SPRING 2004

I. LEGISLATIVE/REGULATORY UPDATE
Pending Legislation

Assembly Bill 2333: Existing law specifies the rights and requirements of a homeowner to bring an action for construction defects, including applicable standards for home construction, the statute of limitations, the burden of proof, the damages recoverable, a detailed pre-litigation procedure, and the obligations of the homeowner. Assembly Bill 2333 (Dutra), which was introduced earlier this year, would declare it the intent of the Legislature to protect the interests of builders, contractors, subcontractors, laborers, and building purchasers, and to facilitate the expeditious and equitable resolution of construction defect claims and litigation. AB 2333 is currently in the Assembly, pending a third reading. AB 2333 was passed by the Assembly Committee on Judiciary, but then amended after its second reading.

Senate Bill 1013: After failing to pass in the Senate Judiciary Committee, Senate Bill 1013 (Ackerman) has been returned to the Secretary of the Senate. SB 1013 would revise service deadlines for motions for summary judgment to 28 days. Currently, the Code of Civil Procedure requires service at least 75 days before the hearing. The bill would also provide a one-year statute of limitations, as opposed to the current 2-year statute, for an action for assault, battery or injury to, or for the death of, an individual caused by the wrongful act or neglect of another, except for the victims of the September 11, 2001 terrorist attacks.

II. JUDICIAL UPDATE

Property Damage Not Established by Mere Failure of Defective Product To Perform as Intended

In F & H Construction v. ITT Hartford Insurance Company of the Midwest, F & H brought suit against Hartford under a commercial general liability insurance policy issued to O’Reilly & Sons. F & H had contracted with Contra Costa Water District to build a water facility pumping plant. F & H entered into a subcontract with O’Reilly for the manufacture and delivery of grade A-50 steel pile caps with a load capacity of 50,000 pounds per square inch. After O’Reilly delivered the pile caps and F & H welded the majority of them to driven piles, F & H discovered that the caps were made with grade A-36 steel rather than the agreed upon A-50 grade steel. F & H modified the caps to meet design requirements and was able to complete the project on time. However, because the modification of the caps slowed the completion time of the project, F & H did not receive any bonus for early completion. F & H obtained a judgment against O’Reilly and then, in light of O’Reilly’s bankruptcy, sought to recover from Hartford under the property damage provisions of the Hartford liability policy.

The appellate court held that there was no coverage because the use of inadequate caps did not constitute physical injury to tangible property. The only injury shown was the welded structure’s failure to perform as intended. The court determined that property damage is not established by the mere failure of a defective product to perform as intended. Incorporation of a defective component or product into a larger structure does not constitute property damage unless and until the defective component causes physical injury to tangible property in at least some other part of the system. Property damage is also not established by economic losses such as the diminution in value of the structure or the cost to repair a defective product or structure. According to the F & H court, liability policies are not designed to provide contractors and developers with coverage against claims their work is inferior or defective. Rather, the risk of replacing and repairing defective materials or poor workmanship is generally considered a commercial risk, which is not passed on to the liability insurer. Liability coverage comes into play when the insured’s defective materials or work cause injury to property other than the insured’s own work or productions. In short, a liability insurance policy is not designed to serve as a performance bond or warranty of a contractor’s product.

The court also held that the costs for repairing and modifying the defective caps and for loss of the early completion bonus were not covered as loss of use of personal property because there was no loss of use of the water facility.

Want to Automatically Receive Regular Construction Updates?

Concrete Manufacturer and Supplier Held Liable for Submicroscopic Damage to the Concrete Product Itself

Mesa Vista South Townhome Association v. California Portland Cement Company involved a massive construction defect lawsuit brought by Mesa Vista against the developer, the general contractor, and many subcontractors, including California Portland. Among other things, Mesa Vista alleged that the condominium complex was constructed on soils with a severe sulfate condition, and that certain cement should have been used for concrete in contact with the onsite earth. Mesa Vista asserted that, because the concrete was not mixed in accordance with the Uniform Building Code’s table for severe sulfate exposure, it had a higher porosity and permeability than it should have, permitting the concrete slabs and foundations at the condominium complex to be damaged by sulfate attack. The trial court found the concrete manufacturer and supplier negligent in regard to the mix of the concrete and found it more likely than not that the concrete itself had suffered damage from sulfate attack and that the concrete would suffer additional damage over time.

The appellate court upheld the decision of the trial court, holding the defendant concrete manufacturer and supplier liable for negligence, even though the only damage suffered was submicroscopic damage to the concrete product itself. The trial court found that the concrete comprising the slabs and foundations of the homes would disintegrate in time from sulfate attack unless somehow prevented, and awarded damages for the repair of the defective concrete, to be effectuated by the application of a protective gel intended to prevent further decay of the slabs and foundations and the ultimate loss of the structural integrity of the homes.

The Mesa Vista court held that the component supplier defense did not absolve the concrete manufacturer and supplier of liability, because the concrete was not substantially changed during the process of manufacturing the slabs and foundations. Rather, it was placed substantially as delivered. Also, despite the appellate court rulings in Zamora v. Shell Oil Co. and Casey v. Overhead Door Corp., which preclude negligence causes of action based on damage solely to the defective product, the court in Mesa Vista determined that the recent Supreme Court decisions in Jimenez v. Superior Court and Aas v. Superior Court do not preclude the recovery of damages in this context. In so finding, the Mesa Vista court stated that neither Jimenez nor Aas addressed whether the economic loss rule always bars the recovery of damages when a component part of a structure has already suffered appreciable harm and will ultimately disintegrate, likely causing substantial harm to other component parts of the structure over time. Moreover, according to the Mesa Vista court, Aas reaffirmed that, in a proper case, economic losses may be recoverable on a negligence theory when the six factors outlined in J’Aire Corp. v. Gregory are satisfied. The court found that all six of the J’Aire factors had been met in Mesa Vista.

Two-Year Statute of Limitations For Personal Injury Actions Not Applied Retrospectively

In John Krupnick v. Duke Energy Morro Bay, LLC, Krupnick filed his personal injury action on January 8, 2003, and alleged that, on January 26, 2001, he fell on Duke Energy’s premises due to pooling of water and other material on the floor. In affirming the dismissal of the action, the appellate court held that the one-year statute of limitations of former California Code of Civil Procedure section 340(3) applied to Krupnick’s case. The two-year statute of limitations in California Code of Civil Procedure section 335.1 did not become effective until January 1, 2003, and did not operate retroactively to revive Krupnick’s lapsed claim. Further, because Krupnick was not a victim of the September 11, 2001, terrorist attacks, Section 335.1 could not be construed as applying retroactively to him.

Judicial Reference Provision in Residential Purchase
Agreement Found Enforceable

Greenbriar Homes Communities, Inc. v. Superior Court (Couris) involved a construction defect action brought by individual homeowners against the developer of the homes. 43 of the 69 homes at issue in the suit were owned by persons who had purchased their homes from the developer and had signed purchase and sale agreements requiring all disputes arising out of the agreement to be determined by a judicial referee. Greenbriar sought to have the plaintiffs’ construction defect matter heard by a referee. The trial court denied Greenbriar’s motion to compel, and Greenbriar sought a writ of mandate.

The appellate court refused to issue a writ with regard to the non-original purchasers because they never entered into a purchase and sale agreement with Greenbriar, and thus, never consented to judicial reference. However, the court did issue a writ with regard to the original purchasers, after finding that the reference provision in the agreements was not unconscionable. The court determined that the reference provision was clear and conspicuously placed in the agreements, and the provision was not one-sided or oppressive. Likewise, the court found no harshness in the parties’ agreement to share referee fees equally, and that the court lacked the authority to invalidate the valid contractual reference provision.

Court Found Reasonable Expectation of Insurance Coverage for Replacement of Homes Damaged by Northridge Earthquake

In Fire Insurance Exchange v. Superior Court (Altman), a group of homeowners whose homes were damaged or destroyed in the 1994 Northridge earthquake brought an action against Fire Insurance Exchange and Farmers Insurance Exchange to recover under their policies and for damages. Plaintiffs alleged that they repaired or rebuilt their homes, and in doing so, incurred costs for land stabilization and for construction upgrades made necessary by changes to the building code, and that the insurers denied their claims for such costs.

The appellate court held that the plaintiffs’ policies did not provide for repairs to the land beneath the covered buildings. However, the court affirmed the trial court’s ruling that the policies were ambiguous and held that an insured might reasonably expect coverage for the costs of a replacement home of substantially similar construction that was the functional equivalent of the home lost or the portion of the home destroyed, even if changes in the building codes resulted in a higher loss settlement than the “cost to repair and replace the property with material of like kind and quality within a reasonable time after the loss, without allowance for any increased cost of repair or reconstruction by reason of any ordinance or law regulating construction or repair.” Accordingly, such ambiguity was resolved against the insurers, and the insurers were not allowed to escape their duty to provide coverage.

Real Estate Brokers and Agents’ Duty to Disclose
Only Owed to Prospective Buyers

In Coldwell Banker Residential Brokerage Company, Inc. v. Superior Court (Salazar), Marcos Sawyer Salazar, a minor, claimed he developed asthma caused by toxic mold in the house in which he lived with his mother, Maria Angelina Casteneda. Casteneda and Marcos sued the seller of the house, the seller’s broker Coldwell Banker and others, alleging they breached various duties of care, including failing to disclose the existence of microbial contamination. Marcos argued the Coldwell Banker owed him a duty of care because it knew he was the buyer’s child and would be living in the home. Thus, Coldwell Banker could reasonably foresee the risk of physical harm to him.

In finding that Marcos could not state a cause of action against Coldwell Banker, the court held that the inspection and disclosure duties of residential real estate brokers and their agents applied exclusively to prospective buyers and not to other persons, such as a buyer’s family members who were not parties to the real estate transaction. Only a buyer can recover from a broker or agent for breach of the duty to conduct a reasonably competent and diligent visual inspection of the property offered for sale and to disclose all facts materially affecting the value or desirability of the property that an investigation would reveal. The mere existence of foreseeability of harm to persons other than parties to the real estate transaction is, for public policy reasons, not sufficient to impose liability on a supplier of information in a commercial context.

Contractor May Recover Payment for Work Performed After Proper License Obtained - Up For Review by California Supreme Court

In MW Erectors, Inc. v. Niederhauser Ornamental and Metal Works Company, Inc., a subcontractor on a large commercial project suffered the consequences of its failure to complete the application process and obtain the requisite contractor’s license(s) before signing two separate contracts. The subcontractor’s work was terminated before the projects were completed and without the subcontractor having obtained full payment of amounts it claimed were due under the contracts. When the subcontractor filed its lawsuit seeking compensation, however, it was met with a successful motion for summary judgment, based on noncompliance with licensing requirements.

The appellate court reversed the grant of summary judgment against the subcontractor, holding that the statutory provisions of Business and Professions Code section 7031 permit a contractor to recover compensation for the acts performed while licensed and, that being the case, the contracts were neither illegal nor void for lack of proper licensing at the time of execution. As long as a contractor alleges he or she was duly licensed during the entire period of time he or she performed acts for which compensation is sought, his or her suit seeking payment for work performed is not necessarily barred just because the license was not in place when work on the contract was initially undertaken. No compensation is available, however, for those acts performed under the contract during that initial period of time when the contractor was not duly licensed.

The MW Erectors case is currently pending before the California Supreme Court. The Court granted review on May 14, 2004.

"Homeowners’ Claims for Breach of Implied Warranty Precluded by Written Disclaimers in Sales and Express Warranty Documents - Up For Review by California Supreme Court

In Robin Hicks, et al. v. Superior Court (Kaufman and Broad Home Corporation), plaintiff homebuyers, individually and as representatives of a class of purchasers of new homes, sued to recover repair or replacement costs for construction defects in homes built by defendant developer Kaufman and Broad Home Corporation. The homebuyers represented a class of individuals who had purchased homes from the developer that had allegedly defective concrete slabs. The homebuyers claimed that the use of polypropylene fiber in the concrete slabs allowed cracks to develop during the curing process that were wider than a hairline, and the use of the fiber was a “serious design and construction defect.”

The developer filed a motion for summary adjudication on the homebuyers’ breach of implied warranty claim, arguing that the homebuyers had waived the implied warranty because there was an implied warranty disclaimer in the sales contract and the homebuyers, through the sales contract, were provided with a comprehensive express warranty entitled “Limited Warranty.” The appellate court affirmed the grant of summary adjudication on this cause of action, finding that the disclaimer was conspicuous, as it was written with all capital letters and printed in bold type. Further, the homebuyers failed to demonstrate that the inclusion of the disclaimer was unconscionable. All homebuyers were given the opportunity to review the sales documents, and there was evidence that the developer would have negotiated that issue rather than lose a potential home sale.

The Hicks case is currently pending before the California Supreme Court. The Court granted review on May 14, 2004.

If you would like to discuss these or any other employment law matters, please do not hesitate to contact any member of Klinedinst's Construction Law Department.