Construction Defects/Litigation

Successive home owners have standing to sue for construction defects that existed prior to purchase.

In Siegel vs. Anderson Homes, Inc. (2004) 118 Cal.App.4th 994, 13 Cal.Rptr.3d 462, plaintiff had purchased a home unaware of several preexisting defects. The seller was unaware of the defects when he sold the home to plaintiff. The defendant builder contended that plaintiff lacked standing to sue because damage had occurred as a result of the defects before plaintiff purchased the property and therefore the cause of action belonged to the original owner. The Court of Appeal noted generally that the rule is that a claim for construction defect accrues when the defect starts to cause property damage and belongs to whomever owns the property at that time. However, the act of selling the property would then limit the liability of the builder. The general rule also fails to take into account discovery of the damage. Here, plaintiff was the first owner to discover the defect. The seller did not know about the damage and thus suffered no economic harm. Under these circumstances it would be manifestly unjust to deprive plaintiff of a cause of action.

Manufacturers can be held strictly liable for supplying component parts of mass-produced homes.

In Jimenez v. Superior Court (2002) 29 Cal.4th 473, 127 Cal.Rptr.2d. 614 the defendant manufacturers of windows successfully obtained a summary adjudication from the trial court that plaintiff could not proceed against them on a products liability theory. The manufacturers argued that the windows were shipped in parts, assembled by third parties and then installed by others. The defendants also contended that the "product" in this case was the home and pursuant to the "economic loss rule" the plaintiff could not recover for damage to the home because of a defect in the home.

The California Supreme Court reversed, holding that the homeowners could sue the defendant manufacturers of the windows under the doctrine of strict liability. The "economic loss rule" allows a plaintiff to recover in strict products liability in tort when a product defect causes damage to property other than the product itself. In distinguishing the mass-produced homes from the windows, the Court concluded that the manufacturer of defective windows installed in a mass-produced home may be held strictly liable in tort for damage that the windows' defects cause to other parts of the home.

The ten 10-year statute of limitations may be subject to equitable tolling during periods of repair.

In the case of Jackson Plaza Homeowners Association v. W. Wong Const. (2002) 98 Cal.App.4th 1088 the First District Appellate Court determined that the 10-year statute of limitations set forth in C.C.P. 337.15 was subject to tolling despite language in the statute which indicates that no action may be brought more than 10 years after substantial completion of the development. The defendants here obtained summary judgment based on the fact that the action was brought more than 10 years after substantial completion of the project. The Appellate Court reversed the summary judgment finding that the 10-year period would be extended during a period of repairs.

The Appellate Court also noted that this issue is currently before the California Supreme Court in the case of Lantcy v. Sentex Homes (2001) previously published at 89 Cal.App.4th 1059, 107 Cal.Rptr.2d. 795.

Federal Arbitration Act found to preempt state law allowing lawsuits for design and construction defects.

In Basura v. U.S. Home Corporation (2002) 98 Cal.App.4th 1205, 120 Cal.Rptr.2d 328 the homeowners sued a builder alleging design and construction defects in their homes. The builder petitioned to compel arbitration and appealed after the trial court denied its petition.

C.C.P. 1298.7 permits a purchaser of a home to sue for construction defects despite having signed an agreement containing an arbitration clause. Here, the builder in some of the sales agreements initialed the arbitration clause while the buyers had initialed the clause in all of the contracts.

Despite the failure to have initialed all of the sales agreements, the Court of Appeal found that the builder could introduce evidence as to its intent to be bound by the clause. More importantly, the Court of Appeal determined that C.C.P. 1298.7 is preempted by the Federal Arbitration Act (FAA) [9 U.S.C. 2], which provides for the enforcement of arbitration clauses in any maritime transaction or in any contract involving "commerce". After reviewing the facts in the case the Court concluded that the agreements involved interstate commerce. Therefore, the plaintiffs could not invoke C.C.P. 1298.7 to avoid the arbitration agreements.

The Court found the indicia of interstate commerce to be: (1) the receipt and use of building materials and equipment which were manufactured out-of-state; (2) the developer contracted with out-of-state design professionals and subcontractors; (3) the builder communicated by interstate mail and telephone with out-of-state manufacturers, etc.; and (4) the builder engaged in marketing and advertising activities throughout the country using interstate media.

Neither the homeowner's association nor the individual homeowners may recover from those involved in the design and construction of their common development homes for construction defects which have not caused property damage.

In a decision that has forever transformed construction defect litigation in California, the State Supreme Court in Aas v. Superior Court (2000) 24 Cal.4th 627, 101 Cal.Rptr.2d 718, upheld the decision of the District Court of Appeals and ruled that neither the homeowner's association nor the individual homeowners who had brought negligence and other claims against the developer, contractor and subcontractors that built their common development single family homes, could recover in negligence or strict liability a money judgment representing either the cost of repair or the diminution in value attributable to construction defects which had not yet caused property damage.

The landmark opinion specifically disapproved and overruled the First District Court of Appeal's decision in Huang v. Garner (1984) 157 Cal.App.3d 404, 203 Cal.Rptr. 800. The court noted that tort claims do not support the recovery of damages representing the lost benefit of a bargain, such as the cost of repairing a defective product, or compensation for its diminished value. A breach of duty causing only speculative harm or the threat of future harm does not normally suffice to create a cause of action.

Attorneys and organizations aligned in favor of the claimants constituted a veritable "Who's Who" of the plaintiff's bar in California.

Insurers have long insulated themselves from exposure for such "damages" in construction defect cases by excluding coverage for the work product of the contractors they insure. However, the contractors themselves have remained exposed to massive adverse verdicts. One can only ponder whether this favorable decision will encourage CGL carriers to once again increase the amount of policies written to construction contractors in California.

Successor liability did not attach to the purchaser of a geotechnical engineering firm for an allegedly faulty soils report.

In Monarch Bay II v. Professional Service Industries, Inc. (1999) 75 Cal.App.4th 1213, 89 Cal.Rptr.2d 778, an apartment building owner sued the corporate successor to the geotechnical engineering firm that had provided the soils report for a building severely damaged in a landslide. The Appellate Court held that the "product line exception" to the rule insulating a successor corporation from the debt and liabilities of its predecessor (see, Ray v. Alad Corp. (1977) 19 Cal.3d 22, 136 Cal.Rptr. 574) is limited to strict liability for defective products.

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