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WSHB Case Update – Matter of First Impression for California Construction Cases: Appellate Court Upholds Contract Clause Shortening Statute of Limitations for Construction Claims

June 14, 2013

Brisbane Lodging, L.P. v. Webcor Builders, Inc.
(Cal. Ct. App., June 3, 2013, No. A132555) 2013 WL 2404154

HOLDING

California Court of Appeal upheld and enforced standard AIA contract language effectively shortening to four years the ten year statute of limitations for bringing claims for latent construction defects.  The Court held that a waiver of the delayed discovery rule and shortening of the statute of limitation is permitted where there are two sophisticated parties in a commercial context that occupied equal bargaining positions.

FACTS

Brisbane Lodging, L.P. and Webcor Builders, Inc. entered into a contract for the construction of a commercial hotel. Eight years after substantial completion of the project, the owner (Brisbane) discovered a latent plumbing defect and sued the general contractor (Webcor) for breach of contract, negligence, and breach of implied and express warranties.  Brisbane had, through its plumbing subcontractor, improperly substituted ABS pipe for cast iron pipe, resulting in plumbing pipe leaks. 

Under California law, a claim for defective construction must be brought within four years after substantial completion if the deficiency is patent (apparent by reasonable inspection).  If the deficiency is latent (not discoverable by reasonable inspection), the “delayed discovery rule” extends the accrual of a claim until the defects were, or could have been, discovered, capping it at ten years after substantial completion.

Webcor moved for summary judgment arguing that section 13.7.1.1 of the AIA contract signed by both parties provided that all causes of action related to the contract work would accrue from the date of substantial completion of the project instead of the date the owner discovered the defective work. Specifically, the relevant language in the contract stated as follows:

 “As to acts or failures to act occurring prior to the relevant date of Substantial Completion, any applicable statute of limitations shall commence to run and any alleged cause of action shall be deemed to have accrued in any and all events not later than such date of Substantial Completion. . .”

In effect, the above clause in the contract required all claims to be brought within four years after substantial completion, abrogating the “delayed discovery rule” and statutory ten year limit claim on latent defects.  In other words, the statute of limitations began to run automatically from the date of substantial completion instead of when the owner first discovered the defective work.  Because Brisbane’s lawsuit was brought more than four years after the agreed upon accrual date, the trial court granted summary judgment in favor of Webcor and Brisbane appealed.

On appeal, Brisbane argued that the clause was too vague to result in a waiver of the ten year statute of limitations, it had never agreed to waive its right to sue for latent defects, and a clause that abrogates the delayed discovery rule is against public policy.  The Court of Appeal rejected all of Brisbane’s arguments.  While the Court of Appeal found that the enforceability of this clause was an issue of first impression in California, it looked to the decisions of many other states which had enforced the same provision.  In making its decision, the Court of Appeal also focused heavily on the parties’ freedom of contract and the sophistication of the parties.  The Court of Appeal relied on the fact that both Brisbane and Webcor were represented by counsel in the negotiation and drafting of the contract, where each side submitted proposed revisions and comments to the agreement.  The Court held, “we conclude that sophisticated parties should be allowed to strike their own bargains and knowingly and voluntarily contract in a manner in which certain risks are eliminated and, concomitantly, rights are relinquished.”

As a result, the Court of Appeal affirmed the lower court’s grant of summary judgment in favor of Webcor and dismissed the complaint filed by Brisbane, leaving Brisbane with no remedy against Webcor despite clearly established defective work.

WHY IS THIS CASE IMPORTANT?

This case is important to all parties in the construction industry, whether an owner, general contractor, subcontractor or lender. The Brisbane case is the first reported case in California holding that the shorter statute of limitations period in the AIA contract documents widely used in the construction industry will be enforced by the courts.  California now joins other states in allowing sophisticated parties in a commercial context to agree on when a claim accrues, limiting the “delayed discovery rule” and shortening the deadline for bringing construction claims.

This ruling is particularly important to owners and contractors involved with commercial construction who will need to closely review their existing California agreements, particularly AIA or those using similar language to section 13.7.1.1 in the AIA contract.  It is our expectation to see many general contractors relying upon this decision seeking to substantially reduce their exposure and also to immediately change their contract language to incorporate similar language.  Owners are lamenting the decision as unfairly depriving them of the protection of the ten year statute of limitation and contending that it is unfair to deprive an owner of a right to recovery for defects that are not yet known by the owner by the time the statute of limitation runs.  We expect to see “substantial completion” as a new battleground as owners seek to push substantial completion out as far as possible, whereas general contractors seek to establish substantial completion as early as possible.

Based upon the strong language in the decision dealing with sophisticated parties represented by counsel, residential builders and developers will have difficulty attempting to rely on this case to shorten the statutory time limits for homeowners to bring construction defect claims.  There are multiple references in the decision that limit the holding in the case to scenarios where there are sophisticated parties represented by counsel, which is typically not the scenario in the residential purchase process.  Thus, while the residential builder could include such a provision in future purchase and sale agreements, it will be a difficult to prevail given the judicially perceived lack of sophistication of buyers and lack of representation by counsel that was at the forefront of this decision.

The attorneys at WSH&B are currently in the process of drafting new contract provisions that take into consideration this new decision.

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