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Protect Valuable Property Rights in the event of construction defects and the resulting damage to your condominium or townhome project.


Developer and Contractor Liability

Construction Defect Issues in California: Who is Liable and Why?

In most situations involving residential construction, the developer is going to be liable for defects, assuming the party with the claim acts in a timely manner and complies with statutory and/or contractual procedural requirements in making the claim. That liability will be based on one or more theories of liability.

1. Liability Under an Express Contractual Warranty

Such warranties are normally found in developer sales contracts. However, except for a one year “fit and finish” warranty as to specified components, the developer has no statutory duty to provide any additional express warranty. So the developer is usually free to limit the application of its own additional express but voluntary warranty. Thus, there may be coverage under that express contractual warranty only if the claimant purchased from the developer, or in the case of a condominium, only if the association is acting on behalf of unit owners who purchased from the developer. Or the warranty period, or period for enforcement of the warranty, may be relatively short. Many defects can remain hidden inside the building envelope for several years before the damage caused by the defect becomes apparent to homeowners. And by then, express contractual warranty rights may have run out.

2. Common Law Implied Warranty Rights

Legislators pass laws, and when signed by the Governor, those laws become operative. And sometimes those laws create legal rights and duties. However, sometimes courts, in deciding cases, establish such rights and duties based on their assessment of public policy considerations, without reference to any particular statutes. The rights and duties created by these decisions are known as common law rights and duties, and remain operative unless and until they are legislatively overridden.

To make a long story short, California courts have created a common law implied warranty that the commercial builder of homes, whether single family, townhouse or condo, warrants that its homes are designed and constructed in a reasonably workmanlike manner.

However, that implied warranty can be disclaimed or eliminated by a developer in its sales contracts, and that disclaimer, if enforceable, will in fact eliminate the common law implied warranty of construction quality.

3. The Doctrine of Strict Liability

The doctrine of strict liability was created by the courts to impose liability on a commercial developer for defective construction of homes because the common law implied warranty offered insufficient protection, such as where an implied warranty was effectively disclaimed by the developer. In other words, unlike the implied warranty, under the doctrine of strict liability, the developer is unable to disclaim or otherwise eliminate its liability for defects in construction.

4. Negligence Liability

From a claimant’s perspective, the advantage of a strict liability claim is that to impose liability on the developer, the claimant doesn’t have to prove the developer, or anyone acting on the developer’s behalf, was negligent. It is sufficient to simply establish that there is a defect in the design or construction of the home.

So in most situations, as long as the developer is strictly liable for the defects, there is no particular point in making a negligence claim against the developer. However, this doesn’t mean that a claimant will have no reason to assert a negligence claim against anyone.

To the contrary, a claimant may want to make a claim against not only the developer, but also against other third parties such as the general contractor, certain subcontractors, and maybe even the design architect and/or engineer, if the claimant isn’t sure the developer will have the financial strength to satisfy the claim. And if the claimant wants to assert claims against one or more of those additional parties, a negligence claim may be the only viable option.

The reason is that in most situations, the common law implied warranty or the common law strict liability doctrine can be applied only against the developer. It can’t be applied against other parties because the implied warranty applies only to sellers and to contractors hired by the claimant, and the strict liability doctrine applies only to developer-sellers. Contractors who work for developers may have built a claimant’s home, but if they didn’t sell the home and didn’t build it pursuant to a construction contract between that contractor and that claimant, that contractor is unlikely to have implied warranty or strict liability obligations to a claimant.

But that doesn’t mean the contractors (or architect and engineer) are “off the hook”. It simply means that the claim against them will have to be characterized as a negligence claim.

5. The Aas Case – A Step Backward

In 2000, in the Aas case (Aas v. Superior Court, 24 Cal.4th 627 (2000)), the California Supreme Court held that in the context of a defect in the construction of a home, there could be no liability under a negligence or strict liability theory absent proof of physical damage. In other words, proof of the defect wasn’t sufficient. The claimant also had to show that physical damage occurred as a result of the defect.

That ruling potentially eliminated a developer’s liability, at least on a strict liability or negligence theory, for building code violations that had not yet resulted in physical damage but that could result in physical damage in the future. That would include structural defects that might result in physical damage only if there was an earthquake, electrical wiring defects that could result in a fire but hadn’t yet resulted in a fire, sound transmission issues unlikely to ever result in physical damage, etc.

6. S.B. 800, etc. – The Overriding of the Aas decision

In response to the Aas decision, which took away homeowner rights with respect to defects that hadn’t yet, and might never, result in physical damage, the California Legislature passed S.B. 800, the so-called Right to Repair Act. That Act was a compromise reflecting “horse trading” between the construction industry and the trade associations and attorneys and others representing the interests of homeowners. As a result of S.B. 800, the right to seek damages for defects, without regard to whether those defects had resulted in physical damages, was established by statute, thus overriding the limitations on recovery imposed by the Aas case.

The tradeoff was that homeowners could no longer sue the developer for defective construction without first giving the developer the right to inspect and offer to repair. However, condo and townhome associations, were already bound by the Calderon Act (named after the principal sponsor of the statute) that required a common interest association involving 20 or more units to submit to a 180 day pre-litigation dispute resolution process before initiating legal action. And all common interest ownership associations, regardless of size, were also already bound by the Davis-Stirling Act’s pre-suit notice of claims provisions.

There is still considerable controversy concerning the exact legal effect of S.B. 800, and that controversy is unlikely to be resolved absent a legislative amendment clarifying ambiguous language in the Act or a decision by the California Supreme Court removing the uncertainties resulting from different appellate courts reaching different conclusions as to the legal effect of the statute.

7. Where Does This Leave Claimants?

Actually, in spite of Aas, association and homeowner rights remain largely intact. And while the Davis-Stirling Act (Civil Code §6100, etc.), the right to repair statute (S.B. 800, etc.) and the Calderon Act (Civil Code §1375, etc.) require a claimant to go through a pre-litigation dispute resolution process, those statutes also require the developer to go through that same process. And those statutes have protocols that enhance the chances of a successful resolution of a defect claim without the expense and delays inherent in resolution through litigation.

8. What About Arbitration?

Theoretically, submitting a claim to arbitration enables all parties to avoid the time and expense of the legal process, and arbitration provisions in developer sales agreements may render the pre-litigation dispute resolution provisions in S.B. 800 and Civil Code §1375 inapplicable. Whether that is a good thing is open to debate. In fact, the assumption that arbitration will be faster and less expensive than a lawsuit is also open to debate.

Arbitration involving substantial claims often requires a three member arbitration panel. At $300 to $500 per hour for each arbitrator, an arbitration hearing or series of hearings can become quite expensive. Moreover, arbitrators are usually attorneys, engineers and architects, many of whom have professional ties to the construction industry. These ties may affect how they view the strength of an association’s claims.

Also, depositions, motions and other pre-trial “discovery” proceedings common to the litigation process are often permitted in the arbitration process. In that situation, the arbitration process often begins to closely resemble the litigation process, with the exception that in an arbitration proceeding, the parties pay the cost of the arbitrators whereas in the litigation process, the taxpayers pay most of the cost of the judge and jury.

9. What is Recoverable in a Construction Defect Case?

Cost of repair is recoverable, including both design fees and contractor charges, as well as construction oversight fees by an owners’ representative. Relocation costs, when necessary to complete repairs, are also recoverable. Also recoverable are expert consultant fees to the extent incurred in identifying and documenting the defects. Attorney fees generally aren’t recoverable in California.

10. Time Limits on Association Action

The time within which an association must take formal action to enforce its rights is a complicated issue. The “rule of thumb” is that an association must act within three years after defects were or should have been discovered. However, for some claims, that period may not start to run any earlier than transition of board control from the developer to unit owners.

Also, in some circumstances, the “limitations period” may be four years instead of three years. And, for some defects, the limitations period may be less than three years, and may start to run sooner than when the defects were or should have been discovered.

Developer attempts to correct defects may temporarily stop the running of the limitations period, but not for all defects.

Also, a developer may be able to shorten an otherwise applicable limitation period by a limitations shortening provision in its sales contracts. To further confuse the matter, there is a ten year limitations period that normally runs from completion of the dwelling. However, that limitations period only applies when the claim is not already barred by an otherwise applicable limitations period. And of course there are exceptions to this ten year statute as well.

As was pointed out above, the “limitations period” is a complicated subject, depending on the nature of the defects in question and lots of other facts. No association board should assume the board has a proper understanding of the limitations period applicable to that association’s claims without first seeking legal advice from an attorney experienced in the resolution of construction defect issues.

CONCLUSION

The statutory and judicial scheme for resolution of construction defects in California provide claimants with a number of different legal theories on which to base a claim of developer liability, and at least one legal theory on which to base a claim of contractor and design professional liability, as well as a mechanism short of formal litigation for resolution of construction defect claims.

However, if significant defects are in issue, the dispute resolution process will usually involve a number of parties, will become fairly complicated, and will usually require the assistance of legal counsel in guiding an association through the process. This is true regardless of whether the dispute is resolved through formal litigation or through the mechanisms for pre-litigation dispute resolution.

Our firm is ready, willing and able to assist associations in resolving their construction defect claims, hopefully without formal litigation, but also through the litigation or arbitration process if that becomes necessary to ensure an appropriate resolution of the claims.

Our law firm can work on a straight hourly basis, on a contingent fee basis, or on a combination of the two. When we work entirely on a contingent fee basis, there is no attorney fee in the absence of a recovery, and if there is a recovery, the fee will normally be a percentage of the gross recovery. When the firm works on a contingent fee basis, whether the association will in any event be responsible for costs incurred in investigating and prosecuting the claim will be determined by provision in the attorney-client agreement that addresses that matter.

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    Levin Law Group LLP

    Richard Levin
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    rlevin@levinlawgroupllp.com

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    San Mateo, CA  94404

    Emily S. Levin
    Partner
    elevin@levinlawgroupllp.com

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    Phone: 877-786-9990
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