California Supreme Court Holds that the Right to Repair Act is a Homeowner’s Exclusive Remedy for Damages Arising from Construction Defects for New Residential Construction

Robert Nobel | TLSS Construction Law Blog | February 15, 2018

In McMillin Albany LLC et al. v. The Superior Court of Kern County (Van Tassel) [Case No. S229762], the California Supreme Court held that California Civil Code §§ 895 et seq. (the “Right to Repair Act”) provides the exclusive remedy for construction defect claims for economic loss and resulting property damages arising from new residential construction. The Supreme Court also held that homeowners are required to engage in the pre-litigation notice and cure procedures under the Right to Repair Act.

The long-awaited holding in McMillin resolved a split in authority among the California Court of Appeals, and effectively overruled the holdings in Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC [(2013) 219 Cal.App.4th 98 (“Liberty”)] and Burch v. Superior Court [(2014) 223 Cal.App.4th 1411 (“Burch”)], to the extent inconsistent with McMillin. In Liberty and Burch, the California Court of Appeals held that the Right to Repair Act is not the exclusive remedy for construction defect lawsuits that allege  resulting property damage arising from new residential construction. Homeowners were thus not required to engage in the pre-litigation notice and cure procedures under the Right to Repair Act because such lawsuits could be maintained as common law claims.  As to construction defect lawsuits where resulting property damage had not occurred (i.e. pure economic loss), such claims are barred by the holding in Aas v. Superior Court [(2000) 24 Cal.4th 627] unless they can be brought under the Right to Repair Act.

In McMillin, a construction defect lawsuit was brought by the purchasers of 37 new single-family homes from McMillin Albany LLC. The homes were purchased at various times after January 2003, thus implicating the Right to Repair Act. In 2013, the homeowners initiated the lawsuit against McMillin Albany LLC alleging numerous construction defects in their respective homes. The complaint included common law causes of action for negligence, strict products liability, breach of contract and breach of warranty, as well as a claim for violation of the Right to Repair Act.

In the trial court, McMillin Albany LLC moved for an order staying litigation to allow the parties to engage in the pre-litigation notice and cure procedures under the Right to Repair Act. The trial court denied the motion, relying upon the California Court of Appeals holding in Liberty.  McMillin Albany LLC appealed the trial court ruling.

On appeal, and disagreeing with the holdings in Liberty and Burch, the California Court of Appeals ruled that the parties must follow the pre-litigation notice and cure procedures because the Right to Repair Act is the exclusive remedy for construction defect claims where property damage has occurred.  The Court of Appeals observed that “the Legislature intended that all claims arising out of defects in residential construction involving post-2003 sales of new homes be subject to the standards and requirements of the Act.”

The California Supreme Court affirmed the ruling of the California Court of Appeals.  In its analysis, the Supreme Court looked to the language of the Right to Repair Act and its legislative history to determine whether the common law had been supplanted where construction defect claims resulted in property damages.  In this regard, the Supreme Court recognized that Section 896 states the Right to Repair Act applies to “any action” seeking damages for construction defect.  This section also states that “claims or causes of action shall be limited to violation of” the functionality standards set forth in the Right to Repair Act and apply only to “original construction intended to be sold as an individual dwelling unit.”

Moreover, Section 944 identifies what damages may be recovered under the Right to Repair Act by a homeowner, which covers the kinds of damages recoverable in a construction defect lawsuit, and Section 943 establishes that such damages may only be recovered under the Right to Repair Action, absent an express exception. The damages recoverable under the Right to Repair Act include pure economic losses, unlike a common law claim.

Furthermore, the Supreme Court recognized that “the creation of a mandatory pre-litigation process and the granting of a right to repair, would be thwarted if we were to read the Act to permit homeowners to continue to sue as before at common law, without abiding by the procedural requirements of the Act, for construction defect claims involving damages other than economic loss.”

Accordingly, the Supreme Court held the Right to Repair Act shows a legislative intent to modify the common law and effectively “provides that construction defect claims not involving personal injury will be treated the same procedurally going forward whether or not the underlying defects gave rise to any property damage.”  Therefore, “claims seeking recovery for construction defect damage are subject to the Act’s pre-litigation procedures regardless of how they are pleaded.”

Dispute Resolution: Arbitration – A Better Option for Resolving Construction Disputes

Kent B. Scott | Babcock Scott & Babcock

This is the third installment in the series of articles on Dispute Resolution.

Arbitration has long been favored as a means of resolving construction disputes.  Many standard construction contract documents provide for a mandatory binding arbitration of all disputes arising under or related to the contract.

Arbitration Statutes

Both Federal and Utah law, like virtually every other state, favor arbitration as a cost-effective and timely means of resolving disputes.  Consistent with these policy considerations, both statutory law and case law support judicial orders compelling arbitration when required by statute or contract. The current Utah law is most commonly referred to as the Revised Utah Uniform Arbitration Act as set out in Utah Code Ann. §78-31a-101 through 131 (“RUAA”).  Utah’s RUAA is patterned after the Revised Uniform Arbitration Act that was approved by the National Conference of Commissioners of Uniform State Laws.  The Federal law is found in Title 9 U.S.C. §1 et seq.  This statute is known as the Federal Arbitration Act.

Commencement of Arbitration and Selection of Arbitrator(s)

Arbitration is initiated by a demand for arbitration.  The most common arbitration clause found in construction contract documents requires arbitration to proceed in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association (“AAA”).  A demand for arbitration pursuant to the AAA’s rules in a very simple document, requiring only a general and brief statement outlining the nature of the claim and a sum representing the damages sought.

The method for the selection of arbitrators is found in the AAA’s Construction Industry Rule or the Federal and Utah state statutes.  The method of selection can also be defined in the parties’ Agreement.

Case Management

The arbitrator will generally schedule, through the AAA, a preliminary hearing wherein the arbitrator and parties’ council will discuss the parties’ claims, scheduling, discovery, motions, witnesses, exhibits, the evidentiary hearing and form of award.

Discovery and Motions

In most instances, the type, amount and time frame for discovery is left to the arbitrator’s discretion.  Most arbitrators try to get the parties to agree on reasonable limits on discovery, especially depositions, but will impose such limits where the parties fail to agree.  Within this same authority, the arbitrator usually has the authority to issue subpoenas and subpoenas duces tecum upon third parties as allowed by the Rules of Civil Procedure.

In theory, arbitrators have always had authority to summarily dispose of all or portions of the claims submitted for arbitration.  Because of the limited avenues of appeal available in arbitration organizations like the AAA have discouraged summary disposition of claims except in the clearest cut of cases.

The Arbitration Hearing

At the evidentiary hearing, the procedure is in form very similar to that encountered in litigation.  It is, however, considerably less formal, particularly as to evidentiary matters.  Simply stated, the rules of evidence do not apply in arbitration.  In fact, both the AAA’s rules and most arbitration acts require the arbitrator to receive and consider evidence material to the dispute.  In short, the test by which evidence is judged in arbitration is materiality, not admissibility.

The Award

Once the arbitrator is satisfied that all other evidence is in, he or she will close the hearing and begin deliberations to the end of making an award.  Historically, arbitration awards have been extremely brief, consisting essentially of a net award of damages in favor of one of the disputants and perhaps an award of attorney’s fees and/or arbitration costs.  Currently, many arbitrators, as well as organizations such as the AAA will provide either a detailed or reasoned award upon request by the parties.

A detailed award must specifically list the arbitrator’s award as to each component of each party’s claims and culminate in a net award as to damages, attorney’s fees, arbitration costs and interest. If a contractor’s claim is comprised of a changed conditions claim, a constructive change order claim and an acceleration claim, the arbitrator must make a specific award as to each claim.  A reasoned award takes the process one step further, requiring the arbitrator to provide at least a minimal written explanation for each component of their award.

Under the AAA rules, an arbitrator must issue their award within 30 days from the date they closed the hearing.  Neither the Utah Arbitration Act nor the United States Arbitration Act has established any such time frame.

Modification of Award

Under the Utah Arbitration Act and the AAA rules, a party has twenty days from the date the AAA transmits the arbitrator’s award to the parties to seek modification of the award to correct any clerical, typographical, technical or computational errors.  The arbitrator has no authority to re-determine the merits of the award but may correct calculations or descriptions of persons or property in the award. Under the Federal Arbitration Act a motion to modify may be filed at any time within three months after the award has been filed or delivered.

Motion to Vacate Award

A motion to vacate the award under the AAA rules or the RUAA must be filed within twenty days from the receipt of the award. Under the Federal Arbitration Act, a motion to vacate may be filed at any time within three months after the award has been filed or delivered.

Once an award has been issued, it may become subject to efforts to vacate by a dissatisfied party. Reversal of an arbitrator’s award can only be done by a court.  Under both the Federal and Utah Arbitration Statutes, an arbitrator’s award will be vacated if it appears that:

  1. The award was procured by corruption, fraud.
  2. The arbitrator is guilty of misconduct.
  3. The arbitrator exceeded its powers.
  4. There was no arbitration agreement.

Again, courts have traditionally deferred to arbitrator’s awards and have been reluctant to revisit them when challenged by a dissatisfied party.  However, the Buzas decision seems to indicate that given improper circumstances, a Utah court may explore further propriety and basis for an arbitrator’s award, then one might expect by simply reading the terms of the RUAA.

Conclusion

The construction industry has used arbitration as an alternate form of dispute resolution for several years. Arbitration as a method of dispute resolution will continue to grow.

Is California’s Right to Repair Statute Really the Exclusive Remedy in Construction Defect Litigation?

Elizabeth D. Beckman | Kramer deBoer & Keane, LLP

Approximately fifteen years after California Governor Grey Davis signed into law Senate Bill 800,1 and much related judicial dispute, the California Supreme Court is set to resolve the legal standard for handling of construction defect claims in the matter of McMillan Albany, LLC v. Superior Court.2 The matter has been fully briefed and awaiting oral argument.

At present, California has different binding appellate court decisions in four of California’s six appellate districts with conflicting but nonetheless valid legal authority, and the uncertainty created by such is adversely affecting a wide range of cases at the trial court level statewide. At issue is whether SB 800 is the exclusive remedy for construction defect claims, or if homeowners may also recover damages under common law claims. The California Supreme Court has accepted the McMillan Albany, LLC matter for hearing, and we should have a final answer in the near future.

As background, SB 800, also known as California’s Right to Repair Act, was intended to establish a pre-litigation protocol for residential properties built after January 1, 2003. This included setting forth applicable standards for home construction, statute of limitations, burden of proof, and certain obligations on the part of the homeowners. SB 800 was intended to effectively reverse parts of the “Economic Loss Doctrine” and therein establish rights and procedures which would allow a homeowner to recover for construction defects in new construction even when there is no actual property damage other than the defective product or work itself.

After SB 800 became law, the Fourth Appellate District found that SB800 was not the exclusive remedy for homeowners in the case of Liberty Mutual v. Brookfield Crystal Cove, LLC.3 Specifically, the Fourth Appellate District found that, for alleged defects that have not yet resulted in actual property damage, a homeowner may elect to proceed under the Right-to-Repair Act and that, for alleged defects which have manifested actual property damage, a homeowner may elect to proceed under traditional common law causes of action. This rule was later adopted by the Second Appellate District in a case this firm was involved in (Burch v. Superior Court4), wherein the Court ruled that SB 800 does not preclude a homeowner from pursuing common law claims for construction defects that have caused actual property damage.

The conflicting line of authority first came from the Fifth Appellate District, who rejected the holding in Liberty Mutual and Burch. The Fifth Appellate District held that SB 800 was the exclusive remedy for homeowners asserting construction defects for both actual and anticipatory damages in the case of McMillan Albany, LLC v. Superior Court. 5 The Third Appellate District thereafter ruled similarly in Elliot Homes v. Superior Court.6

Consequently, California currently has two conflicting viewpoints in four of the State’s six appellate districts, all of which are valid legal authority. Because of this conflict, the California Supreme Court has accepted the McMillan Albany, LLC v. Superior Court matter for hearing. As of the present date, the matter has been fully briefed, including all amicus briefs. The next step is for the Supreme Court to set a date for oral arguments. This means that sometime in the near future the Supreme Court should resolve the standard for handling of construction defect claims in California, as was intended by the passing of SB 800 in the first place.

While we cannot predict with certainty how the Supreme Court will rule, it is likely that a ruling which affirms the Liberty Mutual and Burch line of cases will result in parties litigating both statutory and common law tort claims concurrently. Presumably this would result in more extensive litigation because more evidence is require to establish a liability claim for general negligence than for an alleged SB 800 violation alone. Furthermore, because general negligence is often more difficult to establish than an alleged SB 800 violation, pretrial settlements may be more limited, which could force more of these cases to trial.

On the other hand, if the Supreme Court were to uphold the McMillan and Elliot Homes line of cases, presumably the scope of construction defect litigation in cases involving SB 800 claims would be limited to establishing statutory violations. Such claims are often more easier for property owners to establish, which may make pretrial settlements more desirable and thereby curtail the need for trial in many instances.

1 SB 800, codified as California Civil Code Section 895, et seq. went into effect on January 1, 2003.

2 McMillan Albany, LLC v. Superior Court (Supreme Court Case No. S229762.

3 Liberty Mutual v. Brookfield Crystal Cove, LLC, 219 Cal. App. 4th 98 (2013).

4 Burch v. Superior Court, 223 Cal. App. 4th 1411 (2014).

5 McMillan Albany, LLC v. Superior Court, 239 Cal. App. 4th 1132 (2015).

6 Elliot Homes v. Superior Court, 6 Cal. App. 5th 333 (2016).

Dispute Resolution – Part Two: Mediation – Helping the Mediator Help You

Kent B. Scott | Babcock Scott and Babcock | January 5, 2018

This is the second installment in the series of articles on Dispute Resolution.

The AIA – A-201- General Terms of the Construction Project, provides a requirement for the parties to mediate their dispute before resorting to arbitration or litigation. The contract requirement, in part, states:

If a dispute arises out of or relates to this contract, or the breach thereof, and if the dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by mediation administered by the American Arbitration Association under its Construction Industry Mediation Rules before resorting to arbitration, litigation, or some other dispute resolution procedure.

The mediation of a construction dispute has traditionally been voluntary.  The A-201 mediation requirement, similar contract provisions and required court annexed alternate dispute resolution programs have brought a new element to the dispute resolution game – mandatory mediation. Whether mandatory mediation will serve the needs of the construction industry or become just another fossil in the graveyard of “good attempts” is unknown.  For now, mediation is going to be used with increased frequency by parties involved with a construction dispute.  Here are some of the questions being asked by the contractors involved with those disputes:

What is Mediation?

Mediation is a procedure where two or more parties attempt to resolve their dispute with a neutral party (“mediator’) who presides over a meeting. The mediator remains neutral throughout the meeting.  Mediation is not a judicial settlement conference where a judge attempts to pressure the parties to settle. The process is confidential and no resolution can be reached without the consent of the parties.  If an agreement is reached, the agreement will be binding and can be enforced by the courts.

How Successful is Mediation?

There is no authoritative study on the success rate of construction mediation.  The American Arbitration Association reports an eighty five percent success rate.  This percentage is consistent with the success rate reported by other institutional and individual alternate dispute resolution providers.

What are the Elements of a Successful Mediation?

The success of a particular mediation is mainly controlled by the parties.  Some of the critical components of a successful mediation involve: (1) The background and capabilities of the mediator; (2) attendance of the right people with the knowledge an authority to settle; (3) the needs and interests of the parties; (4) whether a trial or arbitration has been scheduled; (5) and the commitment of the parties and their attorneys to prepare for and participate in the mediation.

What Happens at Mediation?

The following is a brief outline of the events involving a mediation:

  • The attorney’s prepares a short brief for the mediator.
  • The parties are introduced and sign a confidentiality statement.
  • The parties summarize their positions in a joint session.
  • The parties go into separate confidential meetings with the mediator to discuss objectives, needs and settlement options.
  • The mediator shuttles between the parties in an effort to find common ground.
  • If a settlement is reached a written agreement is created that outlines the general terms of the resolution. The agreement may provide for more detailed documentation to be drafted and signed by the parties.
  • If a settlement is not achieved another session may be scheduled or the mediator may offer some suggestions to consider that may assist the parties in future negotiations or other settlement efforts.

When and Where Do I Mediate?

There is no set formula for assuring a mediation will be successful.  Mediation can be effective anytime.  Most mediation’s occur after a claim has been filed and some exchange of information has taken place.  The decision as to whether or when to mediate will vary with each case. However, the statistics from the major institutional mediation services indicate that mediation is most successful when the dispute is in its early stages before the parties have expended their resources on combat, which resources could have been used for settlement. It is important to realize that successful mediation involves a good faith exchange of information between the parties.

The mediation should take place at a neutral site.  The location is often arranged by the mediator.  For mediations involving out of state participants, a value judgment will need to be made concerning the time and expenses that will be incurred.  Most mediators are available to travel to a neutral site to conduct the mediation.

What do I Bring to a Mediation?

  • The following is a brief summary of those who would be expected to attend the mediation: Legal counsel: Yes, if represented.
  • Client: The person with authority to settle – others with knowledge of the facts.
  • Experts: Avoid having experts involved. They are hired to support your position and often complicate the process where settlement options are being discussed. Experts, however, may be helpful to describe technical information.
  • Documents: Less is better. Summaries, graphs and charts are useful.
  • Others: Associates, secretaries or assistants are discouraged. If there is a need, make advanced arrangements so all parties approve and understand their respective roles.
  • Other information requested by the Mediator

 Who Makes the First Move?

This question assumes there is some advantage for one party to move the process forward.  This one is a non-issue.  Many items need to be discussed before offers begin to be put out on the table.  A good mediator will take the time and make the effort to understand the position and interests of each party.  The mediator will know when to start the process of making offers.  Usually the mediator will seek a consensus on the easy issues and work toward an agreement on more difficult matters thereafter.

How Long Should the Mediation Last?

It is common to schedule mediations for either a half or one full day.  More time should be scheduled for mediations that require extensive travel, the presence of many parties or involve complex fact or legal issues. It is best to build in a margin of “float” time for the mediation session.

Summary

The success rate of construction mediated disputes is approximately eighty five percent.  The high success rate is a compliment to the commitment of the parties, their legal counsel and the mediators who oversee the mediation process. The construction industry is more advanced and has more experience with mediating disputes than other industries.  The expanded acceptance and use of mediation in the construction industry is evidenced by the inclusion of the mediation process in the AIA’s A-201 Conditions of the Contract for Construction.

Mediation provides an opportunity for people to have their input into how the process is designed and conducted.  The parties are given an opportunity to confidentially express their interests and values without compromising their positions while in the presence of other parties.  It provides the parties a sense of involvement and control over the mediation process and the terms of a settlement.

Dispute Resolution – Part One: Negotiating Through the Construction Project Minefield

Kent B. Scott | Babcock Scott & Babcock | December 14, 2017

Introduction

Today’s current economic climate puts great pressure on owners and contractors to get projects completed quickly and efficiently.  These pressures have led to tighter time schedules and monetary budgets which have, in turn, created an increased number of disputes.  Another developing trend is the increased costs in time, money, efficiencies and lost opportunities taken up by the dispute.

The following article is the first of a three part series dedicated to the resolution of construction disputes using the tools of Negotiation, Mediation, and Arbitration.

Negotiation

Most disputes are resolved through negotiation. This is the method by which the great majority of construction project issues are resolved.  Timely communication of accurate information between the parties is essential. The most critical contract provision is the signature of the party.  Without a cooperative party there is no contract that can be written that would avoid a dispute.

Contract terms are tools to be used by the parties. The parties can use these tools to bring about different objectives.  Often, the parties are not in harmony with their objectives which results in a conflict.  Most often conflicts between the parties are resolved through negotiation.  Negotiation is the most widely used method of dispute and remains the most preferred.  The parties to a conflict feel better about reaching a resolution by common consent than having the resolution imposed on them by a judge or arbitrator.

There are seven components that make up a negotiation.

One – Alternatives.  Most conflicts have more than one way of being resolved.  In order for a conflict to be resolved information about the subject and personalities of the parties involved is essential. Consider the alternatives if a negotiated settlement is not reached and the resulting consequences. “If I accept this alternative what will happen.”  “Are there other alternatives.”  “What will happen if I walk away?”

Two- Interests.  What are your needs?  What are your wants?  What are the needs and wants of the other party?  This is the part of negotiation that gets the parties beyond their position that has been supported by incomplete and/or inaccurate information.  Most attorneys are trained to be advocates and have a difficult time seeing options that may serve the interests of their client and the opposing party.  Find the interests of the parties and you will be on the road to resolution.

Three – Options.  Options are the possibilities that operate to create an agreement.  They are the scientific equivalent of  “hypothesis.”  It takes courage to explore different ways of seeing the problem.  Attorneys want to please their clients but should not be a mirror of their client’s thoughts and feelings. The best attorneys remain independent.  The best clients are open to suggestions.  The attorneys and clients that make resolutions happen develop the capacity to look past their positions and focus on their interests.  They are able to come up with and test the feasibility of different options that would satisfy those interests.

Four – Legitimacy.  Both attorneys and clients need to evaluate whether a proposed resolution is going to “work.”  In order to best make that assessment, it is best to measure a specific proposal against objective criteria.  The feelings of the parties are important, but so is the “work ability” of the resolution reached.  If it doesn’t work, the parties will climb back into the arena of conflict.

Five – Commitment.  It takes commitment to reach a resolution and to carry out its requirements.  Most parties want to have their problem resolved, but lack the commitment to reach that result.  Attorneys vary in their level of commitment.  Unfortunately there are those attorneys who commit themselves to prolong a dispute for one of the following reasons: (1) it is in their economic interest to keep the dispute going, (2) they have not taken the time to study the information required to enter into successful negotiations, and (3) they have not developed the independence required to deliver information to the client that it does not want to hear.

Clients also vary in their level of commitment.  The ability to reach a resolution to a conflict is inhibited by one or more of the following: (1) the client gets hung up on its position and is not able to see options, (2) the client is not willing to spend the time and effort or pay its attorney to take the time or make the effort to obtain and evaluate information about the dispute, (3) the client is not willing to accept responsibility for resolving the dispute (1) “it’s all his fault.” of (2) “this is the attorney’s job.”

Six – Communication.  Communication means there is a “sender” and a “receiver.”  Too often people are caught up in what they are going to say to respond to what is being said (“sending”).  They do not focus on that which is being said (“receiving”).  When everyone is “sending” and no one is “receiving” the negotiations reach a stalemate. Effective negotiation requires two-way communication.  Try incorporating the following tools in your negotiation tool box: (1) “it sounds like you are saying”, (2) “let me see if I understand you”, (3) “what I am trying to say is”, or (4) “can you clarify what you meant when you said….”

Seven – Relationship.  Some disputes involve relationships that need to be continued (joint venture partners).  Some relationships have the potential to develop for the better once the dispute is resolved (architect-owner, owner-contractor, contractor-subcontractor).  Other relationships need closure (all of the above).  The relationship factor is critical when evaluating the options for a resolution and determining which, if any, option fits the interests of a particular party.  A successful negotiation is one in which the parties have improved their ability to work with each other in the future.  The outcome of the conflict could create a relationship that is better able to deal with differences.

A construction related conflict is a situation where two or more parties feel that the other party has a problem.  Most conflicts grow out of wrong assumptions and rash judgments about the other party.  It is natural to want to avoid conflict.  But conflict is not the enemy.  A conflict that is successfully resolved can lead to a stronger relationship.  And besides – look at all of the things you learn while traveling along the road to resolution.