Special Report

A Modest Appraisal of Senate Bill 800 - Part 1

James Acret is a contributing author to CEB’s California Construction Contracts and Disputes 3d edition. He is of counsel to Thelen Reid & Priest, LLP.

Introduction
In 2002, the legislature dropped a 2,000-pound bomb on the legal structure of construction defect litigation. SB 800 (Civil Code §§895-945.5) is a devil’s compact between consumer lawyers on one side and the construction industry and its insurers on the other. Without extensive committee hearings and amendments, the bill was jammed through the legislature on the last day of its session. It is doubtful that any member of the legislature read the bill through and impossible that any could have understood it. It is my contention that SB 800 was enacted not to serve the public interest, but in submission to the blandishments of lawyer and industry political action groups attempting to advance the interests of their constituencies.

SB 800 - what it means to insurers and lawyers
SB 800 purports to address the reluctance of the insurance industry to provide liability insurance to California subdividers and condominium builders and their design professionals, contractors, and subcontractors. Some say that representatives of the insurance industry participated in negotiating the provisions of SB 800. The melancholy reality is that SB 800 is extremely harmful to the interests of liability insurers and should discourage them from writing business in California. Plaintiffs by artful pleading can nullify most of the substantive benefits that SB 800 would extend to defendants. SB 800 will radically increase the complexity of construction defect litigation and accordingly increase the cost of providing a defense. The price of lawyers’ malpractice insurance will be affected. Counsel will be responsible for monitoring compliance with many new deadlines. This will increase their exposure to malpractice claims that will likely be reflected in the premium for insurance extended to lawyers who participate in construction defect litigation.

The Aas case
The Aas case, decided by the California Supreme Court in 2000, is the engine that pushed SB 800 through the legislature. (Aas v Superior Court (2000) 24 C4th 647, 12 P3d 1125, 101 CR2d 718.) Relying on respectable precedent, Aas applied the economic loss doctrine (see California Construction Contracts and Disputes §8.40A (3d ed Cal CEB 1999)) to alleged construction defects in a residential construction project. The trial court had granted a motion to exclude evidence supporting negligence claims for construction defects that had not caused physical damage. The Supreme Court of California affirmed, relying on its earlier decision that a manufacturer may appropriately be required by tort law to produce a product free from any defect that would cause bodily injury or physical damage, but that the law of torts does not provide a remedy to a plaintiff who has only suffered economic loss. The court was keen to maintain a distinction between remedies available under the tort law and those available under contract and warranty law.

Aas held that tort damages for economic loss could not be recovered even for building code violations that created fire, earthquake, or windload risks. A dissent by Chief Justice George argued that a plaintiff should not have to wait for a fire or a collapse before filing suit. The majority responded by asserting that it is for the legislature, and not for the courts, to impose such liability.

“That body has at its disposal a wider range of options and superior access to information about the social costs and benefits of each.

“Legislatures, in making such policy decisions, have the ability to gather empirical evidence, solicit the advice of experts, and hold hearings at which all interested parties may present evidence and express their views….”

Aas v Superior Court (2000) 24 C4th 647, 651.

The backlash
The Aas decision gave trial lawyers a dais from which to command the attention of the legislature, arguing that public welfare and safety required the imposition of tort liability for economic loss caused by construction defects. But even the clout of trial lawyers was insufficient to roll back Aas over the opposition of the construction industry and its insurers. The price exacted for tolerating a rollback of Aas was enactment of a builder’s wish list that included: 1) a super building code that would specify “actionable” construction defects; 2) builder’s right to repair; 3) damages limited to cost of repair; and 4) short statutes of repose for certain defects.

Legislative findings and intent
SB 800, with 41 co-authors, adds Title 7 to Part 2 of Division 2 of the Civil Code (see CC §§895-945.5).

Section 1 of the bill recites that the prompt and fair resolution of construction defect claims is in the interest of consumers, homeowners, and builders, but certain procedures and standards should be amended to ensure quick and fair resolution of claims. Parties need clear standards and mechanisms for the prompt resolution of claims. The legislature intends to improve the standards and procedures for early disposition of construction defects.

Application
New Title 7 applies to merchant builders and the design professionals, contractors, subcontractors, and manufacturers who contribute to their projects. It applies to newly constructed residential units completed after January 1, 2003. It applies to single-family homes and condominium units and related buildings and structures, and to the claims of homeowners, homeowners associations, and successor homeowners. It does not apply to apartment buildings and condominium conversions or to a project where a builder contracts to build or remodel a residence for a homeowner, rather than sell it.

Actionable defects
A builder casually reading Title 7 would assume that future liability for residential defects would be limited to violations of the building standards established by Chapter 2 (see CC §896). The latter begins with the simple sweeping statement that in any action seeking recovery of damages arising out of, or related to, deficiencies in residential construction, claims against the builder shall be limited to violation of the Chapter 2 standards. Section 942 reiterates that “no other cause of action for a claim covered by this title…is allowed.” But, as we shall see, both plaintiffs and defendants have at their disposal means to prevent the application of Title 7 to almost any residential construction defect.

Chapter 2 Standards
Chapter 2 (see CC §896) enacts an abbreviated building code running to about 2,000 words. The following is an abstract.

Section 896
“Doors, windows, decks, roofs, chimneys, balconies shall not allow water penetration. Foundations and slabs shall not allow water or vapor to enter the structure. Hardscape and landscaping systems shall not allow water or soil to enter into or come in contact with structures. Stucco, walls, and framing systems shall not leak. Stucco, exterior siding, and exterior walls shall not allow excessive condensation. Drainage systems must work properly around retaining walls. Plumbing and sewer systems shall not leak or corrode. Shower enclosures and countertops shall not leak.

Foundations and slabs shall not contain significant cracks or significant vertical displacement. Slabs and load bearing components shall not cause the structure to be structurally unsafe. Load bearing components, slabs, and underlying soil shall materially comply with design criteria of building codes for resistance to chemical deterioration and corrosion. Structure will materially comply with design criteria for earthquakes and windload resistance.

Soils and engineered retaining walls shall not cause damage to the structure and shall not cause the structure to be structurally unsafe. The structure shall materially comply with design criteria of fire codes. Electrical and mechanical systems shall not cause an unreasonable risk of fire. Stucco and siding and exterior finishes shall not contain significant cracks or separations. Ceramic tile must not detach.

Manufactured products shall not be installed so as to interfere with their “useful life” or utility. Heating will maintain a temperature of 70 degrees. Air conditioning shall be consistent with Title 24. Structures shall not impair safety by violating standards determined by a duly authorized public health official or governmental entity having jurisdiction.”

Defects subject to statutes of repose
The following defects are subject to special statutes of repose figured from close of escrow. The drafters didn’t deal with property conveyed without an escrow.

• Driveways, hardscape, sidewalks, and patios shall not contain significant vertical displacement cracks or excessive cracks (four-year statute).
• Plumbing and sewer systems shall operate properly (four-year statute).
  
• Electrical systems shall operate properly (four-year statute).
  
• Attached structures shall comply with noise transmission standards of the building codes, if any (one-year statute).
  
• Irrigation and drainage systems shall operate properly (one-year statute).
  
• Untreated wood posts won’t cause unreasonable decay (two-year statute).
  
• Steel fences won’t corrode unreasonably (four-year statute).
  
• Paint shall be properly applied (five-year statute).
  
• Landscaping shall survive for at least a year (two-year statute).
  
• Dryer ducts will be properly installed (two-year statute).

Section 897
Section 897, a catchall, says

“To the extent that a function or component of a structure is not addressed by these standards, it shall be actionable if it causes damage.”

This sentence is plainly erroneous. A function is actionable? A component is actionable? It is defects that are actionable, not functions or components! Worse, the provision is ambiguous. Does “damage” mean physical injury or does it mean damage in the legal sense: injury suffered by a plaintiff through the fault of another? If it means the latter, then the enactment of the Chapter 2 standards would be superfluous, since any defect would be actionable if shown to injure the interests of the plaintiff. Section 897 should therefore be interpreted to sweep into Title 7 only any defective function or component that causes physical injury. Even this narrow construction would smash the expectations of our hypothetical builder that its liability for construction defects would be limited to defects that violate the Chapter 2 standards.
Unfortunately, interpreting §897 to apply to physical injury does not eliminate all ambiguity. Defendant may argue that §897 sweeps into Title 7 only construction defects that cause physical injury to some other component of the building, while plaintiff may argue that it comprehends a defective component that injures only itself.

Statutes of limitations and repose
Section 941 establishes a general overall statute of repose of ten years after substantial completion of the improvement “but not later than the date of recordation of a valid notice of completion.” No distinction is made between patent and latent defects. “Action” includes an action for indemnity, but the ten-year statute doesn’t bar a cross-complaint for indemnity as long as the original action was brought within ten years. Section 337.1 of the Code of Civil Procedure (4-year statute of repose for patent deficiencies) and §337.15 (10-year statute of repose for latent deficiencies) do not apply to actions under this title. By providing that the 4- and 10-year statutes of repose for patent and latent deficiencies do not apply to actions under Title 7 the legislature revives and promotes the application of Commercial Code §2725 (action for breach of contract of sale - four years); CCP §338 (action for injury to real property - three years); CCP §337 (action founded on a written instrument - four years); and CCP §339 (action upon a contract, obligation, or liability not founded upon an instrument in writing - two years). Since the discovery rule applies to actions under Commercial Code §2725, CCP §§337, 338, and 339, the effect is to extend the temporal potential liability for patent construction defects.

Avoiding statutes of repose
The new 10-year statute does not apply to an action “for a contract or express contractual provision.” (CC §941(e)) Thus, careful pleading can avoid the new 10-year statute of repose without resurrecting the 4-year period or the 10-year period of §§337.1 and 337.15. The statutes of limitations that would apply to an action “for a contract or express contractual provision” would be Commercial Code §2725 (action for breach of contract of sales - four years), CCP §337 (breach of obligation founded upon a written instrument - four years), or CCP §339 (action upon a contract, obligation, or liability not founded upon an instrument in writing - two years). Thus by pleading an action “for a contract or express contractual provision” a plaintiff could avoid all statutes of repose. Since the discovery rule applies to actions under Commercial Code §2725, CCP §§337, 338, and 339 the effect is to impose upon builders an indefinitely enlarged scope of liability for construction defects that are discovered close to or more than ten years after the completion of a project.

Special statutes of repose
The special statutes of repose applied on a defect-by-defect basis run from “close of escrow” between the builder and the original homeowner, but claims of a homeowners’ association run from substantial completion of the project, or the date when builder relinquishes control over the association’s ability to decide whether to initiate a claim, whichever is later. Again, the new short statutes of repose do not apply to conveyances out of escrow.

Notice that the new short statutes of repose will in some cases cut off a homeowner’s rights before a defect has been discovered. Plumbing and sewer leaks (four years) and defective drainage and irrigation systems (one year) can cause soil settlement and undermine foundations. Such defects commonly escape discovery for many years.

Determining whether a defect action is time-barred will be a multi-step procedure. The first step will be to determine whether Commercial Code §2725, CCP §337, 338, or 339 has expired, the second step to determine whether the new 10-year statute of repose has expired, and the third step to determine whether one of the new shorter statutes of repose has expired.

Rollback of Aas - Strict liability
To establish a claim for violation of the standards “a homeowner need only demonstrate…that the home does not meet the applicable standard…No further showing of causation or damages is required…provided that the violation arises out of, pertains to, or is related to the original construction.” (CC §941(e))
This section goes beyond Aas since it sets up strict liability of a builder for failure to meet a standard and “no further showing of damages is required.” It cannot mean what it says. Just imagine a plaintiff resting its case after introducing evidence of violation of a Chapter 2 standard. The trial court would either grant a motion for nonsuit or award nominal damages. A plaintiff who fails to introduce evidence of damages fails to establish a compensable claim. Employment of the word “damages” was a drafting error. The intention was to roll back Aas by removing the need to show “damage” in the sense of physical, mechanical injury. (see Aas v Superior Court 24 C4th 727.)

Damages restricted
Under §944, plaintiff can only recover for the reasonable value of repairing any violation of the standards, reasonable relocation and storage expenses, lost business income if the home was used as a licensed place of business, and reasonable investigative costs for established violations. Section 942(b) provides that as to a claim involving a detached single-family home, the homeowner’s right to the reasonable value of repairing any nonconformity is limited to the repair costs or the diminution in current value of the home, whichever is less. Thus, homeowners’ associations, and condominium owners are given favored treatment: they can recover repair costs even if they exceed diminution in value, but the owner of a detached residential unit may not. This must be a crude error in drafting. Why discriminate against individual homeowners?

Affirmative defenses
Section 945.5 establishes as affirmative defenses release, repair, force majeure, wear, tear, abuse, neglect, the homeowner’s unreasonable failure to mitigate damages, failure of homeowner to properly maintain property, and defect caused by the homeowner.

Third parties
Section 936 provides that Chapters 1, 2, 3, and 5 apply to design professionals, subcontractors, material suppliers, and product manufacturers to the extent that they caused, negligently or in breach of contract, a violation of a Chapter 2 standard. The third parties may assert common law defenses. Claimants and builders may pursue action to enforce an express contract against third parties. However, Section 936 does not apply to a third party to whom strict liability would apply. Since strict liability “would apply” to manufacturers and material suppliers, they appear to be left out of Title 7.

Thus, the form of strict liability established by §941 against builders and developers doesn’t apply to third parties. They are liable only if negligent or in breach of contract, and may assert common law defenses. Design professionals and subcontractors get some benefit from Title 7: the limitation on damages to costs of repair and the short statutes of repose.

Design professionals and subcontractors who cause construction defects not listed in Chapter 2 do not benefit from the limitation of liability to defects caused by Chapter 2 violations. They also do not benefit from the short statutes of repose because, under §936, Title 7 applies to them only to the extent that they caused a violation of a Chapter 2 standard. They are subject to liability for such defects as at common law.

This anomaly - that a builder is immune from liability for certain defects caused by subcontractors and design professionals, while the subcontractors and design professionals remain liable to homeowners - raises perplexing issues. Suppose, for example, a homeowner files action against a subcontractor for installing inferior plastic pipe that does not leak. Subcontractor seeks indemnity from builder because it was builder that specified the inferior pipe. Is builder liable to indemnify subcontractor, even though under §896 claims against the builder, “…shall be limited to violation of, the following standards…?”

Section 916(e) clearly contemplates that builders will file cross-complaints against design professionals, subcontractors, manufacturers, and material suppliers and give them an opportunity to participate in the inspection and repair process. Section 936 provides “…All actions by a claimant or builder to enforce an express contract, or any provision thereof, against a subcontractor, material supplier, individual product manufacturer, or design professional is preserved [sic].…”

Sections 936 and 942 contradict each other. Section 936 says that Title 7 applies to design professionals, subcontractors, suppliers, and manufacturers to the extent that they caused the violation of a standard as the result of a breach of contract. Section 942, however, says that Title 7 does not apply to any action to enforce a contract or express contractual provision. Whether a defendant is helped or hurt by the application of Title 7 depends on the nature of the construction defect. Before taking a position on the question of whether §936 or §942 controls, a defendant would have to analyze the impact of Title 7 on liability, damages, and limitations applicable to the particular defect.

To be continued in next Issue of Case N’ Point.