Montara Owners Assn. v. La Noeu Development, LLC

If a construction contract is only partially overbroad under ORS 30.140, then only those overbroad portions are voidable, rather than the entire contract. If no evidence supports a jury instruction on diminution of value, a jury instruction on damages under the economic waste doctrine is harmless.

This case involving defective construction of town-homes presented three issues for decision to the Court. The Court first addressed the applicability of ORS 30.140 to construction contracts, when only some terms of the contract are overbroad. The second issue before the Court was whether the trial court erred by providing damages instructions to the jury about the economic waste doctrine and not an alternative damages instruction about diminution of value. The final issue was whether the trial court erred by denying a third-party plaintiff general contractor the right to recover attorney fees incurred in first-party litigation.

This case arose out of litigation involving Montara Owners Association (homeowners) and La Noeu Development (general contractor), and the general contractor’s subsequent indemnification of the subcontractors involved in a construction project. The general contractor oversaw the seriously defective construction of 35 homes, resulting in significant economic damages to the homes. The general contractor originally settled with the homeowners for $5 million, and then sought indemnification from each subcontractor, reaching settlements with all but one. The general contractor brought a claim against the final subcontractor for breach of contract, consequential damages from defective construction, and attorney fees. The Court held that (1) if a construction contract is only partially void under ORS 30.140, then the entire contract is not voidable, but merely the portion in violation of the law; (2) a jury instruction on damages under the economic waste doctrine is harmless if there is no evidence to support the alternative jury instruction on diminution of value; (3) a third-party plaintiff may not recover attorney fees as consequential damages of a third-party defendant’s breach of contract, incurred during the first-party litigation in the same action. The Court of Appeals was affirmed in part on issues (1) and (3); and reversed in part on issue (2). The case was remanded to the trial court for proceedings consistent with this opinion.