California Court of Appeal Addresses Right to Repair Statute

Blake Robinson | Davis Wright Tremaine

The California Court of Appeal recently issued a decision analyzing the application of the Right to Repair Act1 as applied to a company that provided an allegedly defective product in a residential construction project. In State Farm General Insurance Co. v. Oetiker, Inc., 58 Cal.App.5th 940 (2020), the court concluded that the Act’s statute of repose barred the plaintiff’s negligence claim but not its strict liability and breach of implied warranty claims because those claims were not subject to the Act.

Summary of the Act

The Act, which was enacted in 2002, “codifies a comprehensive reform to construction defect litigation applicable to residential dwellings in California.”2 The Act establishes certain standards a dwelling’s components must satisfy, requires pre-litigation notices of defect with an opportunity to cure, allows for homeowners to file lawsuits even absent property damage or personal injury, and establishes a 10-year statute of repose for latent construction defect claims.

The Facts

The plaintiff sued the manufacturer of a plumbing product used in a new home’s construction. The plaintiff claimed the product caused a leak that damaged the home.

The plaintiff filed claims for negligence, strict liability, and breach of implied warranty. The trial court granted the manufacturer’s motion for summary judgment as to all claims on the ground that they were barred by the Act’s statute of repose.

The Court of Appeal’s Decision

The Court of Appeal agreed that the negligence claim was barred but disagreed as to the strict liability and implied warranty claims because those claims were not subject to the Act. To determine whether a claim is subject to the Act, the court stated it must first look to see whether the alleged defect would violate the building standards in Section 896 of the Act. The court readily concluded that it did, as the alleged defect was to a component of the plumbing system.

Next, the court addressed the plaintiff’s argument that the “manufactured product” exception in Section 896(g)(3)(E) applied and excluded its claims from the Act. That section excludes “any action seeking recovery solely for a defect in a manufactured product located within or adjacent to a structure.” The court rejected the plaintiff’s argument, concluding that the exception only applies if a plaintiff’s claim alleges that a product is defective but that the defect does not violate a Section 896 standard. Because the plaintiff alleged a Section 896 violation, the Act applied.

Finally, the court analyzed to which claims the Act applied. The court held that the Act applies to product manufacturers only to the extent the plaintiff alleges the manufacturer’s negligence or breach of contract caused a violation of the Section 896 standards. Thus, the Act applied to the plaintiff’s negligence claim, and it was barred by the 10-year statute of repose. The Act did not apply to the strict liability and breach of implied warranty claims, however, so they were not barred by the statute of repose.

Takeaways

The Right to Repair Act is very broad and provides exclusive remedies for many actions relating to residential new construction, so anyone involved in residential construction should familiarize themselves with the Act.

However, at least as to claims against product manufacturers (whether by the homeowner or by the contractor that used the part in the construction), the Act covers only negligence and breach of contract claims and does not cover strict liability and implied warranty claims. This can be significant where, like in Oetiker, the latent defects were not discovered until after the 10-year statute of repose in the Act had already passed.


FOOTNOTES

1  Cal. Civ. Code, § 895, et seq.
2  Id. at 944.

Developers/Declarants Are Liable For Implied Warranties To Association For Construction Defects

Daniel Miske | Husch Blackwell

Facts

Plaintiff, Brooktree Village Homeowners Association, Inc. (“Association”), filed suit “on behalf of itself and on behalf of its members” in May 2017 against the second developer, Brooktree Village, LLC (“Developer”).  Developer had acquired the remaining undeveloped portions of the development, other than the common areas.  “A construction company affiliated with Developer, Rivers Development, Inc. (“Builder”), completed construction of the development.  Developer sold all the newly constructed townhomes to individual homeowners.”  The Association sought damages for the cost of repairs.  The claims asserted by the Association were breach of implied warranty, negligence, and negligence per se.

The construction defects alleged were: 1) improper site grading and drainage; and 2) concrete flatwork settling and cracking, heaving and movement of concrete basement slabs.  The Association sought the cost of repairs as damages, including in the common areas which the Developer never owned.

At the conclusion of an eight-day trial, “the jury awarded $1,850,000 in damages against Developer and Builder on Association’s implied warranty and negligence claims.”  The Developer appealed.

Issue

Whether the Association had the right to assert implied warranty claims against a Developer even though the Association had not acquired the common areas from Developer, Developer never owned the common areas, and a majority of Association’s members had not purchased their townhomes from Developer?

Appeals Court

Developer and Builder claimed the trial court erred by allowing the Association to pursue implied warranty claims when … (1) Builder did not sell any of the townhomes at the development, (2) neither Developer nor Builder ever owned the common areas, and (3) fewer than half of Association’s members purchased townhomes from Developer.  The appeals court went through the legal requirements for an implied warranty claim finding that it “arises from the contractual relation between an entity that constructs and sells a newly constructed building and the purchaser … Proof of a defect due to improper construction, design, or preparation is sufficient to establish liability in the builder-vendor under an implied warranty theory.”

The court went on to find that “only persons in privity of contract with a builder or seller have implied warranties, the class of purchasers entitled to the protection of an implied warranty is limited to first purchasers. Subsequent purchasers are not in privity with the builder or seller and, for this reason, cannot assert implied warranty claims.”  This would have seemed to have excluded the Association from filing claims, however, the court then went on to find that “the twenty-three direct purchasers bought their townhomes, which Builder constructed, directly from Developer.  Moreover, both Developer and Builder are parties to the direct purchasers’ purchase agreements.  The direct purchasers are thus in privity with, and obtained implied warranties of workmanship and habitability from, Developer and Builder.  Although Developer argued that at most it should then be liable for a percentage of the damages, the court held that “it would be unreasonable to discount the damages awardable for the construction defects in the common areas by the percentage of townhomes not owned by direct purchasers.  Such an apportionment would mean that Association could only recover damages for remediation of twenty-three fifty-seconds (approximately forty-four percent) of the construction defects in the common areas.  Repair of less than half of the construction defects in the common areas would not provide the direct purchasers … with a meaningful remedy and would allow Developer and Builder to shirk their responsibility for remediating all the construction defects in the common areas for which they are responsible.  For these reasons, a remedy resulting in repair of only a fraction of the defects in the common areas would be inadequate.…Thus, we hold that … [the] Association may recover from a successor developer or builder the entire cost of remediating construction defects in common areas where (1) the defects are attributable to the successor developer or builder; (2) two or more of the association’s members purchased their homes directly from the successor developer or builder; and (3) those members have rights to use the common areas — even if the successor developer or builder never owned the common areas.”

LESSONS:
  1. Successor Developers and builders of defective buildings and units within an association put themselves at risk for the repair of all defective construction issues.
  2. Successor Developers who accept the benefits of being a Developer also inherit the risks and liabilities left by the initial developer.

Brooktree Village Homeowners Association, Inc. v. Brooktree Village, LLC, No. 19CA1635 (Colo. Ct. App. Nov. 19, 2020)

Illinois Court Determines Duty to Defend Construction Defect Claims

Tred R. Eyerly | Insurance Law Hawaii

    Given the underlying allegations of damage to personal property, the court determined the insurer had a duty to defend. Certain Underwriters at Lloyd’s London v. Metropolitan Builders, Inc., 2019 Ill. App. LEXIS 979 (Ill. Ct. App. Dec. 18, 2019).

    Metropolitan was hired as the general contractor for construction, renovation and demolition at contiguous properties – the 1907 Property, 1909 Property, and 1911 Property. During construction activities, the structures on the 1907 Property and 1909 Property collapsed. The existing structures on the properties were later deemed unsafe and were demolished by the city of Chicago. 

    AIG insured the owner of the buildings and paid over $1.8 million for repairs and associated expenses arising from the collapse. AIG then invoked its rights of subrogation against Metropolitan by filing suit. Metropolitan tendered the suit to its insurer, Lloyd’s, who denied coverage and filed for a declaratory judgment. The trial court found the underlying complaint alleged property damage, but not an occurrence. Summary judgment was awarded to Lloyd’s. 

    The appellate court agreed with Lloyd’s that the damage to the real property was not covered by the CGL policy. Metropolitan was the general contractor with overall responsibility for the renovation and conversion of the existing structures into single-family housing. Metropolitan’s allegedly faulty workmanship led to their collapse and ultimate demolition. Thus, the collapse of the structures was not an “accident” or “occurrence”, but was the natural and ordinary result of faulty workmanship on the contractor’s work product. 

    Metropolitan argued that the underlying complaint alleged damage to parts of the property on which Metropolitan was not working. This, however, did not change the court’s conclusion. The properties were under the responsibility of Metropolitan, as general contractor, to convert the structures into single-family homes. Even if the damage extended to parts of the project on which Metropolitan was not currently working, it was still part of Metropolitan’s scope and responsibility, and thus was part of the project itself. 

    The alleged property damage to personal property deserved a different analysis, however. This was damage to something other than the project itself. The underlying complaint gave no description of what “personal property” of the owner was damaged. But it was not clear from the underlying complaint that AIG did not cover claims of damage to the owner’s person property. The admittedly vague references to damage to the owner’s “personal property” were enough to allege “property damage” caused by an occurrence. The allegations were enough to trigger the insurer’s duty to defend. 

Does the Florida Legislature Finally Have a Fix to Construction Defect Law?

Jeffrey S. Wertman | Berger Singerman

Chapter 558 of the Florida Statutes contains a pre-suit notice and opportunity-to-repair process for construction defect claims. The statute was intended to be a more efficient, alternative dispute resolution mechanism involving a property owner providing written notice of claim to the responsible contractor, subcontractor, supplier, or design professional as a precondition for a construction defect lawsuit. Despite numerous amendments to Chapter 558 over the years, the prevailing view is that the statute is ineffective and subject to abuse. Two related bills pending in the Florida Legislature (SB 270 and HB 21) seek to substantially revise the mandatory procedures under Chapter 558.

The legislation seeks to amend three areas of the dispute resolution process: 

  1. The preliminary notice of claim and corresponding requirements allege building defects.
  2. The pre-litigation requirements regarding building code violations.
  3. The notice a prevailing claimant must provide to someone who possesses a security interest in a property when a construction defect settlement or judgment is obtained.

From the perspective of the contractor, subcontractor, supplier, or design professional, the legislation has the potential to reduce fraudulent construction defect claims and prevent costly litigation if the builder agrees to repair the defects. However, the legislation may also increase costs to property owners who cannot bring civil actions and recover damages for Florida Building Code violations that do not meet the threshold of materiality and have to ultimately pay to repair damages themselves. The most significant proposed changes are discussed below.

New Preliminary Requirement to Exhaust Warranty Claims

The legislation requires a property owner to exhaust any warranty claims before serving a notice of claim by first submitting a claim to the warranty provider to determine whether the alleged defect might be covered under a warranty provision. If the warranty provider either denies the claim or does not offer a remedy satisfactory to the claimant within the time limits in the warranty, the claimant may proceed with a notice of claim.

Changes to the Notice of Claim

The legislation will change the content of a notice of claim and require a claimant to:

  1. Describe in specific, not reasonable, detail each alleged construction defect.
  2. Include at least one photograph of the alleged defect or evidence of the defect if it is visible, any repair estimates or expert reports relating to the alleged defect, and a description of the damage or loss that results from the alleged defect if that information is known.
  3. Identify the specific location of each alleged construction defect.
  4. Affirms that he or she has personal knowledge of the alleged construction defect.
  5. Acknowledge that a false statement is subject to penalties of perjury.

Changes to Claims for Violations of the Florida Building Code

Chapter 553, Florida Statutes, provides a civil cause of action for any person or party damaged  by violating the Florida Building Code. The legislation amends the statutory cause of action for building code violations to limit lawsuits to those alleging a “material” violation of the code. A material violation is defined as a violation that exists within a completed building, structure, or facility which may reasonably result, or has resulted, in physical harm to someone or significant damage to the performance of a building or its systems.

Notice to Mortgagee of Assignee

The legislation creates a new section in Chapter 558 that provides if a property owner prevails in a construction defect claim and receives a monetary settlement or judgment and a mortgagee or assignee has a security interest in the property, within 90 days, the owner must notify the holder of the security of:

  1. The specific nature of the defect.
  2. The outcome of the claim, specifying any monetary settlement reached or any judgment awarded.
  3. Any repairs made or plans to repair the property.

Conclusion

The pending legislation to repair Florida’s broken construction defect law is commendable. Still,  it does not address the exploding cost of construction defect litigation, the pre-suit obstacles and impractical hurdles for owners with genuine defect claims, and litigation of negligence and breach of contract lawsuits involving minor defects. We will closely monitor SB 270 and HB 21 as they make their way through the Florida Legislature.

Texas Legislation Filed to Relieve Contractors of Liability Resulting From Design Defects

Brian Comarda andAllison K. Wells | Gordon Rees Scully Mansukhani

Currently, Texas is one of only two states where a contractor may be held liable for defects related to construction designs, plans, or specifications – even if provided by the hiring party (i.e., the owner, owner’s agent or design professional). However, new legislation in Texas (SB 219 and HB 1418) has been filed to square Texas in line with other states, to grant contractors protection, and to reverse, in part, the 2012 Texas Supreme Court holding in El Paso Field Services, L.P. v. MasTec North America,[1] which led to this current situation.

The Texas Supreme Court, in MasTec, held that parties enter into contracts freely and voluntarily, and risk of any construction defect should be allocated pursuant to the agreement between the parties. The Court further held that if it chose to become involved in the dispute between the contractor and hiring party, it would essentially render the applicable risk allocation agreement pointless, and essentially prevent sophisticated parties from apportioning risk as they saw fit. As a result of this holding, contractors have been held responsible for the defects that resulted from work performed in accordance with designs, plans, and specifications provided by the hiring party.

This new legislation would effectively overrule the Court’s holding in MasTec. More specifically, SB 219 and HB 1418, would relieve a contractor of responsibility for the consequences of defects in plans, specifications, or other design or bid documents provided to the contractor by the person with whom the contractor entered into the contract. The bill specifies further that the contractor does not warranty the accuracy, sufficiency, or suitability of such plans. The bill requires the contractor to disclose in writing the existence of any known defect discovered by the contractor before or during the construction or lose the liability protection for the consequence of known, undisclosed defects. This protection cannot be waived by contract. It should be noted that similar legislation failed to pass in 2017 and 2019 over opposition from owners, designers, and architects.