In a Win for Design Professionals, California Court of Appeals Holds That Relation-Back Doctrine Does Not Apply to Certificate of Merit Law

Garret Murai | California Construction Law Blog | December 5, 2017

The year was 1995. The old guard was still in power in Sacramento. “Button-Down” Pete Wilson was Governor. Willie Brown, the self-nicknamed “Ayatollah of the Assembly,” was Speaker of the Assembly. And Bill “Huggy” Lockyer was Senate Pro Tem. Names that, for many reasons as of late, seem . . .  well . . . let’s just say, “quaint.”

Their time, however, was coming to an end. Three years earlier, California voters approved Proposition 140, which instituted term limits for the first time in California. And by 1996, the first slate of legislators would be “termed out.” The immediate impact: It was the time for making deals because you didn’t know who would be keeping house next.

At the time, I was lobbying for a trade association in Sacramento representing the architecture profession. One of the key legislative priorities for the association was protecting and “preserving” a statute that had originally been enacted in 1979 and scheduled to have sunsetted in 1984. For more than 10 years, it had been kept alive by legislative extensions.

The law, Business and Professions Code section 411.35, was designed to limit frivolous lawsuits against licensed architects, registered professional engineers and licensed land surveyors by requiring attorneys to consult with another design professional as a condition of filing a complaint or cross-complaint against a licensed architect, registered professional engineer, or licensed land surveyor.

Also known as a “Certificate of Merit,” the law was supposed to sunset in 1995, but the association was able to get the sunset removed. Business and Professions Code section 411.35, as currently amended, provides that “on or before” serving a cross-complaint alleging the professional negligence of a licensed architect, registered engineer, or licensed surveyor, a certificate of merit must be signed by the attorney and filed with the court representing that either:

  1. The attorney has consulted with at least one architect, professional engineer, or land surveyor licensed to practice in California or any other state, who is in the same discipline as the architect, professional engineer, or land surveyor, and the attorney has concluded based on the consultation that there is reasonable and meritorious cause for filing the complaint or cross-complaint;
  2. The attorney was unable to obtain a consultation before the running of the statute of limitations, in which event, a certificate of merit shall be filed within sixty (60) days after filing the complaint; or
  3. The attorney was unable to obtain a consultation following three (3) good faith attempts to obtain an opinion from three (3) separate architects, professional engineers, or land surveyors.

An attorney is not required to disclose the identity of architect(s), professional engineer(s), or land surveyor(s) consulted unless the attorney files a certificate of merit stating that it was unable to obtain a consultation, in which event, the identities of the architects, professional engineers, or land surveyors from whom a consultation was sought may be required to be disclosed by the court.

However, if, at the conclusion of litigation, the licensed architect, registered engineer, or licensed surveyor prevails, the licensed architect, registered engineer, or licensed surveyor may file a motion with the court requiring the attorney to disclose the names, addresses, and telephone numbers of the persons consulted. If the court finds that the consulting requirements were not met, the court may order a party, a party’s attorney, or both, to pay reasonable expenses, including attorney’s fees, to the licensed architect, registered engineer, or licensed surveyor.

In Curtis Engineering Corporation v. Superior Court of San Diego, Case No. D072046 (October 23, 2017), the California Court of Appeals addressed the impact of the relation-back doctrine – a doctrine that generally provides that a later-filed pleading “relates back” to the date of an earlier-filed pleading for statute of limitations purposes – on the certificate of merit law.

Curtis Engineering Corporation v. Superior Court of San Diego

In Curtis Engineering, George Sutherland, a crane operator, was injured when his crane tipped over on May 5, 2014. Nearly two years later, on May 3, 2016, he filed suit in the San Diego Superior Court. His complaint included a negligence cause of action against Curtis Engineering Corporation.

Sutherland’s original complaint, however, did not include a certificate of merit. On December 1, 2016, Sutherland filed an amended complaint that included a certificate of merit.

In response, Curtis Engineering filed a demurrer arguing that Sutherland had failed to file the required certificate of merit within the two-year statute of limitations period applicable to a negligence cause of action. The trial court, however, denied the motion concluding that the first amended complaint “related-back”to the date the original complaint was filed

Curtis Engineering appealed.

The Court of Appeal Decision

On appeal, Curtis Engineering argued that the two-year statute of limitations for negligence expired on May 5, 2016, that the certificate of merit was not filed until December 1, 2016 (nearly seven months after expiration of the statute of limitations), and that the sixty (60) day grace period under Business and Professions Code section 411.35 had expired on July 2, 2016.

Discussing the relation-back doctrine, the Court of Appeals explained that under the doctrine a later-filed pleading will be deemed to have been filed at the time of an earlier complaint if the amended complaint is based on the same general set of facts. However, held the Court, based on the language of the certificate of merit statute, the relation-back doctrine does not apply to later-filed pleadings alleging the professional negligence of a licensed architect, professional engineer, or licensed surveyor for two reasons.

First, held the Court of Appeals, Business and Professions Code section 411.35 states that a certificate of merit “shall” be signed and filed by an attorney “on or before the date of service.” This requirement, explained the Court, would be rendered meaningless if the relation-back doctrine permitted an attorney to file a certificate of merit later in time in order to avoid a statute of limitations deadline.

Second, held the Court of Appeals, Business and Professions Code section 411.35 provides a sixty (60) day grace period applicable in situations where an attorney is unable to file a certificate of merit before a statute of limitations deadline. “[A]pplying the relation-back doctrine in this situation,” explained the Court, “would mean a plaintiff has virtually an unlimited amount of time to obtain the necessary consultation as long as the plaintiff files the certificate of merit with an amended complaint that relates back to the original complaint. This cannot be what the Legislature intended.”

Conclusion

Curtis Engineering provides further assurances to licensed architects, registered engineers and licensed surveyors that the intent of the certificate of merit law is preserved, by requiring attorneys to obtain a certificate of merit “on or before” service of a complaint or cross-complaint, or if a certificate of merit cannot be filed by the time a statute of limitations deadline expires, by requiring that a certificate of merit be filed within sixty (60) days after the filing of a complaint or cross-complaint.

The California Legislature Passes SB 496 Limiting Design Professional Defense and Indemnity Obligations

Mark Himmelstein and Jenny Guzman | Construction Defect Journal | June 15, 2017

Since 2008 when the California legislature limited subcontractor indemnity obligations, the design professional community has been shouting “what about us?” Well, the legislature finally responded and a new law that limits design professional’s defense and indemnity obligations to their percentage of fault goes into effect on January 1, 2018.

THE NEW LAW – SB 496
SB 496 amends California Civil Code section 2782.8 and states that indemnity agreements must be limited to the negligence, recklessness or willful misconduct of the indemnitee (i.e. no more Type I indemnity with design professionals). The amendment also provides that “in no event shall the cost to defend charged to the design professional exceed the design professional’s proportionate percentage of fault”, with a limited opportunity for reallocation in the event another defendant is judgment proof.
However, the duty to defend still remains and still arises at the time of the tender of the defense (both issues that were unsuccessfully targeted by the design professional lobbyists).

WHAT CAN BE DONE NOW?
Developers and Owners should strongly consider reviewing and revising the indemnity provisions in their consultant contracts to comply with the new legislation before the first of the year. This includes master agreements because project addenda entered into after January 1 are subject to the new law. The statute does not apply to current contracts, so these do not need to be amended.

Gillotti v. Stewart (2017) 2017 WL 1488711 Rejects Liberty Mutual, Holding Once Again that the Right to Repair Act is the Exclusive Remedy for Construction Defect Claims

Richard H. Glucksman, Esq. and Chelsea L. Zwart, Esq. | Construction Defect Journal | June 5, 2017

Background
In Gillotti v. Stewart (April 26, 2017) 2017 WL 1488711, which was ordered to be published on May 18, 2017, the defendant grading subcontractor added soil over tree roots to level the driveway on the plaintiff homeowner’s sloped lot. The homeowner sued the grading subcontractor under the California Right to Repair Act (Civil Code §§ 895, et seq.) claiming that the subcontractor’s work damaged the trees.

After the jury found the subcontractor was not negligent, the trial court entered judgment in favor of the subcontractor. The homeowner appealed, arguing that the trial court improperly construed the Right to Repair Act as barring a common law negligence theory against the subcontractor and erred in failing to follow Liberty Mutual Insurance Co. v. Brookfield Crystal Cove LLC (2013) 219 Cal.App.4th 98. The Third District Court of Appeal disagreed and affirmed the trial court’s judgment in favor of the subcontractor.

Impact
This is the second time the Third District Court of Appeal has held that Liberty Mutual (discussed below) was wrongly decided and held that the Right to Repair Act is the exclusive remedy for construction defect claims. The decision follows its holding in Elliott Homes, Inc. v. Superior Court (Hicks) (2016) 6 Cal.App.5th 333, in which the Court of Appeal held that the Right to Repair Act’s pre-litigation procedures apply when homeowners plead construction defect claims based on common law causes of action, as opposed to violations of the building standards set forth in the Right to Repair Act. Elliott is currently on hold at the California Supreme Court, pending the decision in McMillin Albany, LLC v. Superior Court (2015) 239 Cal.App.4th 1132, wherein Liberty Mutual was rejected for the first time by the Fifth District. CGDRB continues to follow developments regarding the much anticipated McMillin decision closely, as well as all related matters.

Discussion
The Right to Repair Act makes contractors and subcontractors not involved in home sales liable for construction defects only if the homeowner proves they negligently cause the violation in whole or part (Civil Code §§ 911(b), 936). As such, the trial court in Gillotti instructed the jury on negligence with respect to the grading subcontractor. The jury found that while the construction did violate some of the Right to Repair’s building standards alleged by the homeowner, the subcontractor was not negligent in anyway. After the jury verdict, the trial court found in favor of the grading subcontractor.

The homeowner moved for a judgment notwithstanding the verdict or a new trial on the grounds that the trial court improperly barred a common law negligence theory against the grading subcontractor. The trial court denied the motions on the grounds that “[t]he Right to Repair Act specifically provides that no other causes of action are allowed. See Civil Code § 943.” The trial court specifically noted that its decision conflicted with Liberty Mutual, in which the Fourth District Court of Appeal held that the Right to Repair Act does not eliminate common law rights and remedies where actual damage has occurred, stating that Liberty Mutual was wrongly decided and that the Liberty Mutual court was naïve in its assumptions regarding the legislative history of the Right to Repair Act.

In Gillotti, the Third District Court of Appeal stated that the Liberty Mutual court failed to analyze the language of Civil Code § 896, which “clearly and unequivocally expresses the legislative intent that the Act apply to all action seeking recovery of damages arising out of, or related to deficiencies in, residential construction, except as specifically set forth in the Act. The Act does not specifically except actions arising from actual damages. To the contrary, it authorizes recovery of damages, e.g., for ‘the reasonable cost of repairing and rectifying any damages resulting from the failure of the home to meet the standards….’ ([Civil Code] § 944).”

The Court also disagreed with Liberty Mutual’s view that because Civil Code §§ 931 and 943 acknowledge exceptions to the Right to Repair Act’s statutory remedies, the Act does not preclude common law claims for damages due to defects identified in the Act. The Court stated: “Neither list of exceptions, in section 943 or in section 931, includes common law causes of action such as negligence. If the Legislature had intended to make such a wide-ranging exception to the restrictive language of the first sentence of section 943, we would have expected it to do so expressly.”

Additionally, the Court of Appeal rejected the argument that Civil Code § 897 preserves a common law negligence claims for violation of standards not listed in Civil Code § 986. It explained that the section of Civil Code § 897, which provides, “The standards set forth in this chapter are intended to address every function or component of a structure,” expresses the legislative intent that the Right to Repair Act be all-encompassing. Anything inadvertently omitted is actionable under the Act if it causes damage. Any exceptions to the Act are made expressly through Civil Code §§ 931 and 934. The Court concluded in no uncertain terms that the Right to Repair Act precludes common law claims in cases for damages covered by the Act.

The homeowner further argued that she was not precluded from bringing a common law claim because a tree is not a “structure,” and therefore the alleged tree damage did not fall within the realm of the Right to Repair. The Court of Appeal also rejected this argument, holding that while the tree damage itself was not expressly covered, the act of adding soil to make the driveway level (which caused the damage) implicated the standards covered by the Right to Repair Act. The Court explained that since under the Act a “structure” includes “improvement located upon a lot or within a common area” (Civil Code § 895(a)), as the driveway was an improvement upon the lot, the claim was within the purview of the Right to Repair Act. As the soil, a component of the driveway, caused damage (to the trees), it was actionable under the Act.

Prime Contractors Take Note of New California Law Imposing Liability for Subcontractors’ Employees’ Unpaid Wages

Robert A. James, John r. Heisse and Amy Pierce | Gravel2Gavel | November 21, 2017

California is imposing greater responsibilities on prime contractors for nonpayment of wages and benefits by their subcontractors. On October 14, Governor Jerry Brown signed into law Assembly Bill 1701 (Thurmond), adding Section 218.7 to the California Labor Code. Labor Code § 218.7(a)(1) requires prime contractors, on all private construction contracts entered into beginning January 1, 2018, to assume and be liable for any unpaid wages or fringe benefits incurred by subcontractors of any tier. Although this liability extends to unpaid wages, benefit payments, and union contributions (including interest thereon), it does not extend to any penalties or liquidated damages resulting from a subcontractor’s failure to make such payments in the first instance. As a result, going forward in California, prime contractors on private projects will need to be as involved in monitoring their subcontractors’ payroll practices as their public works counterparts.

While the new law also forbids the prime contractor or any other person from evading or negating the protections of the law, it expressly allows contractors of any tier to provide for contractual remedies against downstream subcontractors who fail to timely pay their workers. So while a prime contractor, for example, can require its subcontractors to defend and indemnify it in any suits brought by sub-subcontractors, the prime cannot escape liability to the unpaid claimants themselves for the subcontractor’s non-payment of wages.

How else can prime contractors protect themselves?

Although prime contractors can protect themselves by requiring subcontractors to post payment and performance bonds, this is not a panacea. First, the subcontractors most likely to fall into arrears on their payroll contributions are also those least likely to qualify for bonding.  Second, requiring all subcontractors to provide bonds will increase the prime contractor’s bid price, making it less competitive.

So, how else can a contractor protect itself?  With information about the potential wage claimants, for starters. Labor Code § 218.7(f)(1) requires subcontractor to provide specified payroll records upon the request of the prime and higher-tier subcontractors (i.e., records, which, at a minimum, contain the information set forth in [Labor Code § 226(a)], and which are payroll records as contemplated by [Labor Code § 1174]). These records are subject to the partial redaction of social security numbers, but must contain information sufficient to apprise the requesting contractor of the status of the subcontractor’s payment of wages, fringe or other benefit payments or contributions to a third party on the employee’s behalf. In addition, the law requires subcontractors, upon request, to provide “award information, including the project name, name and address of the subcontractor, contractor with whom the subcontractor is under contract, anticipated start date, duration, and estimated journeymen and apprentice hours, and contact information for its subcontractors on the project.” This information will help the prime contractor track payroll data against projected targets.

In addition, a prime contractor can require subcontractors to provide payroll records before issuing payment intended to compensate potential wage claimants, and verifying that all wages and benefits have been paid by subcontractors of any tier. Prime contractors can withhold payment for a subcontractor’s failure to provide the requested or contractually required information. Although a subcontractor’s failure to provide the required payroll records does not relieve the prime contractor from its liability to the claimants, Labor Code § 218.7(i) allows the prime contractor to withhold as “disputed” all sums owed if a subcontractor does not timely provide the requested payroll information, until that information is provided. This allows a careful prime contractor to avoid the risk of double payment (e.g., being liable to the union for monies already paid to an insolvent subcontractor). However, the prime contractor will need to protect itself against the impact of pay disputes in its relationship with the project owner (e.g., delayed receipt of subcontractors’ lien releases for progress and retention payments).

Further, as mentioned above, prime contractors should include indemnity language in their subcontracts. More specifically, they should require all subcontractors to (a) provide the payroll records for the subcontractor and its sub-tiers on a weekly or monthly basis, (b) include language in their sub-subcontracts requiring the same documents to be given to the subcontractors, and (c) defend any claims for non-payment of wages or benefits, and indemnify and hold them harmless for any liability, including attorneys’ fees and costs, arising out of such claims. Such clauses should extend the defense and indemnity obligations to claims arising out of the alleged non-payment of wages and benefits by the subcontractor’s sub-subcontractors of any tier.

Who may enforce the new law?

The new law authorizes the Labor Commissioner to pursue the prime contractor under Labor Code §§ 98 or 1197.1, or through a civil action, but limits the prime contractor’s liability to the Commissioner to unpaid wages, and any accrued interest.

The law also authorizes third parties owed fringe or other benefit payments or contributions on a wage claimant’s behalf (such as Union Trust Funds) to bring a civil action against a prime contractor to seek payment of such benefits, and provides that the court “shall award a prevailing plaintiff in such an action its reasonable attorney’s fees and costs, including expert witness fees.” Thus, whether a project is private or public, Union Trust Funds will recover their fees and costs of pursuing contractors for the overdue contributions of their signatories.

Industry trade organizations can also enforce the new law. Labor Code § 218.7(b)(3) further authorizes a joint labor-management cooperation committee established pursuant to the federal Labor Management Cooperation Act of 1978, 29 U.S.C. § 175a, to sue prime contractors or subcontractors of any tier for unpaid wages owed to a wage claimant for the performance of private work. Prior to commencing an action, the committee is required to provide the prime contractor and subcontractor that employed the wage claimant with at least 30 days’ notice by first-class mail describing the general nature of the claim. As with actions by Union Trust Funds, the court shall award a prevailing plaintiff—but not a prevailing contractor—its reasonable attorney’s fees and costs, including expert witness fees.

Although no other party may bring an action against a prime contractor to enforce the liability created by Labor Code § 217.7(a), the large number of parties who can bring such actions to enforce the new law drives home the need for prime contractors on private work to become far more involved in their subcontractors’ payroll practices than in the past.

California Court Confirms Broad Coverage Under “Ongoing Operations” Endorsements

Kevin C. Brantley | Payne & Fears | November 15, 2017

A California Court of Appeal has confirmed that additional insured endorsements (“AIE”) granting coverage for liability arising out of a named insured’s “ongoing operations,” and in effect during those “ongoing operations,” do not require that the liability arise while the named insured is performing work.  McMillin Mgmt. Servs., L.P. v. Financial Pacific Ins. Co., Cal. Ct. App., November 14, 2017, Case No. D069814.

In McMillin, a construction defect insurance coverage action, Lexington Insurance Company argued that McMillin had no liability to homeowners until after their homes closed escrow; thus, McMillin did not face liability while the named insureds’ work was ongoing.  The Court of Appeal rejected Lexington’s argument, finding that the “ongoing operations” AIEs provide only that McMillin’s liability “be ‘linked’ through a ‘minimal causal connection or incidental relationship’ with [the named insureds’] ongoing operations.”  (internal citations omitted).  The Court reasoned that Lexington had not established that all of the damage in the underlying action occurred after the named insureds completed their work, thus Lexington had not established as a matter of law that there was no potential for coverage for McMillin under the policies.

While the McMillin Court explicitly limited its ruling to the issue regarding whether the lack of homeowners at the time the named insureds’ ceased work precluded coverage for McMillin under the AIE, this is yet another ruling limiting insurers’ abilities to rely on “ongoing operations” endorsements to preclude coverage when a named insured’s work is complete.

In reaching its decision, the McMillin Court relied on another recent California Court of Appeal decision, Pulte Home Corp. v. American Safety Indem. Co., 14 Cal. App. 5th 1086 (2017).  Pulte held that “ongoing operations” AIEs, in effect at the time that work is completed, provide coverage to additional insureds for any liability arising out of the named insureds’ work performed during the policy periods.  Both McMillin and Pulte show that California courts are willing to extend coverage to additional insureds pursuant to policies issued with “ongoing operations” AIEs where those policies are in effect at the time the named insured performs work.

Although McMillin and Pulte  have seemingly resolved the “ongoing operations” AIE dispute with regard to policies in effect at the time work is performed, the question remains whether California courts will extend this reasoning to provide additional insured coverage under policies issued after a named insureds operations are complete.  Policyholders should be prepared to continue to face disputes over “ongoing operations” AIE in disputes in those situations.