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Memo-Nine Mile Cove Water Main Legal Issues . . /, t Public Warks Department Memorandum To: Honorable Mayor and Members of the City Council Copy: Steven C. Mielke, City Manager ~ Steven J. Stadler, Public Works Director From: Date: May 1, 2003 Subject: Nine Mile Cove Water main Legal Issues Wynn Curtis, City Attorney, has reviewed the project files, agreements, correspondence and the circumstances surrounding the problems associated with a section of new water main installed as a part of the Nine Mile Cove residential redevelopment. His attached memo includes a clear description of the background and legal issues as well as his recommendation. He states that a major hurdle in pursuing a cost recovery lawsuit is the two-year statute of limitations (SOL). It is possible our case could be dismissed based on expiration of the SOL. Wynn recommends we file a claim to at least see if we can win the SOL issue. This is estimated to cost the city $3,000 - $5,000 in legal fees. Staff agrees with the City Attorney's recommendation. s- /Z./o3 TO: STEVE STADLER, DIRECTOR OF PUBLIC WORKS FROM: WYNN CURTISS, CITY ATTORNEY RE: NINE MILE COVE W A TERMAIN CLAIM The purpose of this memorandum is to discuss possible legal claims arising from the failure of the watermain constructed as part of the Nine Mile Cove development. BACKGROUND On April 7, 1997, the City of Hopkins C'Hopkins") entered into a Development Agreement (the "Agreement") with Taurus Properties, Inc. ("Taurus") to permit construction of a 62-nit townhome development located at what was to be called Nine Mile Cove (hereafter, the "Project"). Included in the Project was the construction and installation of certain utilities, including a watermain (the "Watermain"). Taurus, pursuant to a contract dated August 19, 1997, hired Arcon Construction Co. ("Arcon") to be the Project's general contractor. Pursuant to the Agreement, Taurus was required to obtain from Arcon a Maintenance Bond (the "Bond") to pay for repairs to the Project in the event Arcon refused to do so. There is no other language in the Agreement specifically requiring Taurus to provide a warranty for the Project work. Instead, the Bond was to cover all defects, deficiencies and failures to the . improvements discovered or arising within three years of the date Hopkins accepted the improvements. On November 3,2000, Arcon provided Hopkins a Bond that, by its terms, indicated the Project had been accepted effective October 21, 1998, the date from which the Bond's three-year coverage period ran. For reasons that are not clear, the Bond specifically excluded a portion of the project that included the Watermain. Due to soil conditions on the Project site, different options were considered regarding the manner in which to construct the Watermain. Based on the recommendations of an engineering firm, it was decided that the Watermain would be supported by pilings driven into the soil. Construction on the Watermain was completed in 1998 and the first failure of the Watermain occurred shortly thereafter. \ . Between 1998 and April 2002, there were five breaks of the watermain. The first four were repaired by Arcon without cost to Hopkins. In May 2001, following the fourth break, an investigation the Watermain was damaged by the pilings due to the fact a wood support placed between the piling and the Watermain itself, called the pile cap, was being crushed, with the result being that the Watermain itself was being forced down onto the piling and being damaged by the piling. Following the May 2001 break, Hopkins contacted Taurus, Arcon and the Bond company, LibertyMutual, regarding the ongoing problem. Taurus responded by referring to the lack of a specific warranty from it in the Agreement. Arcon responded by claiming the work was not defective and even if it was, the remedy was to come from the Bond. Arcon noted, however, that the area of damaged Hopciv\9MileCoveCouncilMemo Watermain was excluded from the Bond. Liberty Mutual did not respond. No further action was pursued by Hopkins. In the spring of 2002, an new leak occurred and Hopkins again contacted Arcon which replied that it would not repair the leak unless it was paid to do so. Hopkins hired STS Consultants ("STS") to evaluate the ongoing problem wi~h the Watermain to determine the cause of the problem. STS provided a report dated December 3,2002, that indicated the primary cause of the problem was the use by Arcon of wood for the pile caps that was inadequate to support the expected weight. STS also indicated the pile cap also should have been constructed with a "saddle area" and that the lack of a "saddle area" likely contributed to the pile cap failure. A new watermain section will be constructed to replace the defective Watermain, at a cost to Hopkins in excess of $40,000.00. LEGAL ISSUES . The question is whether Hopkins has a legal claim against Taurus, Arcon or the Bond company, Liberty Mutual, for the cost of repairing the Watermain. Due to the circumstances in this matter, claims against each of the possible defendants have significant obstacles. . TAURUS CLAIMS . Hopkins' claims against Taurus would be for breach of warranty due to the defective work, breach of contract due to the defective work, breach of contract for failing to require Arcon to provide the appropriate maintenance bond and negligent design of the Watermain system. Hopkins' breach of warranty and breach of contract claims due to the defective work are problematic due to the lack of a specific provision in the Agreement by which Taurus warrants the quality of the work or is otherwise held to a specific performance standard. As Taurus rightly notes, the Agreement appeared designed to shift the risk for correcting defects from Taurus to Arcon and/or its bond company. Taurus itself did not agree to provide a separate warranty for the Project. A second problem with a warranty/contract claim against Taurus relates to the statute of limitation for claims involving improvements to real property. Minnesota law requires that a legal claim involving a defect to an improvement to real property be brought within two years of the time the defect is or should have been discovered. In this case, the first break in the Watermain occurred in 1998 and several subsequent breaks occurred through May 2001. In each case, the break related to the crushed pile caps. Any defendant, therefore, likely will claim Hopkins knew or should have known long ago that the pile caps were the problem and brought suit within two years. In response, Hopkins could claim that because Arcon fixed the problems, there was no claim to make. Hopciv\9MileCoveCouncil Memo . Alternatively, Hopkins could claim the Bond applies through October 2001 and any defects discovered during that time trigger the two-year limitations period, which would not completely run until October 2003. Because the May 2001 break clearly demonstrated the cause of the problem to be the pile caps, the court could take the position the two-year period began running at that time. A second possible claim against Taurus relates to the fact the Bond did not provide complete coverage for all aspects of the Project. Failure to provide the appropriate maintenance bond would be a breach of the Agreement and Taurus would have to stand in where the Bond does not apply. The biggest obstacle to this claim is that Taurus itself did not procure the Bond or provide it to Hopkins. Rather, Arcon provided the Bond, which clearly states an exclusion not permitted by the Agreement. Taurus undoubtedly would claim Hopkins waived any claim due to the defective Bond because Hopkins accepted the Bond in the form provided by Arcon. Hopkin's negligent design claim against Taurus would be subject to the same limitations period defense as the warranty and contract claims discussed above. Hopkins might also have a negligence claim against another Taurus subcontractor, Westwood Professional Services, Inc., which assisted Taurus in the Project. ARCON CLAIMS Hopkins claims against Arcon likely would be limited to a negligent construction claim due to the defective pile caps. Because Hopkins did not have a contract with Arcon, there is no contract or warranty claim to make by Hopkins against Arcon. Any claim against Arcon also would be subject to the statute of limitations claim. If Hopkins were to pursue a claim against the Bond, the bonding company likely would sue Arcon pursuant to the terms of the agreement between Arcon and the bonding company. BOND CLAIMS Hopkins might bring a claim against the Bond itself. The Agreement language says the Bond applies to defects arising within three years of the date the Project is accepted. Clearly, the defects occurred within that time. The question, as before, is whether Hopkins had to bring the claim against the Bond within two years of discovering the defect. The Bond itself sets no procedure for making a claim and imposes no earlier deadline than the statutory two-year period. DISCUSSION . The most important issue is the application of the statute of limitations. The best documented cause of the problems comes from the May 14,2001 break. If a claim is to be filed, it would, therefore, be prudent to file a claim before May 14,2003, to limit the possible application of the statute of limitations defense. Hopciv\9MileCoveCouncilMemo '. The second issue is cost. It is likely that the defendants will, quite quickly in the litigation, file a motion with the Court seeking to dismiss the claims on the grounds the statute oflimitation precludes the claims. To get to this point in the litigation it likely will cost Hopkins between $3,000.00 and $5,000.00 in legal fees and costs. If the case is dismissed following such a motion, an appeal is possible and it would cost an additional $2,500.00 to $3,000.00, if pursued. The initial goal of the litigation would be to defeat the motion to dismiss. If the defendants are forced to proceed with the case, they will have an incentive to settle the case rather than incur the fees necessary to litigate to a conclusion. The more defendants that can be included (Taurus, Arcon, Liberty Mutual, Westwood) the more pockets available to contribute to a settlement. If the motion to dismiss is denied, the possible cost to Hopkins for a trial likely would be between $15,000.00 and $20,000.00. None of these attorney fees can be recovered, althdugh some other costs might be. However, since each of the defendants also would likely incur this level of fees, or higher given the relatively low rate Hopkins would pay compared to the rates the other parties would pay their attorneys, there would be a good chance the matter could be settled for an amount that would cover the cost of the fees paid by Hopkins plus an additional amount to defray some of the costs of moving the Watermain. Typically, settlements do not make a party whole. It is unlikely Hopkins could expect to receive a settlement that paid all the attorney fees and costs and 100% of the costs to replace the Watermain. The issue for the Council, therefore, is whether it wishes to risk $3,000.00 to $5,000.00 in attorney fees and costs to pursue the claims in the hope of recovering an amount greater than the costs to pay some of the extra costs incurred to remedy the Watermain problem. RECOMMENDATION The position of the City Attorney's office is that a claim should be filed against at least Taurus and Arcon and possibly Westwood. A claim against the Bond company seems less appropriate since the Bond company only wrote the type of bond it was asked to write, it had no independent obligation to write a bond that met the terms of the Agreement. As for the claims against Taurus et aI, it is our opinion that the statute of limitations defense poses a significant, although not insurmountable, obstacle to recovery. Given the cost to repair the Watermain, the cost to pursue the claims at least through the inevitable motion to dismiss appear reasonable and justified. . Hopciv\9M i leCoveCouncllMemo