The unanimous decision by the California Supreme Court in the highly anticipated McMillin Albany, LLC v. Superior Court, No.5229762 (1/18/2018), case resolved a previous split in California law as to the boundaries of California’s Right to Repair Act, Civil Code §§ 895, et seq. In its decision, the Court settled two issues: (1) whether SB800 precludes a homeowner from pleading common law causes of action for defective conditions that resulted in physical damage to a home; and (2) whether a homeowner’s failure to comply with SB800’s pre-litigation procedures mandates a stay of proceedings where the homeowner commences litigation by asserting common law causes of action for construction defects. The California Supreme Court answered “yes” to both, giving builders and developers a decisive win. The Court held that SB800 cuts off a homeowner’s right to creatively plead around the statute by asserting common law causes of action against a builder or developer relating to alleged construction defects, and requires that homeowners participate in the SB800 pre-litigation procedures.
The homeowner Plaintiffs purchased 37 new single-family homes built by developer and general contractor McMillin Albany LLC (“McMillin”) after January 2003. In 2013, the homeowners sued McMillin, alleging the homes were defective in nearly every aspect of their construction. The operative first amended complaint filed by the homeowners included common law claims for negligence, strict product liability, breach of contract, breach of warranty, and a statutory claim for violation of the construction standards set forth in SB800. The complaint alleged the defects caused property damage to the homes and economic loss due to the cost of repair and the reduction in property values. McMillin sought a stipulation from the homeowners to stay the litigation so the parties could proceed through the informal pre-litigation process contemplated by SB800.
The homeowners elected not to stipulate to a stay and instead dismissed their SB800 statutory claim. McMillin then moved for a court-ordered stay, which the trial court denied. In doing so, the trial court concluded it was bound to follow Liberty Mutual Ins. Brookfield Crystal Cove LLC, 219 Cal.App.4th 98 (2013), which held that SB800 was adopted to provide a remedy for construction defects causing only economic loss and did not alter pre-existing common law remedies in cases resulting in actual property damage or personal injuries. However, the trial court certified the issue as one worthy of immediate review. McMillin sought writ relief.
The Court of Appeal granted the petition and issued the writ, disagreeing with Liberty Mutual.
In doing so, the Court of Appeal held the Act’s pre-litigation resolution process applied even though the homeowners dismissed their SB800 statutory claim. The Court of Appeal concluded that McMillin was entitled to a stay pending completion of the pre-litigation process.
- The Supreme Court of California granted review and affirmed the judgment of the Court of Appeal in a unanimous opinion authored by Justice Liu.
- The issue before the Court was whether a common law action alleging construction defects resulting in both economic loss and property damage is subject to SB800’s pre-litigation notice and cure procedures.
- The Court’s analysis relied heavily on statutory history and construction.
- Superior Court, 24 Cal.4th 627, 632 (2000), the California Supreme Court held that the economic loss rule bars homeowners from recovering damages where there is no showing of actual property damage.
- In doing so, the Court emphasized that the Legislature was free to alter the limits on recovery and to add any homeowner protections it deemed appropriate.
- Two years later, the California Legislature responded by enacting comprehensive construction defect litigation reform, which was codified at Civil Code §§ 895-945.5 (commonly known as the Right to Repair Act or SB800).
- In addition to setting forth standards for construction of a dwelling and providing homeowners with a right to sue for deficiencies even in the absence of property damage or personal injury, SB800 also established a pre-litigation dispute resolution process, whereby builders must be given notice of alleged construction defects and an opportunity to cure the defects prior to a homeowner filing a lawsuit.
- The California Supreme Court observed that the analysis turned on the extent to which the Legislature intended SB800 to alter the common law – whether SB800 was designed only to abrogate Aas by supplementing common law remedies with a statutory claim for economic loss or whether it was to go further and supplant the common law with new rules governing the method of recovery in actions alleging property damage.
The Court focused on the actual text of SB800 and the legislative history in making its ruling.
Specifically, the Court noted that Civil Code § 896 expressly states that it applies to “any action” seeking damages for a construction defect, not just any action under the title. The Court also noted that the express language of SB800 states that the cause of action brought by a claimant shall be limited to violation of the standards set forth in SB800 except as explicitly set forth in SB800.
The Court then points out that negligence and strict liability claims for property damage, unlike personal injury claims, are not among those specifically excepted from SB800. The Court found further support for SB800’s comprehensive nature in the Legislative history, which consistently described the Act as “groundbreaking reform” and a “major change” in construction defect litigation, designed to “significantly reduce the cost of construction defect litigation and make housing more affordable.” Finally, the Court noted that if it were to read SB800 to permit homeowners to continue to sue as before at common law, without abiding by the procedural requirements of SB800, it would thwart the mandatory pre-litigation process and right to repair.
- The California Supreme Court concluded that the Legislature intended SB800 to: (1) displace and supplant common law as to construction defects that cause property damage; (2) supersede the holding in Aas by providing a statutory basis for recovery for construction defects in the absence of property damage; and (3) preserve the status quo for common law claims for personal injuries arising from construction defects.
- Therefore, SB800, and its appurtenant provisions, constitutes the exclusive remedy for economic losses and property damage arising from construction defects affecting residential construction projects and homeowners are required to initiate and complete the pre-litigation procedures provided in SB800 prior to commencing litigation.
- Learning Points: The California Supreme Court held that SB800 is the exclusive remedy not just for economic loss, but also for property damage arising from construction defects.
- This decision limits the causes of action homeowners can bring against builders and developers.
- No longer can homeowners bring common law causes of action for negligence or strict liability against a builder alleging construction defects on new houses sold after 2003.
- All claims seeking recovery for construction defect damages are subject to SB800’s pre-litigation procedures regardless of how they are plead in the complaint and homeowners must comply with the pre-litigation procedures before filing suit.
- The McMillin Albany decision will have a significant impact on construction litigation by providing trial courts with the authority to ensure compliance with SB800, including strict compliance with the limitations periods set forth therein.
- Builders and developers will also be able to use SB800 to assert that homeowners’ claims are not actionable if the allegedly defective condition was unilaterally repaired or changed by a homeowner or where the homeowner failed to fully comply with SB800’s pre-litigation procedures.
This is significant in that builders and developers can apply it as a defense to subrogation cases involving claims by homeowners’ insurance carriers that have repaired property damage claims submitted by the homeowner without complying with the pre-litigation procedures of SB800. In sum, the McMillin Albany decision is a win for builders and developers and will significantly impact the handling of construction defect claims and litigation for years to come.
This article first appeared in the PB June 2003 issue of Pro Builder. SB800, effective Jan. 1, 2003, establishes a mandatory process prior to the filing of certain types of construction defect suits.
The bill applies whenever there are defects alleged by a homeowner in new residential construction, but does not apply to condominium conversions. The bill provides that any construction defect action against a builder, subcontractor, product manufacturer or design professional will be governed by the standards set forth in SB800.
(Note that the existing Certificate of Merit requirements for design professionals are not abrogated by the bill and apply in the event a lawsuit is filed after completion of the SB800 process.).
The bill attempts to specifically define what constitutes a "defect" for virtually all aspects of a residential building and its appurtenant systems.
- Most of the definitions for defective construction concentrate on water intrusion issues (requiring that building systems such as windows, doors, roofs and plumbing "shall not leak") and also provide that the defects "shall not materially impair the use of the structure by its inhabitants."
- The statutory process outlined by must be exhausted prior to the filing of a lawsuit.
- A Homeowner initiates the process by first submitting a written claim to Builder's designated agent.
- If no offer to repair the alleged defects is made by the Builder, or if the Builder otherwise fails to adhere strictly to the process, the Homeowner may proceed with the filing of a lawsuit.
- As illustrated in the accompanying time-line (as well as in Attachment #2) the following hypothetical schedule assumes that a Homeowner has notified the Builder of alleged defects on January 3, 2003.
- It is also assumed (for purposes of simplicity and to illustrate the maximum duration of the statutory pre-litigation process), that each event takes place on the last day of the period allowed under the bill.
- Homeowner submits claim to Builder on January 3, 2003. Builder must "acknowledge" claim by January 17, 2003.
- If Builder sends Homeowner a written acknowledgment on January 17, it then has until January 31, 2003 to complete its preliminary inspection.
- Builder has until February 3, 2003 to request a second inspection.
- This second inspection must be completed within 40 days, i.e., by March 15, 2003. Builder then has until April 14, 2003 to make its offer to repair some, all or none of the alleged defects and to suggest a contractor to perform the work.
- Homeowner may consider Builder's offer until May 14, 2003.
- Should Homeowner object to the repair contractor designated by Builder, Builder has until June 18, 2003 to provide Homeowner with a list of three alternative contractors.
- [Builder may also make a final, "non-invasive" inspection, ostensibly to facilitate the involvement of the repair contractor, by June 3, 2003.].
- Assuming Homeowner agrees to a repair contractor on June 18, 2003 repairs must commence by July 2, 2003.
- "Every effort" must be made to complete repairs by October 30, 2003. Total duration of illustrated process: 300 days. If a Homeowner does not file a written claim with Builder in advance of filing suit, SB800 provides for a statutory bar to the action and a court would have no authority to hear the case.
The case would be dismissed without prejudice, meaning it could be re-initiated at a later time, after proper exhaustion of the SB800 process. If the Builder has not strictly adhered to the process, or if the repairs are not suit or initiate other legal proceedings (i.e., arbitration). The Homeowner need not follow the process for matters not covered by the legislation (i.e., alleged defects in products, such as washers/dryers, etc., which have been manufactured completely offsite).
All defects discovered after the process is completed would require the initiation of a new SB800 procedure and the Builder is not responsible for repairs of defects which it had no notice of or opportunity to repair. If the statute of limitations has already run when the defect is discovered, the process cannot be initiated and no lawsuit may be brought. If the process is initiated prior to the running of the statute, the statute will be extended to allow Homeowner and Builder to complete the process (see below).
If an action to enforce the bill's standards is initiated in court by a Homeowner, the fact that a repair effort was made may be introduced to the trier of fact, and evidence of the parties' conduct during the repair process may be introduced during a subsequent enforcement action.
Repair efforts by a Builder are not considered confidential and privileged settlement communications and may not be withheld from evidence on this basis. Civil Code Section 1375 (commonly referred to as the "Calderon" bill) sets up an analogous pre-litigation process for common interest development projects such as condominiums.
The pre-trial process prescribed by Section 1375 is mandatory and involves a minimum 6-month period of information exchange and alternative dispute resolution ("ADR") sessions between the prospective litigants.
- SB800 creates another, entirely separate, pre-litigation process that lasts for at least 101 days.
Because it is entirely foreseeable that certain residential projects will fall within the ambit of both SB800 and Calderon, SB800 contains an express provision excusing compliance with Section 1375's provisions where the requirements of the two statutes are "substantially similar."
- Liability would arise in spite of the Supreme Court's decision in Aas v.
Superior Court (2000) 24 Cal.4th 627 (which held that only those construction defects causing property damage are actionable under negligence and strict liability theories).
- Under SB800, it is not required that the "construction defects" enumerated in the legislation cause property damage, thereby amounting to a legislative veto of the Aas decision.
- Existing law provides that an action based on defects not apparent from a reasonable inspection ("latent" defects) must be brought no later than 10 years after "substantial completion" of the development or improvement.
- Although SB800 maintains the 10-year statute of limitations for actions falling within the ambit of the bill, there are shorter time frames prescribed for certain types of defects (i.e., 1 year for noise transmission and irrigation system claims, 2 years for defective wood posts, 4 years for defective steel fences, 5 years for painting claims, etc.).
Further, if the 10-year statute of limitations expires during the SB800 process, it will be extended for 100 days following completion of the repairs.
- The 10-year statute of limitations is also extended in the event a mediation occurs after completion of the repairs.
- SB800 provides immunity from liability to third-party inspectors who provide, under contract with an applicant for a residential building permit, an "independent quality review" of residential plans and specifications.
- This immunity would extend to any potential claimant except the person who retains the inspector, meaning only the person paying the inspector for his/her services could sue for negligence.
- A third-party inspector will be required to meet certain minimum experience requirements to qualify for the immunity, and will also be required to maintain a minimum of $2 million in liability insurance coverage.
A Builder is not released after completing repairs.
- The bill presumes that a Builder warrants implicitly, in addition to any express warranties on the original construction, that the repairs will be reasonably adequate to restore the structure to the condition intended by its designers, and that the home will be reasonably habitable by its occupants.
Specifically, a Builder may not obtain a release or waiver of any kind in exchange for the repair work mandated by the bill.
- If the repairs fail before the statute of limitations runs, a Homeowner may still bring a lawsuit against the Builder.
However, nothing in the bill prohibits a Builder from obtaining an enforceable release in exchange for a cash payment. It requires Builders to provide homeowners with a minimum one-year express warranty covering the "fit and finish" of cabinets, mirrors, flooring, interior and exterior walls, countertops, paint finishes and trim.
- The bill also permits builders to exceed the warranty standards of the bill and provide homeowners with other more extensive warranties.
- If a Builder has complied with the bill's requirements and has completed a repair prior to the filing of an action by a Homeowner (and if there has been no previous mediation between the parties), the Homeowner is then required to request mediation in writing.
- In the event that a mediation is undertaken at this point, any applicable statutes of limitation will be tolled.
- SB800 also allows a Builder to pursue ADR as an alternative to its provisions. However, a Builder may not pursue ADR as an alternative to SB800 and then also insist on compliance with the SB800 process after completion of ADR.
SB800 provides that if the Builder intends to hold a subcontractor, design professional, or material supplier, including an insurance carrier, warranty company, or service company, responsible for its contribution for any construction defects, the builder shall provide notice to that person or entity sufficiently in advance to allow them to inspect the alleged defects and to participate in the repair process.
Despite its lofty intentions, SB800 will probably not result in an appreciable decrease in the amount of construction litigation in California, and may actually cause additional litigation over its meaning and intent.
- Perhaps more importantly, a Builder who performs repairs pursuant to the SB800 process may not obtain a legally binding release, thus raising a potential disincentive to perform such work.
- Serious insurance coverage questions may also arise with respect to any voluntary repair work performed by a Builder pursuant to SB800, and for construction defects which do not result in property damage.
- Further, depending upon the complexity of the issues involved, the time deadlines set forth in SB800 may not prove workable or realistic under the circumstances. In sum, it will probably be many years before the final chapter on SB800's effectiveness in actually decreasing construction defect litigation will be written. However, given the far-reaching nature of the legislation and its attendant ambiguities and complexities, it is probably a safe bet that residential construction defect claims will continue to be a hotly litigated area in the foreseeablefuture. For more information regarding SB800 and its implications on construction defect litigation, please contact:.
- And the trauma is equally upsetting to both the builder and the user. Construction projects, by their nature, often have setbacks, delays, and alterations in plans and specifications and, as one veteran builder once told the author, he had never seen either a battle or a construction project that went strictly according to plan.
- Change orders are inevitable in even the simplest project. But construction defects go beyond the issue of alterations in plans and specifications or change orders. Defects constitute errors in construction, design, or specification that must be corrected, are often hidden for years (either intentionally or not) and significantly lower the value or utility of the construction.
- California, home of so much construction over the years with much of the construction in earthquake or flood zones, has myriad statutes and much case law addressing the issue of construction defect and providing remedies for owners and defenses for builders, architects, engineers and developers.
- This article shall outline the basic law that applies to claims for construction defects in California. This is a constantly changing area of the law and the reader is advised to obtain up to date legal advice before taking any action. The Basic Law: . There are numerous legal theories that arise when a party claims defect in construction, each giving rise to causes of action that may be brought singly or in combination by the injured party. Note we have articles on this site addressing each of the types of actions below. Causes of Action:. Breach of contract. Breach of implied or express warranties of suitability of construction. Strict Liability. Statutory Violations These causes of action may be applicable depending on the facts of a case.
- This is even more extreme when the property subject to alleged construction defect is residential construction, as more fully discussed below. There are also provisions that require the owner in certain types of construction to offer to allow corrective work by the builder, more fully discussed below. Negligence is the breach of a duty that results in or causes damage as more fully discussed in the Tort article on this website. In the field of construction, it is the duty of the builder and the professionals who constructed a building to exercise the “standard of care of reasonable tradesmen conducting the same type of work.” Professional malpractice can be asserted against the architect, engineer or other design professional if they were negligent in the performance of their duties.
- If a breach of this standard of care occurs, resulting in a construction defect which causes damage, the property owner may file an action against the builder and/or the professionals and note that these causes of action are available to the property owner whether the property owner directly purchased the property from the builder or from a third party such as a prior owner or the developer.
- Breach of Express Warranty:. In construction defect claims, the breach of contract refers to the failure of the property owner to receive the benefit of a reasonably defect-free building. But a breach of express warranty requires that the property owner actually received a specific warranty from the builder or has entered into a contract with the builder that expressly warranted the condition or quality of the property.
- The builder “warrants” the quality or condition of the property and construction in the same manner that any seller warrants the quality of the item sold or constructed. The warranty is usually in writing and specifies in the contract what tasks must be performed and what quality must be achieved.
- A warranty is, essentially, a separate contract to perform according to certain levels of quality and a failure to do so is similar to a breach of contract but is limited to the sole issue of the warranty expressly granted in the warranty commitment.
Note that the statute of limitations for breach of a written contract is four years from breach in California, but that period may be extended if the injured party did not know of the breach and could not be reasonably expected to know of the breach.
The same applies to warranty which often have specific periods that the warranty extends…which may be ignored in some circumstances if the defect was hidden. Breach of Implied Warranty:.
- In addition to the possible breach of an express warranty, California imposes an implied warranty that work performed on new construction is performed in a “reasonable workmanlike manner” according to current construction practices and the regulations put forth by governmental statutes. And note that proof of a defect due to improper construction, design, or preparation is sufficient to establish liability of the builder or developer and breach of this implied warranty.
- Strict Liability (Residential Property). Strict liability is a legal doctrine that imposes liability whether or not the defendant was negligent or breached an agreement, indeed, often without the defendant even knowing a defect or error exists. It normally only applies under statute or in remarkable situations. And it does exist in California for one type of construction defect: defects in residential property.
- Statute of Limitations:. A statute of limitations is the time during which a suit may be brought. Even if the builder supplied a warranty for one or two years, it will likely not affect the rights to a remedy for construction defects since California law determines the length of time a lawsuit may be filed.
The time period to bring a construction defect action against the builder is based on (1) the time period after the substantial completion of the property, (2) the nature of the defect, and (3) when the defect was discovered by the property owner.
Hidden defects that can not be reasonably expected to be discovered by the owner have quite long statute of limitations, often exceeding ten years under particular circumstances. These statute of limitations laws can be very difficult to understand and interpret, and such concepts as concealed defects can create longer statute of limitations which, however, are still normally limited to ten years in most cases even if not discovered until later.
Prompt discussion with an expert in the field is suggested.