WINTER 2003

I. LEGISLATIVE/REGULATORY UPDATE
Pending Legislation

In an effort to streamline the construction defect litigation process, bring predictability and finality to construction defect litigation in California, and encourage insurers to return to the California market, the California legislature enacted several statutes in 2002 designed to promote early discovery and resolution. Among these statutes was Senate Bill No. 800.

Senate Bill No. 800, Effective January 1, 2003

Senate Bill No. 800 ("SB 800"), which was signed into law by Governor Davis on September 20, 2002, and took effect January 1, 2003, applies to residences sold on or after January 1, 2003. SB 800 specifies the rights and requirements of a homeowner to bring an action for construction defects, including the burden of proof, the damages recoverable, a detailed pre-litigation procedure, and the obligations of the homeowner. Moreover, SB 800 provides builders with the opportunity to inspect and repair allegedly defective work before litigation is commenced and allows for the early disposition of many construction defect claims involving single-family homes. The "right to repair" section of the bill is now codified in Civil Code sections 895-945.5.

SB 800 further provides a framework for minimum construction standards and expressly lists "actionable defects" with respect to water, structural, soil, fire protection, plumbing and sewer, electrical system, and other miscellaneous (hardscape, exterior wall finishes and fixtures, manufactured products, heating and air conditioning, irrigation and drainage, wood posts and steel fences, paint and stains, roofing materials, landscaping, ceramic tile and dryer ducts) issues, and creates a cause of action for violation of any of the specified standards. The homeowner need only show that the home fails to meet the standards set forth in the statute; no showing of causation and/or damages is necessary.

Additionally, SB 800 reduces the statute of limitations for filing lawsuits concerning numerous specified defects. For example, actions for deficiencies in plumbing and sewer, electrical systems, and flatwork must be brought within four years of the completion date of the property or be forever barred. Similarly, painting defects must be brought within five years; fencing and dryer duct defects within two years; and irrigation and draining claims must be brought within one year of substantial completion of the property. Previously, these construction defect claims needed to be filed within 10 years of the completion of the home per Code of Civil Procedure section 337.15. Senate Bill No. 688, Effective January 1, 2003 Extends Statute of Limitations for Bodily Injury Claims and Notice Requirements for Motions for Summary Judgment

Senate Bill No. 688 ("SB 688") was signed into law by Governor Davis on September 11, 2002, and became effective January 1, 2003. This legislation adds Section 335.1 to the Code of Civil Procedure, which extends the statute of limitations for actions for bodily injury to two years. Previously, the statute of limitations was one year for actions for assault, battery, or injury to, or for the death of, a person caused by the wrongful act or neglect of another.

Likewise, SB 688 amends Section 437c of the Code of Civil Procedure. Motions for summary judgment or summary adjudication must now be served at least 75 days before the time appointed for the hearing of the motion. Previously, motions for summary judgment or summary adjudication needed to be served only 28 days before the hearing. The additional time between notice and hearing provides opposing parties with the opportunity to engage in substantial discovery while the motion is pending in an effort to defeat the motion.

II. JUDICIAL UPDATE

Component Parts Manufacturers Can be Held Strictly Liable

In Jimenez v. Superior Court of San Diego County, the owners of a home in the Galleria residential development brought suit against two window manufacturers and the companies that supplied and installed the windows.

The plaintiffs asserted that the defendants had "designed, developed, manufactured, produced, supplied and placed into the stream of commerce" defective windows installed in the homes of the subject Galleria and Renaissance housing developments, and that the defects caused property damage. They alleged strict liability and negligence causes of action. The window manufacturer T.M. Cobb moved for summary adjudication of the strict liability cause of action. T.M. Cobb argued that the manufacturer of a product installed in a mass-produced home, unless it has ownership and control over the housing development, cannot be held strictly liable to a homeowner for a defective or dangerous condition in the home.

The California Supreme Court in Jimenez disapproved La Jolla Village Homeowners' Assn. v. Superior Court and Casey v. Overhead Door Corp. to the extent inconsistent, and held that the manufacturers of component parts that are installed in mass-produced homes can be subject to strict products liability in tort when their defective products cause harm. Further, the Court held that the economic loss rule allows a plaintiff to recover in strict products liability in tort when a product defect causes damage to "other property," that is, property other than the product itself. The Court imposed such strict liability "to assure just compensation to innocent victims, to give all those in the distributive chain an incentive to improve product safety and performance, and to promote equitable spreading and apportionment of the losses resulting from physical injuries as a cost of doing business."

The Court retained, however, the limitation, consistent with established law, that persons (i.e., subcontractors) providing only services are not subject to strict liability.

Further, the Court held that the issue was not whether the product was sold fully assembled or in parts, since the mere assembly of a product that is sold in parts is not a "substantial change" in the product. Rather, the issue was whether the defect that resulted in the alleged damage existed when the windows left the manufacturers' control. The Court noted Defendants' argument that the defect in the windows resulted from improper assembly or installation, but held that it was not properly before the court.

Additionally, the Court noted, but would not consider, defendants' argument that, if they (or other component manufacturers in other lawsuits) are ultimately held strictly liable for defects in component parts of mass-produced homes, they might then seek equitable indemnity from developers or designers of the homes, thereby subjecting those developers or designers to liability for defects in their homes in suits brought after the expiration of the 10-year statutory limitation period. Defendants had not raised the argument in the trial court, Court of Appeal or in their petitions for review.

Finally, in holding only that the economic loss rule does not bar a homeowner's recovery in tort for damage that a defective window causes to other parts of the home in which it has been installed, the Court advised that it had no occasion to consider whether defective raw materials should be treated in the same manner as component parts or whether there may be situations in which the economic loss rule would bar recovery for damages that a defective component part causes to other portions of the finished product of which it is a part.

Settlement Agreements Require Mutuality of Obligation

In Sully-Miller Contracting Company v. Gledson/Cashman Construction, Inc., two building material suppliers brought actions against a general contractor, the general contractor's surety, and a school district to recover for unpaid materials on a school construction project. The suppliers signed documents agreeing to dismiss their action and release their claims against the defendants in exchange for the payment of money. The documents did not call for any signatures other than the suppliers', nor did the documents specify who was obligated to make the payments on which the agreements were conditioned.

When no payments were forthcoming, the suppliers gave notice that they were withdrawing their agreement to settle. Subsequently, the defendants attempted to tender payment, which the suppliers refused. After the suppliers pointed out that the parties had not signed documents, the general contractor simply added its signature to the end of both documents. The Sully-Miller court concluded that the documents were not enforceable as settlement agreements under Code of Civil Procedure section 664.6. As drafted, the documents were merely unilateral offers to settle that were revoked prior to their acceptance by the tender of payment. Furthermore, the ad hoc addition of the general contractor's signature that was neither contemplated in the original document nor bargained for was insufficient to render the document enforceable under Code of Civil Procedure section 664.6. 

In the documents, the suppliers promised to dismiss and release their claims against the defendants in exchange for payment of money, but defendants did not promise to make any payments to the suppliers. " [M]utuality of obligation must exist where the exchange of promises between promisor and promisee is meant to represent the contract's consideration." Since the defendants made no promises in exchange for the suppliers' promises and offered no other consideration, the court held that those promises made by the suppliers constituted unilateral offers to settle that were revocable until accepted by the tender of payment.

Additionally, the court held that a written settlement agreement is not enforceable under section 664.6 unless it is signed by all of the parties to the agreement, not merely the parties against whom the agreement is sought to be enforced. Further, a party's signature fails to convey the necessary knowledge and express consent to settlement unless it is contained in a document that was clearly intended by that party to be a binding settlement agreement.

"Inadequate Renovation" Exclusion Bars Coverage for Claims of Loss Due to Unfinished Renovations

In Wilson v. Farmers Insurance Exchange, plaintiff mortgagees learned that the mortgagor's son was making substantial renovations to the house. Then, when the mortgagor stopped making payments on the mortgage and the renovations were not completed, the mortgagees submitted a claim to Farmers Insurance Exchange (Farmers) under an all-risk homeowner's policy for loss in the value of the house insured by the policy, which was due to the unfinished renovation project on the house. Farmers denied the claim, and the mortgagees brought suit.

The court found that the loss for which the mortgagees sought coverage was expressly excluded from the policy under the "inadequate renovation" exclusion. The loss in the value of the house due to the unfinished renovation fell within the exclusion as a loss caused by inadequate repair, construction, renovation, or remodeling. The unfinished renovation that left the house in a state of disrepair was clearly inadequate. Further, the mortgagees knew of the renovation and the exclusion precluded them from claiming a loss because the renovation left the property work less than it was before.

Pursuant to the Wilson court, the risk that renovation or remodeling will be performed defectively or inadequately, leaving the house in a state of disrepair that reduces its value, is exactly the sort of risk of loss expressly encompassed by the "inadequate renovation" exclusion. The exclusion is intended to prevent the expansion of coverage under the policy to insuring the quality of a contractual undertaking by the insured or someone authorized by him.

If you would like to discuss these or any other construction law matters, please do not hesitate to contact any member of Klinedinst's Construction Law Department (Arthur S. Moreau III, Kurt U. Campbell, Susan S. Kohn, Kevin J. Gramling, Dayna L. Chmelka, Maurine P. Travis, Mark H. Nys, Kristin M. Johnson, David N. Bregman, Hartford O. Brown, Bonnie M. Simonek, Gabe P. Wright, Bonnie L. Lutz, and Matthew R. Wiese).

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