This article was published in the July 2016 issue of AGC Law in Brief (Volume 2, Issue 4), Practical Construction Law & Risk Issues. It is reprinted here with permission.
Owners who are dissatisfied with their contractors’ performance increasingly assert fraud-based claims in addition to breach of contract claims because fraud-based claims are not typically barred by contractual waivers and limits of liability. Fraud-based claims may also create the potential for punitive damages in addition to compensatory damages. Contractors and their counsel, however, can limit their potential exposure for fraud-based claims through careful contract drafting and thoughtful selection of the law to be applied to disputes.
When selecting the law to be applied to disputes, contractors should first consider the codified law of the jurisdiction where the project is to be built and of any jurisdiction whose law they are considering. They should first determine whether the state in which the project is located is one of the approximately 26 states that has a “home court rule” that deems void any choice of law clause that applies the law of another state to domestic construction projects. See, e.g., Va. Code Ann. § 8.01-262.1; Tex. Bus. & Com. Code Ann. § 272.001; N.Y. Gen. Bus. Law § 757. If the state in which the project is located has such a statute, a contractor’s selection of another state’s law will likely not be enforced unless the parties agreed to arbitrate their disputes (in which case the Federal Arbitration Act [FAA] may supersede state law) or the project was located in a federal enclave, such as a military base (in which case state law does not apply). See Ope Int'l LP v. Chet Morrison Contractors, 258 F.3d 443 (5th Cir. Tex. 2001) (deeming preempted Louisiana’s home-court rule as applied to an agreement to arbitrate subject to the FAA); United States ex rel. Milestone Contractors, L.P. v. Toltest, Inc., No. 1:08-cv-1004-WTL-JMS, 2009 U.S. Dist. LEXIS 44382 (S.D. Ind. May 27, 2009) (Indiana home-court rule had no effect given that state law did not apply to training base of Indiana National Guard).
Another group of statutes that contractors should consider are those that regulate the availability of punitive damages. Approximately 25 states cap punitive damages at specified amounts or multiples of actual damages. For example, New Jersey caps punitive damages at five times compensatory damages or $350,000, whichever is greater, N.J.S.A. 2A:15-5.14; Ohio caps punitive damages at two times compensatory damages under most circumstances, O.R.C. 2315.21(D)(2)(a); and Nebraska does not permit punitive damages at all, see Neb. Const. art. VII, sec. 5, note 3 (citing State ex rel. Cherry v. Burns, 602 N.W.2d 477 (Neb. 1999)).
Contractors should also consider differences in common (aka judge-made) law. For example, in most jurisdictions, the economic loss rule bars plaintiffs from asserting tort causes of action to recover for “economic loss,” typically defined as any loss other than personal injury or third-party property damage...
