   Today is tomorrow. 

Not all sellers of products are created equal.  At least not for purposes of a product liability action.  Some sellers both manufacture products and sell them to end users.  Other sellers, more akin to distributors, have nothing to do with the design or manufacture of the product; they merely sell them to the end user.  The distinction can be critical. 

A seller who does not manufacture the product is not liable in a product liability action, except in one of 7 ways identified in Chapter 82.  In the construction context, there are 3 common exceptions in which a non-manufacturing seller may be liable in a product liability action: If the seller altered the product, if the seller installed the product on another product, or if the manufacturer is insolvent or unable to be haled into Texas court.  

With a large number of construction materials originating in other countries, not all manufacturers will be subject to the jurisdiction of a Texas court.  In addition, in prolonged economic downturns such as the 2008 financial collapse, not all manufacturers are able to stay solvent.  In those instances, the non-manufacturing supplier may carry the liability for a defective product.

2.    What if there is no tomorrow? There wasn’t one today.

 One of the biggest risk management tools provided in Chapter 82 is indemnity.  A product manufacturer must hold harmless and indemnify a seller for any losses arising out of a product liability action.  This includes a seller who completely or partially assembles a product in accordance with the manufacturer’s instructions. As with almost every rule, there are exceptions.  For instance, if the loss is caused by the seller’s acts or omissions, such as modifying the product, the seller is independently liable.    

The indemnity obligation is broad. It encompasses indemnity for expenses, attorney’s fees, and reasonable damages, regardless of how the dispute is concluded (e.g., trial or mediated settlement). It also includes fees and damages associated with enforcing the indemnity obligation.  Texas courts have held that the indemnity obligation applies even if the facts alleged in the product liability action are false or incorrect.  A claimant, for example, might allege that the manufacturer of a certain roofing system was X, when in reality it was Y.  X would still owe a duty to defend.    

3.    Do you ever have déjà vu? 

Not all sellers of products are created equal. At least not as to whether a manufacturer owes indemnity.  Is the indemnity owed to a subcontractor who installed the product the same as the indemnity owed to a general contractor who retained the subcontractor?  Two Texas Supreme Court cases answer that question.

 In Fresh Coat, Inc. v. K-2, Inc., a subcontractor was hired to install EIFS, a synthetic stucco, on several homes. The subcontractor purchased the stucco from K-2, the manufacturer. A number of homeowners sued the homebuilder, subcontractor and K-2 alleging the EIFS was a defective product and allowed water penetration and resulting damage. After settling with the homeowners and the homebuilder, the subcontractor sought recovery from K-2 under Chapter 82. 

Critical to the Supreme Court’s holding, the subcontractor argued that it was not only in the business of installing stucco but was also in the business of selling synthetic stucco. The Court found the subcontractor was a “seller” entitled to indemnity for $1 million it paid to the homeowners to settle their claims, $1.2 million it paid to the homebuilder to satisfy the contractual indemnity obligation, and slightly more than $725,000 it incurred in attorney’s fees.  

Approximately six years later, the Texas Supreme Court addressed the issue of whether a general contractor is entitled to the same type of Chapter 82 indemnity from a manufacturer.  In Centerpoint Builders GP, LLC v. Trussway, Ltd., the general contractor purchased preassembled wood trusses directly from the manufacturer, Trussway. A subcontractor moved the trusses to a high floor, awaiting installation. An independent contractor stepped on one of the trusses, the truss broke, and the independent contractor suffered injuries. The independent contractor sued all parties. After settling, the general contractor sought recovery from Trussway.

Distinguishing the Fresh Coat case, the Court found the general contractor was not a “seller” entitled to indemnity from Trussway.  The Court reasoned that the general contractor was not “engaged in the business of” selling trusses. Instead, the general contractor was selling construction services and the sale of trusses was “incidental” to its contract to construct the building.  

Does this mean that a general contractor can never obtain “seller” status? No. Does this mean that all subcontractors are considered “sellers”? No. The Court notes that, regardless of classification as a general contractor or subcontractor, seller status is dependent upon the specific facts at issue. 

As with all issues involving the interpretation of legal rights and remedies, consulting qualified legal counsel is always recommended.  The attorneys in our Austin and Dallas offices are available to answer any questions you may have.  You may contact us at info@gstexlaw.com with any questions you may have.

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