Montara Owners Assn. v. La Noue Development, LLC

No. 22 June 18, 2015 333

IN THE SUPREME COURT OF THE

STATE OF OREGON

MONTARA OWNERS ASSOCIATION,

an Oregon non-profit corporation,

Plaintiff,

v.

LA NOUE DEVELOPMENT, LLC,

an Oregon limited liability company; et al.,

Defendants.

LA NOUE DEVELOPMENT, LLC,

an Oregon limited liability company,

Third-Party Plaintiff-Appellant,

Respondent on Review,

and

Mark LA NOUE,

an individual,

Third-Party Plaintiff,

v.

SUTTLES CONSTRUCTION, INC.,

an Oregon corporation;

Gordon Harding, an individual,

dba Gordon Harding Construction;

MCM Architects, PC,

an Oregon professional corporation; et al.,

Third-Party Defendants,

and

Vasily A. SHARABARIN,

an individual, dba Advanced Construction,

Third-Party Defendant-Respondent,

Petitioner on Review.

EVANS CONSTRUCTION SIDING CORPORATION,

an Oregon corporation,

Fourth-Party Plaintiff,

v.

334 Montara Owners Assn. v. La Noue Development, LLC

DAVE BURGESS CONSTRUCTION, INC.,

an Oregon corporation; et al,

Fourth-Party Defendants.

DAVE BURGESS CONSTRUCTION, INC.,

an Oregon corporation,

Fifth-Party Plaintiff,

v.

Raul HERNANDEZ

and Carlos Hernandez, individuals,

dba Hernandez Brothers, a partnership; et al,

Fifth-Party Defendants.

LA NOUE DEVELOPMENT, LLC,

an Oregon limited liability company;

and Mark La Noue, an individual,

Plaintiffs,

v.

MCM ARCHITECTS, PC,

an Oregon professional corporation,

Defendant.

(CC051213487, CC061213628;

CA A140771; SC S062120)

En Banc

On review from the Court of Appeals.*

Argued and submitted on November 6, 2014.

Thomas M. Christ, Cosgrave Vergeer Kester LLP,

Portland, argued the cause and filed the briefs for petitioner

Vasily A. Sharabarin. With him on the brief was Julie A.

Smith.

Leta E. Gorman, Jordan Ramis PC, Lake Oswego,

argued the cause and filed the brief for respondent La Noue

Development, LLC.

______________

* Appeal from Multnomah County Circuit Court, Hon. Jean K. Maurer,

Judge. 259 Or App 657, 317 P3d 257 (2013).

Cite as 357 Or 333 (2015) 335

BALMER, C. J.

The decision of the Court of Appeals is affirmed in part

and reversed in part. The judgment of the circuit court

is affirmed in part and reversed in part, and the case is

remanded to the circuit court for further proceedings.

Case Summary: Homeowners sued the general contractor of their townhome

development for damages caused by construction defects, and the general con-

tractor, as a third-party plaintiff in the same action, sued a subcontractor. The

general and the homeowner settled before trial. After an instruction on the eco-

nomic waste doctrine, the jury found that the subcontractor had breached his

contract and caused $43,711 in damages. The trial court also dismissed the gen-

eral contractor’s claim for contractual indemnification—on the ground that the

indemnification provision was void under ORS 30.140—and dismissed the gen-

eral contractor’s claim seeking to recover from Sharabarin the attorney fees La

Noue expended in defending against the litigation by the homeowners. Held: (1)

indemnity provisions in construction contracts can be partially enforceable under

ORS 30.140; (2) it was harmless error to give a jury instruction on the economic

waste doctrine in this case; and (3) ORCP 68 provides the procedure for a third-

party plaintiff to seek attorney fees as consequential damages of a third-party

defendant’s breach of contract, even in the same action as the first-party litiga-

tion in which the fees were incurred.

The decision of the Court of Appeals is affirmed in part and reversed in part.

The judgment of the circuit court is affirmed in part and reversed in part, and the

case is remanded to the circuit court for further proceedings.

336 Montara Owners Assn. v. La Noue Development, LLC

BALMER, C. J.

This construction defect case presents three issues

on review, following certain rulings by the trial court and an

award of damages by the jury. First, we consider the proper

application of ORS 30.140, a statute that voids overbroad

indemnity provisions in construction contracts. The Court of

Appeals held that the trial court had erred by invalidating

an indemnity provision in its entirety when the provision

was only partially void under ORS 30.140. Montara Owners

Assn. v. La Noue Development, LLC, 259 Or App 657, 682-

83, 317 P3d 257 (2013). On that issue, we affirm the Court of

Appeals and remand to the trial court. Second, we consider

whether it was error for the trial court to give an instruc-

tion on the economic waste doctrine in the absence of any

evidence on the alternative measure of damages, diminu-

tion in value. The Court of Appeals found that it was error

to give the instruction and that the error was not harm-

less. Id. at 669-70. As to that issue, we reverse the Court of

Appeals, because we conclude that the instructional error

was harmless. Third, we consider whether a third-party

plaintiff can recover attorney fees as consequential dam-

ages for a third-party defendant’s breach of contract when

the attorney fees were incurred in the first-party litigation

in the same action. The Court of Appeals affirmed the trial

court’s ruling that the general contractor in this case could

not recover such attorney fees. Id. at 683. On the issue of the

proper procedure to recover those fees, we agree with the

Court of Appeals and the trial court. However, we reverse

and remand to the trial court to consider the general con-

tractor’s substantive right to those fees.

The Montara Owners Association (homeown-

ers) sued the developer and general contractor, La Noue

Development, LLC (La Noue), for damages caused by design

and construction defects in the building of the Montara town-

homes, a complex of 35 separately owned units in multiple

buildings. The defects included problems with the framing,

siding, decking, and windows, resulting in water intrusion

and water damage. La Noue, in turn, filed a third-party

complaint against multiple subcontractors, including Vasily

A. Sharabarin, dba Advanced Construction (Sharabarin),

Cite as 357 Or 333 (2015) 337

who provided siding work on four buildings. Before trial,

however, La Noue settled with the homeowners for $5 mil-

lion—eliminating the first-party litigation from the case—

and also reached settlements with most of the third-party

subcontractors. La Noue did not settle with Sharabarin.

Because of various pretrial rulings, the only claims

submitted to the jury were La Noue’s breach of contract

claims against Sharabarin and two other subcontractors.1

Before trial, the trial court granted summary judgment

in favor of Sharabarin on La Noue’s claim for contractual

indemnity, on the ground that the indemnification provision

on which La Noue had relied was void under ORS 30.140.

The trial court also held that the court—not the jury—would

decide whether La Noue could recover the attorney fees that

it had incurred in defending against the homeowners’ claims

as consequential damages for Sharabarin’s breach of con-

tract and that the court would resolve that issue after trial.

In its post-trial ruling on the attorney fee issue, the court

ultimately held that La Noue could not recover attorney fees

as consequential damages in the case, even after trial, and

denied La Noue’s claim for those attorney fees.

La Noue tried its breach of contract claim to the

jury. La Noue generally contended that Sharabarin’s work

in siding the townhouses had deviated from the plans and

specifications in the contract and had damaged the buildings

that Sharabarin had worked on. Through an expert witness,

La Noue presented evidence that it would cost just under

$2 million to repair the damage caused by Sharabarin’s

breach. In contrast, Sharabarin’s expert witness testified

that the cost to repair all of the damage caused by various

subcontractors to the four buildings Sharabarin worked on

would be only around $1 million. He further stated that only

five percent of that $1 million repair cost involved areas

where Sharabarin had performed work, and concluded that

the resulting amount (about $50,000) represented the cost

of repairing any damages caused by Sharabarin’s breach.

1

The other subcontractors settled with La Noue while the case was pend-

ing before the Court of Appeals, leaving Sharabarin as the only subcontractor

remaining on appeal. Because of those settlements, we limit our discussion of the

facts to Sharabarin’s participation at trial.

338 Montara Owners Assn. v. La Noue Development, LLC

The jury found that Sharabarin had breached his

contract with La Noue and awarded $43,711 in total dam-

ages, significantly less than La Noue had sought. La Noue

appealed. The Court of Appeals reversed the summary

judgment in favor of Sharabarin on the contractual indem-

nity claim, held that the trial court erred in giving one of

Sharabarin’s requested jury instructions and that the error

was prejudicial, and affirmed the trial court’s denial of La

Noue’s claim for attorney fees. Montara, 259 Or App at 670.

Sharabarin petitioned this court for review of the Court of

Appeals’ rulings on the jury instruction and contractual

indemnity issues. La Noue opposed review but requested

contingent review of the Court of Appeals’ ruling on attor-

ney fees and another aspect of the Court of Appeals’ ruling

on the jury instruction issue.

I.  INDEMNITY UNDER ORS 30.140

We first address whether the trial court erred in

granting summary judgment on the issue of contractual

indemnification. “In reviewing a trial court’s disposition

of a motion for summary judgment, this court determines

whether the moving party is entitled to judgment as a matter

of law.” PIH Beaverton, LLC v. Super One, Inc., 355 Or 267,

275, 323 P3d 961 (2014) (citing ORCP 47 C). The indemnity

provision in the contract between La Noue and Sharabarin

provided:

“[Sharabarin] specifically and expressly agrees to

indemnify and save harmless [La Noue], its officers, agents

and employees, from and against any and all suits, claims,

actions, losses, costs, penalties and damages, of whatso-

ever kind or nature, including attorneys’ fees, arising out

of, in connection with, or incident to [Sharabarin’s] perfor-

mance of th[e] subcontract, whether or not caused in part

by [La Noue], [its] employees or agents, but excepting that

caused by the sole negligence of [La Noue], [its] employees

or agents.”

(Capitalization omitted.) In a pretrial ruling, the trial court

granted Sharabarin’s motion for summary judgment on

the issue of contractual indemnity because “this case falls

squarely within ORS 30.140 and its interpretation in Walsh

[Const. Co. v. Mut. of Enumclaw, 338 Or 1, 104 P3d 1146

Cite as 357 Or 333 (2015) 339

(2005),]” and therefore, the court concluded, the indemnity

clause was void.

ORS 30.140 provides:

“(1)  Except to the extent provided under subsection (2)

of this section, any provision in a construction agreement

that requires a person or that person’s surety or insurer to

indemnify another against liability for damage arising out

of death or bodily injury to persons or damage to property

caused in whole or in part by the negligence of the indemni-

tee is void.

“(2)  This section does not affect any provision in a con-

struction agreement that requires a person or that person’s

surety or insurer to indemnify another against liability for

damage arising out of death or bodily injury to persons or

damage to property to the extent that the death or bodily

injury to persons or damage to property arises out of the

fault of the indemnitor, or the fault of the indemnitor’s

agents, representatives or subcontractors.”

Because the contract at issue here provided for

indemnification “whether or not caused in part by [La Noue]

[and only] excepting that caused by the sole negligence of

[La Noue],” the parties agree that it violates the prohibi-

tion on requiring indemnification “for damage * * * caused in

whole or in part by the negligence of the indemnitee.” ORS

30.140(1) (emphases added). The issue here is the effect

of the exception in ORS 30.140(2) on that prohibition. As

noted, the Court of Appeals agreed with La Noue that ORS

30.140(2) sets out an exception to ORS 30.140(1) and that

the indemnification provision here comes within that excep-

tion. Montara, 259 Or App at 682-83. For that reason, it

reversed the trial court.

On review, Sharabarin argues that ORS 30.140

sets forth two mutually exclusive categories of construc-

tion agreement indemnification provisions, one of which is

enforceable and the other of which is void. Under his view,

if an indemnification provision requires one person (the

indemnitor, usually a subcontractor) to indemnify another

(the indemnitee, usually a general contractor) 2 for damages

2

Although ORS 30.140 uses the terms “indemnitee” and “indemnitor,” we

refer to the general contractor and the subcontractor, respectively, in this opinion

where doing so lends clarity to our reasoning.

340 Montara Owners Assn. v. La Noue Development, LLC

that arise in whole or in part out of the negligence of the

general contractor, the provision is void in its entirety under

subsection (1); in contrast, if an indemnification provision

requires the subcontractor to indemnify the general con-

tractor for only damages that arise out of the fault of the

subcontractor, the provision is enforceable under subsection

(2). Sharabarin argues that because the contract provision

at issue here requires indemnity to a greater extent than

allowed under subsection (2), it falls under subsection (1)

and is void in its entirety. La Noue concedes that the pro-

vision in the subcontract with Sharabarin partially does

what subsection (1) prohibits, but argues that the provision

remains enforceable to the extent allowed by subsection (2),

because the legislature intended subsection (2) as an excep-

tion to subsection (1) and intended such provisions to be par-

tially enforceable. For the reasons set out below, we agree

with La Noue that the provision is partially enforceable.

This issue presents a question of statutory inter-

pretation to be analyzed using the framework described in

State v. Gaines, 346 Or 160, 206 P3d 1042 (2009). We begin

by examining the statute’s text and context and then look

to legislative history if helpful to determine the legislature’s

intent. State v. Klein, 352 Or 302, 309, 283 P3d 350 (2012).

Where parts of a statute conflict, we attempt to harmonize

them in a way that gives effect to both. Weldon v. Bd. of

Lic. Pro. Counselors & Therapists, 353 Or 85, 91-92, 293 P3d

1023 (2012) (citing State v. Guzek, 322 Or 245, 266-68, 906

P2d 272 (1995)).

ORS 30.140(1) declares that an indemnity provision

of the kind that it describes is void “[e]xcept to the extent

provided under subsection (2).” (Emphasis added). That

phrase lends support to La Noue’s interpretation—that sub-

section (2) was intended to carve out an area of indemnifi-

cation from the general rule voiding indemnification clauses

in subsection (1). By including the phrase “[e]xcept to the

extent provided under subsection (2)” in subsection (1), the

legislature intended that the subsections would overlap

rather than be mutually exclusive, as Sharabarin contends.

Sharabarin’s interpretation, on the other hand, would make

that phrase superfluous. “Except” in that context means

Cite as 357 Or 333 (2015) 341

“with the exclusion or exception of” or “other than : BUT.”

Webster’s Third New Int’l Dictionary 791 (unabridged ed

2002). “Extent” means “the range (as of inclusiveness or

application) over which something extends : SCOPE * * *

<the ~ of his authority> <the ~ of the law>” and “the limit to

which something extends <exerting the full ~ of his power>.”

Webster’s at 805. Thus, ORS 30.140(1) makes certain con-

struction contract provisions void—provisions that require

indemnification for damage “caused in whole or in part by

the negligence of the indemnitee” general contractors—but

excludes from being voided the part of the indemnification

agreement that comes within subsection (2)—that is, where

the liability “arises out of the fault of the indemnitor” sub-

contractor. Subsection (2) confirms the legislative intent that

the statute “not affect” indemnification for damage which is

“the fault of the indemnitor” subcontractor.

In arguing for a contrary understanding of the stat-

ute, Sharabarin urges this court to give weight to the legis-

lature’s choice of the words “any provision” in subsection (1).

Sharabarin argues that the legislature intended the part

of the provision that is unenforceable under subsection (1)

to void the entire indemnification provision—including the

part that otherwise would be enforceable under subsection

(2)—and that that legislative intent is evidenced by the lan-

guage in subsection (1) making void “any provision” requir-

ing what it forbids. We disagree, however, that the statutory

phrase “any provision” can be read so broadly. It is true that

the contract language at issue in this case is a “provision”

requiring, in part, what subsection (1) forbids. However, it

does not follow that the entire provision—including the part

permitted by subsection (2)—is void.

The context for interpreting a statute’s text includes

the preexisting common law, and we presume that the leg-

islature was aware of that existing law. Blachana, LLC v.

Bureau of Labor and Industries, 354 Or 676, 691, 318 P3d

735 (2014). Under Oregon law, both today and at the time

the legislature enacted ORS 30.140, when an “agreement is

partly legal and partly illegal, if the legal may be separated

from the illegal, the legal part will be enforced.” Eldridge v.

Johnston, 195 Or 379, 405, 245 P2d 239 (1952); see also State

342 Montara Owners Assn. v. La Noue Development, LLC

v. McDonnell, 310 Or 98, 116, 794 P2d 780 (1990) (Fadeley,

J., concurring in part and dissenting in part) (collecting

cases supporting the proposition that “Oregon disregards

the illegality and enforces the contract”).

In Eldridge, the defendant agreed as part of the

sale of his interest in the plaintiff’s meat business to not

engage in the meat business in “the entire states of Oregon

and Washington” for 10 years. 195 Or at 400. This court—

after assuming that the two-state exclusion was so broad as

to be void because of the public policy against restraints on

trade—held that a “reasonable territorial area” in Oregon

where the plaintiff actually conducted business could be

severed from the two-state area and enforced against the

defendant. Id. at 409-10. In this case, as in Eldridge, the

legal and illegal parts of the provision are intermingled.

However, the illegal indemnification in this contract can be

severed, and would be under Eldridge, allowing indemnifi-

cation to the extent permitted by ORS 30.140(2). See Hays

v. Centennial Floors, Inc., 133 Or App 689, 695, 893 P2d

564 (1995) (holding that “[former] ORS 30.140(2) voids the

clause to the extent that its application would require [the

subcontractor] to indemnify [the general contractor] for its

own sole negligence” (emphasis added)); accord Richardson

v. Howard S. Wright Const. Co., No CV-05-1419-ST, 2007

WL 1467411 at *5 (D Or, May 18, 2007) (unpublished) (cit-

ing Hays for proposition that, if contract is broad enough

to violate ORS 30.140(1), “it is only unenforceable in part”).

We do not believe that, in adopting ORS 30.140, the legisla-

ture intended to create a different system where any imper-

fection in a contract provision would void the entire provi-

sion. Rather, we interpret ORS 30.140 to be consistent with

Eldridge and Oregon case law providing for severance of the

illegal part of a contract provision and enforcement of the

remainder.

The legislative hearings on Senate Bill (SB) 788—

the 1995 revision to ORS 30.140 in which the first and second

subsections took their present form—further reveal that the

legislature intended to address an issue of perceived unfair-

ness in the construction business. See Walsh Construction

Co. v. Mutual of Enumclaw, 338 Or 1, 7-9, 104 P3d 1146

(2005) (examining in detail the “evolution of ORS 30.140”);

Cite as 357 Or 333 (2015) 343

Gaines, 346 Or at 172 (court may consult legislative history

to confirm interpretation even where there does not appear

to be an ambiguity in the statute’s text). The prior version

of the statute “spoke very clearly to [the situation of] sole

negligence [of the general contractor], but it le[ft] quiet the

question of concurrent negligence.” Tape Recording, Senate

Judiciary Committee, SB 788, Apr 3, 1995, Tape 83, Side A

(statement of Steve Frey). Because of that ambiguity in the

law, general contractors had developed a practice of requir-

ing subcontractors to indemnify them on a take-it-or-leave-it

basis for everything except the sole negligence of the gen-

eral contractor, essentially “shov[ing] the insurance liability

down the line to the guy on the bottom, and if he wants

the contract he must” accept the provision. Tape Recording,

House Commerce Committee, SB 788, May 4, 1995, Tape 33,

Side A (statement of Rep Larry Wells).

Little was said in the public hearings and work

sessions on SB 788 about particular contract wording or

provisions. Rather, the legislature appears to have been

more concerned about the practical outcome of the contract

provisions: essentially, that the “[sub]contractor [should]

be responsible for the [sub]contractor’s actions, and the

[general contractor should] be responsible for the [general

contractor’s actions].” Tape Recording, House Commerce

Subcommittee on Business, SB 788, May 2, 1995, Tape 75,

Side A (statement of Ruth Spetter). One subcontractor char-

acterized the bill as “essentially * * * propos[ing] to” “edit

out” language in subcontracts requiring that a subcontrac-

tor indemnify a general contractor for the general contrac-

tor’s own negligence. Tape Recording, Senate Judiciary

Committee, SB 788, Apr 3, 1995, Tape 83, Side A (statement

of Frank Morse). From that legislative history, we under-

stand that, when the legislature used the phrase “to the

extent” in ORS 30.140(1), it intended to refer to the extent

of fault described by subsection (2). That is, the legislature

intended that a subcontractor remain liable for the subcon-

tractor’s negligence even as subsection (1) protects the sub-

contractor from having to indemnity a general contractor for

the general contractor’s negligence.

Given the analysis above, we conclude that the trial

court should have severed the unenforceable parts of the

344 Montara Owners Assn. v. La Noue Development, LLC

indemnity clause—the parts that violate ORS 30.140(1)—

but still allowed La Noue’s claim to go forward to determine

if, and to what extent, the “damage to property ar[ose] out

of the fault of [Sharabarin], or the fault of [Sharabarin’s]

agents, representatives, or subcontractors” under ORS

30.140(2). We agree with the Court of Appeals that the trial

court erred in granting Sharabarin’s motion for summary

judgment on La Noue’s indemnity claim under ORS 30.140,

and we remand that claim to the trial court for further pro-

ceedings on that claim.3

II.  JURY INSTRUCTIONS

We turn to La Noue’s argument that it was revers-

ible error for the trial court to instruct the jury on the eco-

nomic waste doctrine as part of the instruction on damages

for the breach of contract claim. The trial court described

the economic waste doctrine for the jury in Instruction No.

26, which dealt with the appropriate measures of damages:

“If one party breached the contract, then you must

decide if the breach caused a loss and, if so, how much

money should be paid.

“The mere fact that I am talking about money does not

mean that you should or should not award any money.

“The cost of replacement or repair so as to make the

building conform to the plan is the correct measure of dam-

ages for defects in construction work unless that remedy

generates undue economic waste. If you find that, except

for technical, nonsubstantial, or immaterial departures by

the defendants from the plans and specifications, the fram-

ing or siding work is satisfactory, and that an award to La

Noue Development, L.L.C. for claimed repair costs would

result in gross economic waste, the proper measure of dam-

ages is not the cost of repair but rather the difference in the

value of Montara as built and what its value would be if it

had been built according to the subcontracts.”

3

We do not address any potential overlap between La Noue’s different claims

or the damages that it may recover under those claims. It may be that the indem-

nification provision, as constrained by ORS 30.140, does not provide for La Noue

to recover anything more than they have already been awarded by the jury for

Sharabarin’s breach of contract plus any attorney fees potentially recoverable for

the reasons set out later in this opinion.

Cite as 357 Or 333 (2015) 345

That instruction identified the “cost of replacement or repair”

as the “correct” measure of damages, but it also told the jury

that there was an alternative measure of damages—the dif-

ference between the value of the project as built and its value

if it were built according to the contract—that the jury could

award if the repair cost resulted in “gross economic waste.”

The verdict form asked the jury to determine

whether Sharabarin had breached his contract with La

Noue, and, if so, what damages the breach had caused La

Noue. As noted, the jury found that Sharabarin had breached

his contract and awarded $43,711 in total damages, signifi-

cantly less than the $2 million that La Noue had sought.

On appeal, La Noue argued that, in giving Instruction No.

26, the trial court had erred by instructing the jury that—

if it found economic waste—it could award damages based

on the diminution in value of the project, rather than the

cost of repair. La Noue asserts that the $43,711 represented

the amount that the jury believed was the diminution in

value caused by Sharabarin’s breach, but that there was no

evidence in the record of diminution in value. Sharabarin,

on the other hand, claims that the $43,711 represented the

cost of repair, and that evidence in the record supported

that amount. As noted previously, Sharabarin’s expert tes-

tified that Sharabarin’s breach of contract, if proved, caused

approximately five percent of the $1 million in total cost to

repair the buildings that Sharabarin had worked on.

Where, as in this case, a party alleges error in the

jury instructions given by the trial court, this court asks

three questions: whether the objection was preserved;

whether the instruction was erroneous; and, if it was errone-

ous, whether the instruction substantially affected the par-

ty’s rights under ORS 19.415(2). Wallach v. Allstate Ins. Co.,

344 Or 314, 319-22, 180 P3d 19 (2008). The Court of Appeals

concluded that La Noue adequately preserved its objection

to the jury instruction, Montara, 259 Or App at 664-65 n 2,

and we agree. We therefore examine the doctrine of eco-

nomic waste to determine if Instruction No. 26 included an

erroneous statement of that doctrine, either because the

instruction misstated Oregon law or because the evidence

was insufficient to support giving the instruction.

346 Montara Owners Assn. v. La Noue Development, LLC

A.  The Economic Waste Doctrine in Oregon

When a “contractor fails to keep [an] agreement,”

the measure of damages “is always the sum which will put

[the injured party] in as good a position as if the contract

had been performed.” Samuel Williston, 24 Williston on

Contracts § 66.17, 461 (Richard A. Lord ed., 4th ed 2002). In

Oregon construction defect cases, that “sum” is the “amount

of money equal to the cost of curing the defects, provided

repair is the prudent remedy to apply.” Turner v. Jackson,

139 Or 539, 560, 11 P2d 1048 (1932). That is the injured

plaintiff usually “recovers such amount as he has reason-

ably expended, or will reasonably have to spend, to remedy

the defect.” Schmauch v. Johnston, 274 Or 441, 446-47, 547

P2d 119 (1976) (quoting Charles T. McCormick, Damages

§ 168, 648 (1935)). That “cost of repair” calculation is ordi-

narily the measure of damages in a construction defect case,

as the instruction at issue here stated.

However, Oregon courts use an alternative mea-

sure of damages—the diminution in the market value of the

property—when the cost of repair is not “the prudent rem-

edy to apply” because that remedy would create “economic

waste.” See Turner, 139 Or at 560. In the case of economic

waste, “damages will be measured not by the cost of remedy-

ing the defect, but by the difference between the value of the

building as it is and what it would have been worth if it had

been built in conformity with the contract”—in other words,

the diminution in value.4 Schmauch, 274 Or at 447.

Economic waste occurs where “the defect in mate-

rial or construction is one that cannot be remedied without

an expenditure for reconstruction disproportionate to the

end to be attained, or without endangering unduly other

parts of the building.” Id.; see also Restatement (Second) of

Contracts § 348(2)(b) (1979) (courts award “the reasonable

cost of completing performance or of remedying the defects

if that cost is not clearly disproportionate to the probable

loss in value to” the injured party). Stated differently, “[d]

iminution in value is the proper measure of damages only

4

For clarity, we refer to that measure throughout this opinion as the “dim-

inution in value,” although we note that it is the same amount that the market

value of the building would be expected to increase if the repair were completed.

Cite as 357 Or 333 (2015) 347

when the cost of repair is disproportionate to the diminu-

tion in value.” Hanset v. General Construction Company,

285 Or 101, 106, 589 P2d 1117 (1979) (emphasis in origi-

nal).5 In Jacob & Youngs v. Kent, 230 NY 239, 129 NE 889

(1921), a classic case on economic waste, the defendant

contracted to build a home for the plaintiff according to a

contract requiring the use of “Reading” brand pipe. After

the house was complete, the plaintiff discovered that the

defendant had instead used “Cohoes” pipe, an equally good

brand. Id. at 241, 129 NE at 890. To replace the Cohoes pipe

with Reading pipe would have required tearing down walls

at great expense. Id. The substitution of Cohoes pipe for

Reading pipe did not affect the market price of the house,

and therefore the proposed repair would not have increased

the market price of the house. Judge Cardozo declared that

the cost of repair was “grossly and unfairly out of proportion

to the good to be attained,” namely “the difference in value,

which [in that case] would be either nominal or nothing.”

Id. at 244, 129 NE at 891. Where the diminution in value

was near zero, and the cost of repair was a “great expense,”

the court awarded only nominal damages. Id. The Jacob &

Youngs decision accords with Oregon law.

B.  The Trial Court Erred in Giving Instruction No. 26.

“In determining whether it was error to give a par-

ticular jury instruction, this court reviews the instructions

as a whole to determine whether they accurately state the

law.” State v. Serrano, 355 Or 172, 187, 324 P3d 1274 (2014).

A trial court errs if it gives a jury instruction that is “at odds

with [a] general rule” of Oregon law or “inconsistent with

[a] specific application of that rule” in prior Oregon case

5

In Beik v. American Plaza Co., 280 Or 547, 555-56, 572 P2d 305 (1977), this

court suggested that the disproportionality test for economic waste in Oregon is

not necessarily limited to a comparison of cost of repair and diminution in value,

and may involve consideration of other factors, such as purchase price, need for

structural change, loss of habitability, and savings to the breaching party. See

also Hanset, 285 Or at 106-07 (considering plaintiffs’ intentions to live in, rather

than sell, their home in determining appropriate measure of damages). Although

this court has referred to those other factors, the parties have not asked us to

resolve, and it is not necessary to resolve here, any uncertainty as to the proper

formulation of the economic waste doctrine, because all of the variations involve

some consideration of diminution in value. It is sufficient for the purposes of this

case to consider the test for economic waste that compares cost of repair to dimi-

nution in value.

348 Montara Owners Assn. v. La Noue Development, LLC

law. Wallach, 344 Or at 319-20; see also Hernandez v. Barbo

Machinery Co., 327 Or 99, 107, 957 P2d 147 (1998) (“[W]e

first inquire whether the requested jury instruction is a cor-

rect statement of the law.”). An instruction can also be erro-

neous because there is no evidence in the record to support

giving the instruction. That is because giving instructions

not supported by the evidence permits the jury to speculate

in rendering its verdict, rather than to base the verdict on

the evidence and the applicable law. Dormaier v. Jesse et al,

230 Or 194, 198, 369 P2d 131 (1962); see also Purdy v. Deere

& Co., 355 Or 204, 227, 324 P3d 455 (2014) (“[T]he parties

in a civil action are entitled to jury instructions on their the-

ory of the case if their requested instructions correctly state

the law, are based on the current pleadings in the case, and

are supported by evidence.” (Emphasis added.)); Sherrard v.

Werline, 162 Or 135, 157, 91 P2d 344 (1939) (“The purpose

of instructions is to state to the jury the principles of law

governing the facts revealed to the jury by the evidence.”).

Neither party argues that Instruction No. 26 was

erroneously given because it was incorrect as an abstract

statement of law.6 As discussed above, the instruction

described the default measure of damages—cost of replace-

ment or repair—and the circumstances in which an alter-

native measure of damages, diminution in value, would be

appropriate, viz., when an award of the cost of repair would

constitute “economic waste.”

La Noue, however, argues that it was error for the trial court

to give the instruction because the economic waste doctrine

does not apply to this type of case, where La Noue is not a

homeowner suing a building contractor but rather a general

contractor suing a subcontractor.

Contrary to La Noue’s assertion, there is no require-

ment that the party injured by defective work be a home-

owner. See Turner, 139 Or at 560 (referring to “the injured

6

Because neither party raised the issue, we do not consider whether

Instruction No. 26 was erroneous for failing to define the term “economic waste”

or for failing to refer in any respect to the cost of repair as being “disproportion-

ate.” See Schmauch, 274 Or at 446; see also State v. McDonnell, 313 Or 478, 497,

837 P2d 941 (1992) (although “words of common usage need not be defined for the

jury,” terms that are not of common usage and are not “understandable without

elaboration” should be defined).

Cite as 357 Or 333 (2015) 349

party”); Williston, Williston on Contracts § 66:17 at 476

(“[T]he principles [of the economic waste doctrine] are gen-

erally applicable to all kinds of contracts for a particular

piece of work, such as, for example, where a charter party

is broken by the failure of the charterer to load the vessel.”

(Footnotes omitted.)). One of the leading cases on economic

waste arose from the breach of a lease contract requiring a

lessee to re-grade a family farm at the conclusion of a min-

ing lease term. Peevyhouse v. Garland Coal & Min. Co., 1962

Okla 267, ¶ 14, 382 P2d 109, 114 (1962) (where the cost of

re-grading was $29,000 and the market value was dimin-

ished only $300, court measured property owners’ lost expec-

tancy by the lesser amount). La Noue cites no authority that

limits the application of Oregon’s economic waste doctrine to

cases where one party is a homeowner or landowner, and we

see no principled reason to adopt that limitation.

La Noue argues in the alternative that, even if

the economic waste doctrine applies to this type of case,

Sharabarin failed to meet his “burden of proof” to show

economic waste. Sharabarin presents two arguments in

response: First, the burden to show economic waste was not

his and, alternatively, to the extent that he did have the bur-

den of proof on economic waste, he met that burden. Second,

Sharabarin argues that once he made some showing of eco-

nomic waste, the subsequent burden to prove damages—

the amount of the diminution in value—shifted back to

the party seeking damages (in this case, La Noue) because

that party always has the burden of proof on damages. See

North Pacific Lbr. v. Moore, 275 Or 359, 366, 551 P2d 431

(1976) (plaintiff has burden to “establish the fact of damage

and evidence from which a satisfactory conclusion as to the

amount of damage can be reached”).

The parties’ arguments over who bears the “burden

of proof” on economic waste, however, do not address the

relevant issue regarding the jury instruction in this case.

Rather, the legal issue on review is whether there was “some

evidence” in the record from which the jury could have

reached a verdict that was consistent with the instruction.

See State v. Brown, 306 Or 599, 602, 761 P2d 1300 (1988)

(“In civil cases, the jury must be permitted to consider every

claim on which the plaintiff has presented some evidence

350 Montara Owners Assn. v. La Noue Development, LLC

tending to establish each element of that claim.” (Emphasis

in original.)); Wootten v. Dillard, 286 Or 129, 136, 592 P2d

1021 (1979) (“We conclude that we are unconcerned with the

quantum of evidence. Our concern is only with the existence

of evidence which, if accepted as being true by the trier

of fact, would establish [the fact in question].”); Plourd v.

Southern Pac. Transp. Co., 266 Or 666, 670-71, 513 P2d 1140

(1973) (because there was “some evidence” in the record

relating to an issue, plaintiff was entitled to jury instruction

on that issue). Regardless of which party ultimately bore

the burden of production or proof on economic waste, if there

was no evidence in the record to support that part of the

instruction, the instruction was erroneous.

As discussed above, the proper determination of

whether economic waste would result from an award of

cost of repair damages requires a comparison of the cost of

repair and the diminution in value. Thus, it was error to give

the part of the instruction that dealt with economic waste

unless there was some evidence in the record of both mea-

sures of damage. Here, there was no evidence in the record

regarding diminution in value. Sharabarin points only to

evidence that some (but not all) of his breaches of contract

were merely “technical” deviations from the plans and to

evidence of the cost to build the townhouses. Neither party

put on evidence of the value of the townhouses or of any

reduction in value as a result of Sharabarin’s breach of con-

tract. And neither party sought to tie that breach to any par-

ticular reduction in value or in market price. At least some

evidence of diminution in value was required to support an

instruction that would have allowed the jury to base its ver-

dict on that theory. Because there was no such evidence, the

trial court erred in giving that part of the instruction.

C.  The Erroneous Instruction Did Not Substantially Affect

La Noue’s Rights.

When an appellate court concludes that a jury

instruction was erroneously given, the next question is

“whether the erroneous instruction substantially affected

[the party’s] rights” under ORS 19.415(2).7 Wallach, 344

7

ORS 19.415(2) provides that “[n]o judgment shall be reversed or modified

except for error substantially affecting the rights of a party.” See also Or Const,

Cite as 357 Or 333 (2015) 351

Or at 322. In applying that standard, an appellate court

must “assess[ ] the extent to which an error skewed the odds

against a legally correct result” and determine “whether—

in an important or essential manner—the error had a detri-

mental influence on a party’s rights.” Purdy, 355 Or at 226.

Generally, “little likelihood is not enough, but more—that is

‘some’ or a ‘significant’ likelihood that the error influenced

the result—will suffice for reversal.” Id.; see also id. at 235

(Balmer, C. J., concurring) (“[T]he bar for the appellant is

somewhere above ‘possibly affected’ the result, but below

‘necessarily affected’ the result,” and how much likelihood is

required “will depend on factual and legal issues in the case

as determined from the trial court record.”).

As noted, it was error for the trial court to give

Instruction No. 26 because that instruction referred to both

the usual measure of damages, as to which evidence had

been introduced by both parties, and to an alternative mea-

sure of damages, as to which there was no evidence in the

record. ORS 19.415(2) places the burden to demonstrate

prejudicial effect on whichever party loses in the trial court

and then seeks reversal or modification of the judgment on

appeal. Purdy, 355 Or at 225; Shoup v. Wal-Mart Stores, Inc.,

335 Or 164, 173-74, 61 P3d 928 (2003).

Here, La Noue has not met its burden of showing

that the instructional error substantially affected its rights.

Sharabarin’s expert testified that the entire cost of repair

for the buildings Sharabarin worked on would be $1 mil-

lion, with only five percent of that amount attributable to

Sharabarin. La Noue’s expert testified that the cost of repair

of the work done improperly by Sharabarin was slightly less

than $2 million. If the jury believed Sharabarin’s expert

over La Noue’s expert, it would have attributed $50,000 in

damages to Sharabarin—five percent of the $1 million total.

The jury awarded La Noue $43,711 in damages for breach of

contract.

We presume, as we ordinarily do, that the jury

followed the instructions. Wallach, 344 Or at 326. Here,

Art VII (Amended), § 3 (This court should affirm when “the judgment of the court

appealed from was such as should have been rendered in the case * * * notwith-

standing any error committed during the trial[.]”).

352 Montara Owners Assn. v. La Noue Development, LLC

those included instructions that the jury base any award

of damages “on the evidence” and that the jury not decide

the case based on “guesswork, conjecture, or speculation.”

The instructions also told the jury that damages could be

awarded in the amount of the cost of repair or, in certain

circumstances, in the amount of diminution in value. Both

parties introduced evidence on cost of repair, and the jury

awarded an amount of damages ($43,711) that was close

to the cost of repair as estimated by Sharabarin’s expert

($50,000). On the other hand, there was no evidence as to

diminution in value. In these circumstances, we presume

that the jury based its award on the cost of repair evidence.

Assuming the jury followed the instructions, that was the

only theory on which it could have based the verdict, because

no evidence supported a verdict based on the alternative

theory of diminution in value. See Shoup, 335 Or at 178-79

(harmless error because defendant had “not identified any-

thing in the record to demonstrate that the jury based its

verdict on” the error); Jensen v. Medley, 336 Or 222, 240, 82

P3d 149 (2003) (where alternative basis could support jury’s

verdict, court asks “whether the record contains sufficient

evidence to support liability on that alternative basis”).

La Noue points to nothing in the record to suggest that the

reference in the damage instruction to diminution in value

as an alternative measure was likely to have had any effect

on the jury’s deliberations.

The Court of Appeals concluded that the instruc-

tional error was not harmless because “the jury instruction

permitted the jury to speculate as to the loss in value of

the buildings as a consequence of Sharabarin’s breach of

the contract.” Montara, 259 Or App at 670. We disagree.

The assessment of harmless error under ORS 19.415(2)

necessarily involves a contextual, record-based review that

takes into account what evidence the jury had before it.

An Oregon appellate court “must adhere to the limitation

of ORS 19.415(2) and reverse or modify a judgment only if

it can [determine] from the record that the error ‘substan-

tially affect[ed] the rights of a party.’ ” Shoup, 335 Or at 174

(emphasis added); see also Purdy, 355 Or at 236 (Balmer,

C. J., concurring) (“[W]e do not look at trial court errors in

the abstract—rather, we examine those errors in the context

Cite as 357 Or 333 (2015) 353

of the trial record as a whole, including * * * the evidence

admitted and excluded[.]”).

The Court of Appeals concluded that the jury “spec-

ulate[d] as to the loss in value.” Montara, 259 Or App at

670. La Noue’s arguments do not persuade us, and we reach

a different conclusion. As discussed, not only was there no

evidence of “loss in value,” there was evidence—from both

parties—of cost of repair. The jurors were cautioned not to

speculate, and nothing in the record suggests that they did.

On this issue, the jury apparently credited Sharabarin’s

expert and not La Noue’s. The record points to the conclusion

that the jury followed a permissible path from evidence in

the record of cost of repair, through the instructions given,

to its award of damages. Cf. Jensen, 336 Or at 240 (Where

“the jury instructions gave the jury two possible grounds

for imposing liability,” one based on an erroneous instruc-

tion and the other not, defendant “c[ould] not demonstrate

that the verdict was based on the erroneous instruction * * *,

rather than on the correct * * * instruction.”). We cannot

say that the error in this case “skewed the odds against a

legally correct result” to such an extent that the trial court

judgment should be disturbed. See Purdy, 355 Or at 226;

Shoup 335 Or at 173 (under ORS 19.415(2), an “error must

cause something more than the ‘possibility’ of a different

result” and is “not merely one that ‘might’ have changed the

outcome of the case”). Because La Noue has not met its bur-

den under ORS 19.415(2), we conclude that the instructional

error was harmless.

III.  ATTORNEY FEES

In La Noue’s third-party complaint against

Sharabarin, La Noue sought the attorney fees that it had

incurred defending the first-party claim by the homeowners

against La Noue. La Noue argued that those attorney fees

were recoverable as consequential damages of Sharabarin’s

breach of contract. The trial court made two rulings on that

issue, one before trial and one after trial. We address those

rulings separately.

Before the trial began on La Noue’s breach of contract

claim against Sharabarin, there was a dispute over whether

354 Montara Owners Assn. v. La Noue Development, LLC

La Noue could seek, as consequential damages, attorney

fees that it had incurred defending against the homeowners’

claims. Sharabarin argued that those fees could be recov-

ered only under the procedure set out in ORCEP 68, while

La Noue asserted that the fee issue should be presented to the

jury as part of its claim for damages caused by Sharabarin’s

breach of contract. Although we briefly discuss below the

substantive basis for La Noue’s claim, the narrow issue for

decision here is the proper procedure for La Noue to assert

that fee claim. We note that the usual ORCP 68 attorney fee

claim is one in which a party that has prevailed in a pro-

ceeding against another party—and that has a contractual

or statutory right to attorney fees as the prevailing party—

files a claim for those fees. This case presents the unusual

variant of a defendant that incurs attorney fees in an action

brought by a plaintiff, files a third-party claim in the same

action, and, as part of its damages claim against the third-

party defendant, seeks recovery of those first-party fees.

We are unaware of reported Oregon cases in this posture,

although, as we discuss below, courts in other states have

considered whether a third-party plaintiff can seek attor-

ney fees against third-party defendants that the third-party

plaintiff incurred in defending against first-party claims in

the same action.

With that background, we turn to the dispute over

the application of ORCP 68.8 The ORCP 68 procedure for

8

In relevant part, ORCP 68 provides:

“C(1) Application of this section to award of attorney fees. * * * [T]his

section governs the pleading, proof, and award of attorney fees in all cases,

regardless of the source of the right to recover such fees, except when:

“C(1)(a)  Such items are claimed as damages arising prior to the action;

“* * * * *

“C(3) Proof. The items of attorney fees and costs and disbursements

shall be submitted in the manner provided by subsection (4) of this section,

without proof being offered during the trial.

“C(4) Procedure for seeking attorney fees or costs and disbursements.

The procedure for seeking attorney fees or costs and disbursements shall be

as follows:

“C(4)(a)  * * * A party seeking attorney fees or costs and disbursements

shall, not later than 14 days after entry of judgment * * * [f]ile with the court

a signed and detailed statement of the amount of attorney fees or costs and

disbursements[.]

“* * * * *

Cite as 357 Or 333 (2015) 355

recovering attorney fees, with limited exceptions set out in

the rule, “governs the pleading, proof, and award of attor-

ney fees in all cases, regardless of the source of the right to

recover such fees.” ORCP 68 C(1) (emphasis added). The rule

provides an exception when the fees “are claimed as dam-

ages arising prior to the action.” ORCP 68 C(1)(a) (emphasis

added). When ORCP 68 applies, the party seeking the fees

must first allege the right to attorney fees in a pleading,

motion, or response, and then file a detailed statement of the

amount of attorney fees within 14 days after entry of judg-

ment. ORCP 68 C. Thus, proof of attorney fees is ordinarily

not part of the trial itself, but rather is presented in a post-

trial proceeding, which may involve a court hearing without

a jury. ORCP 68 C(3), (4)(e)(i).

La Noue argues that its claim for the fees that it

incurred in defending against the homeowners’ complaint is

not subject to ORCP 68 procedure because it comes within

the ORCP 68 C(1)(a) exception for fees “arising prior to

the action.” In the trial court, La Noue argued that those

fees arose prior to the trial on La Noue’s claims against

Sharabarin because La Noue had already settled the home-

owners’ claims before the trial of La Noue’s third-party

claims against Sharabarin and they were thus part of a

“separate and distinct action.” La Noue sought to present

evidence of those attorney fees to the jury as consequential

damages from Sharabarin’s breach of contract. Sharabarin

objected, arguing that ORCP 68 covers all claims for attor-

ney fees in an action “regardless of the source of the right

to recover those fees,” ORCP 68 C(1), and that La Noue’s

fee request was subject to the post-trial procedure of ORCP

68 C(4). Sharabarin asserted to that “this is all part of one

action, * * * one caption, one case number” and “a separate

action [is] required for attorney fees to be counted as dam-

ages in a case such as this.” At oral argument on that dis-

pute, the trial court observed that Sharabarin’s position

would allow a party to claim the attorney fees in a subse-

quent action, but “another party who [seeks the fees in the

same action] is precluded from those very same damages.”

“C(4)(e)(i)  If a hearing is requested the court, without a jury, shall hear

and determine all issues of law and fact raised by the objection.”

(Emphases omitted.)

356 Montara Owners Assn. v. La Noue Development, LLC

(Emphasis added.) Sharabarin responded that La Noue

was “not precluded” and agreed that it “would be entitled to

argue [those damages] at a later time,” presumably using

the post-trial procedures of ORCP 68.

At that pretrial stage, the trial court was concerned

that if it did not allow La Noue to present evidence of the

attorney fees as consequential damages for Sharabarin’s

alleged breach of contract to the jury, then La Noue would

be “precluded” from pursuing that component of its damages

at all. But the trial court apparently accepted Sharabarin’s

acknowledgement that the ORCP 68 procedure would allow

La Noue to seek those damages after trial and thus not “pre-

clude” La Noue from recovering any damages to which it

would otherwise be entitled. On that basis, the trial court

held that La Noue could not present evidence to the jury

of the attorney fees that it incurred defending against the

homeowners’ claims, but that La Noue could seek those

attorney fees post-trial using the ORCP 68 procedure.9 The

Court of Appeals agreed with the trial court that what-

ever damages arose from the homeowners’ claims against

La Noue did not “aris[e] prior to the action,” ORCP 68

C(1)(a), because those claims and La Noue’s third-party

claims against Sharabarin were part of the same action.

Montara, 259 Or App at 683. On review, La Noue reprises

its arguments below.

La Noue’s argument turns on whether its claim

comes within the exception for fees and other expenses

that “are claimed as damages arising prior to the action.”

ORCP 68 C(1)(a). Although the word “action” is not defined

in the rules, rules other than ORCP 68 make it clear that

first-party claims, such as the homeowners’ claims against

La Noue, and third-party claims, such as La Noue’s against

Sharabarin and other subcontractors, are part of the same

“action.” ORCP 22 C(1), in discussing third-party practice,

refers to both first and third-party claims as part of “the

9

While the trial court’s ruling was not entirely clear, that appears to be

the intent of its pretrial ruling. The court ultimately declared that it was ruling

“with the defense on this” and characterized the defense’s position as being that

this was “something that would be argued at the time of, perhaps, the attorney

fee decision made by the court at the end of the case as opposed to an element of

damage that goes to the jury.”

Cite as 357 Or 333 (2015) 357

action.” Additionally, ORCP 67 B provides that, “[w]hen more

than one claim for relief is presented in an action, whether as

a claim, counterclaim, cross-claim, or third party claim, * * *

the court may render a limited judgment as to one or more

but fewer than all of the claims or parties.” (Emphasis added.)

The conclusion that fees incurred in the same action

are not fees “arising prior to the action” is consistent with

the Council on Court Procedure’s comment on ORCP 68.

The comment notes that the rule was “designed to provide

a procedure for claiming and proving attorney fees which

are an incident of the action.” For that reason, the Council

stated, “pre-existing attorney fees which are actually claimed

as damages are excluded.” Council on Court Procedures,

Oregon Rules of Civil Procedure and Amendments, Rule 68

comment, at 22 (December 13, 1980) (emphasis added). The

comment thus emphasizes the distinction between fees that

are “an incident of the action,” which are subject to ORCP

68, and “pre-existing” fees—those that “existed” prior to the

action—that are not.

We conclude that the first- and third-party claims

in this case were part of the same “action” and, conse-

quently, that ORCP 68 provided the procedure for seeking

an award of those attorney fees. We acknowledge that the

ORCP 68 procedure seems to have been adopted with an

eye toward resolving a claim by a prevailing party against

a non-prevailing party for attorney fees incurred in the lit-

igation between those two parties. However, the text of the

rule is sufficiently expansive to encompass claims for fees

incurred in the same action, because they did not “arise

prior to the action.”10 We therefore affirm the trial court’s

pretrial decision not to send La Noue’s claim for attorney

10

There is a potential dispute about the meaning of the word “arising” in

ORCP 68 C(1)(a). “[A]rising prior to the action” could have at least two different

meanings: that the fees had been partially incurred prior to the action, or that

they had been fully incurred prior to the action. On the one hand, that phrase

could include those attorney fees that are being incurred on an ongoing basis

at the time the action begins, regardless of whether more attorney fees are yet

to be incurred. Alternatively, “arising prior to the action” could mean that the

prior proceeding that gave rise to the attorney fees had been concluded before the

action in which the fees are sought is filed, so that the amount of the fees can be

determined. Because the fee issue in this case comes up in the context of a single

action, we do not address the issue of the potential meanings of “arising.”

358 Montara Owners Assn. v. La Noue Development, LLC

fees to the jury and to defer ruling on that claim until after

trial.11

The trial court’s post-trial ruling denying La Noue’s

claim for those attorney fees presents different issues.12

After the jury trial, as part of a series of post-trial hear-

ings, La Noue again requested as damages the attorney fees

that it had incurred in defending the first-party claims by

the homeowners. The court’s written ruling stated that the

court denied La Noue’s claim “because its attorney fees were

incurred in the same action in which La Noue made third-

party claims against the Subcontractors[, and t]he recov-

ery of attorneys’ fees as consequential damages in a breach

of contract claim is predicated on those fees having been

incurred in a prior separate action.” In its oral ruling, the

court further stated:

“As to whether or not there are consequential damages

that will be allowed in terms of the attorney fees that were

accrued or incurred, I find that this is a different situa-

tion from the situation in many prior cases which can hold

attorney fees can be consequential damages.

“Unlike the situation in those cases, this is not a situa-

tion in which there was earlier or separate litigation with

a third party. That is invariably the context in which this

discussion occurs, rather than the context which has pre-

sented itself here in this case, which is the presence of a

single case in which there was a settlement that was made

with a number of the parties and in which litigation then

continued against remaining parties. There was, there-

fore, no prior litigation which resulted in attorney fees

that might be recoverable as consequential damages, and I

couldn’t find any cases that would suggest that this is so.”

In those oral and written post-trial rulings, it

appears that the trial court was referring to arguments

made by the parties based on both ORCP 68 and Huffstutter

11

The parties have not raised any argument that the trial court violated the

Oregon Constitution when it concluded that La Noue could not submit that aspect

of its damages case to the jury. See Or Const, Art I, § 17 (“In all civil cases the

right of Trial by Jury shall remain inviolate.”); Or Const, Art VII (Amended), § 3

(“In actions at law, where the value in controversy shall exceed $750, the right of

trial by jury shall be preserved[.]”).

12

As discussed further below, La Noue did not use the procedure set out in

ORCP 68 to seek those fees.

Cite as 357 Or 333 (2015) 359

v. Lind, 250 Or 295, 301, 442 P2d 227 (1968), and we

address both of those sources of law below. The Court of

Appeals acknowledged that La Noue “might have” some

“substantive entitlement” to the attorney fees incurred in

defending against the homeowners’ claims, but nonetheless

affirmed the trial court because, in contrast to the situa-

tion in Huffstutter, there was “no prior litigation with a third

party.” Montara, 259 Or App at 683; see Huffstutter, 250 Or

at 301 (“[A]ttorney fees are generally allowable as damages

in an action against a defendant where the defendant’s tor-

tious or wrongful conduct involved the plaintiff in prior liti-

gation with a third party.” (Emphasis added.)).

The legal basis on which the trial court rejected La

Noue’s post-trial request for attorney fees was not clear. If

the post-trial ruling was based on the trial court’s conclu-

sion that it could not consider the substance of La Noue’s

request under ORCP 68, that ruling was erroneous. ORCP

68 was not intended to affect any substantive right of a

party to attorney fees as consequential damages for a

breach of contract. See ORCP 68 C(1) (distinguishing pro-

cedure for “the pleading, proof, and award of attorney fees”

from “the source of the right to recover such fees”); Council

on Court Procedures, Oregon Rules of Civil Procedure and

Amendments, Rule 68 comment, at 21 (December 13, 1980)

(“[T]he rule simply provides a procedure for assessing such

fees no matter what source is relied upon as providing the

right to such fees.” (Emphasis added.)). Moreover, the trial

court’s pretrial ruling denying La Noue’s request to put on

evidence of attorney fees as part of its damages case against

Sharabarian apparently was predicated in part on its view

that La Noue would be able to seek those fees in a post-

trial proceeding. As we have held, that ruling was correct.

Insofar as the trial court’s post-trial ruling denying the

attorney fee claim relied upon the conclusion that the fees

were not “claimed as damages arising prior to the action”

under ORCP 68 C(1)(a), it was error.13

13

We recognize that La Noue did not use the ORCP 68 procedure in its post-

trial attorney fee request for the attorney fees incurred in defending the home-

owners’ claims. However, we agree with La Noue’s assertion at oral argument

before this court that seeking those attorney fees again in their ORCP 68 filing

would have been futile, given the trial court’s post-trial ruling denying La Noue’s

claim for those fees as consequential damages because they had been incurred in

the same action.

360 Montara Owners Assn. v. La Noue Development, LLC

We also conclude that the trial court and Court

of Appeals read Huffstutter too narrowly when they con-

cluded that it did not apply unless the attorney fees claimed

were incurred in separate, earlier litigation. Under the

so-called American rule regarding the award of attor-

ney fees, “Generally, a party cannot recover attorney fees

unless there is a statute or a contract that authorizes

recovery of those fees.” Peace River Seed Co-Op, Ltd. v.

Proseeds Marketing, Inc., 355 Or 44, 65, 322 P3d 531 (2014).

La Noue lacked any statutory or contractual basis for the

recovery of any attorney fees.14 Huffstutter, however, rec-

ognized a third-party litigation exception to the American

rule in the circumstances when attorney fees are claimed

as consequential damages.15 Huffstutter held that, although

“[i]n the absence of contract, attorney fees are allowable only

where there is statutory authority,” there is an exception to

that rule, whereby “attorney fees are generally allowable as

damages in an action against a defendant where the defen-

dant’s tortious or wrongful conduct involved the plaintiff in

prior litigation with a third party.” 250 Or at 301; see also

OnePoint Solutions, LLC v. Borchert, 486 F3d 342, 352 (8th

Cir 2007) (“[U]nder the third-party litigation exception to

the American Rule * * * a court may award attorney fees as

damages if the defendant’s tortious act thrusts or projects

the plaintiff into litigation with a third party.” (Internal

quotation omitted.)).

14

The only reference to attorney fees in La Noue’s contract with Sharabarin

was in the contractual indemnification clause, which provided that “[i]n the

event of litigation between [Sharabarin] and [La Noue] to enforce the rights

under this subparagraph (o) [relating to indemnification], reasonable attorneys’

fees shall be allowed to the prevailing party.” Because Sharabarin was the “pre-

vailing party” on the issue of contractual indemnification, the only contractual

basis available for recovering attorney fees, La Noue could not argue that the

contract authorized recovery of these attorney fees. See ORS 20.077 (establish-

ing process to determine prevailing party for purpose of attorney fee award).

As discussed above, however, the trial court erred in deciding the contractual

indemnification claim, and that claim will be the subject of further proceedings

on remand.

15

The third-party litigation exception to the American rule has been adopted

by almost every jurisdiction in the United States. Robert Rossi, 1 Attorneys’ Fees

§ 8:3, 9 (3d ed 2014) (identifying Arkansas and North Carolina as only states that

have declined to adopt the doctrine). It might be more accurate to say that a claim

for attorney fees as consequential damages for another party’s wrongful conduct

is simply a situation in which the American rule does not apply, rather than an

“exception” to the rule.

Cite as 357 Or 333 (2015) 361

Although the court in Huffstutter referred to attor-

ney fees incurred in “prior litigation” with a third party, it

did so because of the procedural posture of that case. The

gravamen of the case was not that the fees must have been

incurred in a prior case, but rather that the American rule

does not apply when a plaintiff seeks attorney fees as con-

sequential damages on the theory that “the defendant’s tor-

tious or wrongful conduct” involved the plaintiff in litigation

with a third party. 250 Or at 301. That holding is consistent

with other authorities cited in Huffstutter recognizing that

such attorney fees can be claimed as damages, and we fol-

lowed Huffstutter in Osborne v. Hay, 284 Or 133, 585 P2d

674 (1978). Both Huffstutter and Osborne discussed claims

for attorney fees as consequential damages in tort cases,

but the rule has also been applied in appropriate contract

cases. When “a breach of contract results in claims by third

persons against the injured party,” the breaching party is

liable for the injured party’s “reasonable expenditures in the

litigation, if the party in breach had reason to foresee such

expenditures as the probable result of his breach at the time

he made the contract.” Restatement (Second) of Contracts

§ 351 comment c; see also Raymond v. Feldmann, 124 Or

App 543, 546, 863 P2d 1269 (1993) (collecting cases and

treatises describing the third-party litigation exception).

Whether those damages arose in a separate, earlier

case or in the same action in which a party seeks them will

determine only the procedure for asserting a claim for those

fees—either by presenting evidence at trial on the merits

or by using the post-trial procedure established by ORCP

68—but it will not determine whether a party has any sub-

stantive right to those fees. Cases from other jurisdictions

have acknowledged that, although ordinarily a plaintiff that

asserts a claim for attorney fees as a component of damages

for a defendant’s wrongdoing will do so in a separate lawsuit

from that in which the fees were incurred, nothing prevents

those attorney fees from being claimed in the same action.

See Prentice v. North Am. Title Guar. Corp., Alameda Div.,

59 Cal 2d 618, 621, 381 P2d 645 (1963) (“In the usual case,

the attorney’s fees will have been incurred in connection

with a prior action; but there is no reason why recovery of

such fees should be denied simply because the two causes

362 Montara Owners Assn. v. La Noue Development, LLC

(the one against the third person and the one against the

party whose breach of duty made it necessary for the plain-

tiff to sue the third person) are tried in the same court at the

same time.”); M.F. Roach Co. v. Town of Provincetown, 355

Mass 731, 733, 247 NE2d 377, 378 (1969) (same).

Nothing in our rules or case law suggests that a dif-

ferent result would obtain here. Indeed, one of the cases cited

by Huffstutter involved a claim for fees that were incurred in

the same action rather than a separate and earlier action.

250 Or at 301 (citing Prentice, 59 Cal 2d at 621). In the

usual case, previously incurred attorney fees are sought in

a separate action against the wrongdoer. In those cases, the

ORCP 68 procedure for seeking attorney fees post-trial does

not apply because of the exception in ORCP 68 C(1)(a) for

fees and other expenses “arising prior to the action.” But

if a party chooses to seek those fees in the same action in

which it incurred them—as La Noue has done here—it may

do so, although the party will need to follow the ORCP 68

procedure.

The Court of Appeals affirmed the trial court and

rejected La Noue’s attorney fee claim because the fees did

“not originate from prior litigation with a third party.”

Montara, 259 Or App at 683. For the reasons set out above,

we disagree. Like the courts in Prentice and M.F. Roach,

we conclude that a party may seek attorney fees under the

third-party litigation exception, even if the party incurs

those fees in the same action. Our holding is limited to

reversing the lower court rulings that La Noue was pre-

cluded from seeking attorney fees as part of its damages,

and we express no opinion as to the substantive merits of

La Noue’s claim. Because the trial court concluded that

La Noue could not pursue its claim for attorney fees, the

parties did not develop and the trial court did not rule on the

legal and factual grounds for establishing, or the potential

limitations on, such a claim.16

16

Oregon has relatively little case law on the requirements that must be met

for a party in La Noue’s position to prevail on its attorney fee claim. One treatise

summarizes the requirements as follows:

“[The party seeking to recover attorneys’ fees under this doctrine must

establish:]

Cite as 357 Or 333 (2015) 363

We conclude that La Noue may use the ORCP 68

procedure to seek from Sharabarin, as consequential dam-

ages of Sharabarin’s breach of contract, attorney fees that

La Noue incurred in defending against the homeowners’

claims in the first-party action. We remand to the trial

court for further proceedings to determine whether La Noue

meets the requirements to recover those fees and, if it does,

to determine the appropriate amount of the fee award.

IV. CONCLUSION

In summary, we hold that ORS 30.140 allows for

partial invalidation of overbroad indemnity clauses in con-

struction contracts. As to La Noue’s claim for contractual

indemnity, we therefore affirm the decision of the Court

of Appeals, reverse the judgment of the circuit court, and

remand the case to the circuit court for further proceedings.

With respect to the instruction on damages, we reverse

the decision of the Court of Appeals and affirm the trial

court because, although we conclude that it was error for

the trial court to instruct on diminution in value as a mea-

sure of damages when there was no evidence on diminution

in value, that error was harmless. Finally, we reverse the

Court of Appeals decision on attorney fees. We affirm the

trial court’s pretrial ruling that the ORCP 68 procedure

applies to La Noue’s claim for attorney fees that it alleges as

consequential damages for Sharabarin’s breach of contract,

but reverse the post-trial denial of that claim and remand

for further proceedings.

The decision of the Court of Appeals is affirmed in

part and reversed in part. The judgment of the circuit court

“(1) that the plaintiff had become involved in a legal dispute either because

of a breach of contract by the defendant, or because of defendant’s tortious

conduct; that is, that the party sought to be charged with the fees was guilty

of a wrongful or negligent act or breach of agreement; (2) that the litigation

was with a third party, not with the defendant from whom the fees are sought

to be recovered; (3) that the attorneys’ fees were incurred in that third-party

litigation; and (4) that the fees and expenses which were incurred were the

natural and necessary consequences of the defendant’s act, since remote,

uncertain, and contingent consequences do not afford a basis for recovery;

in other words, the attorneys’ fees sought to be recovered must have been

proximately and necessarily caused by the act complained of.”

Rossi, 1 Attorneys’ Fees § 8:3 at 10-13.

364 Montara Owners Assn. v. La Noue Development, LLC

is affirmed in part and reversed in part, and the case is

remanded to the circuit court for further proceedings.