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CONSTRUCTION DEFECT:
SLIPPING AND CRUMBLING HOME DEVELOPMENTS

by

Raymond Paul Johnson
Thomas H. Schelly
Raymond Paul Johnson, A Law Corporation
2121 Rosecrans Avenue, Suite 3400
South Bay    Los Angeles
El Segundo, CA 90245

 

I.          INTRODUCTION

The construction of new homes is always work in progress.  In boom times and down times, the demand for new houses may grow or shrink, but it never stops. 

Home construction however involves many aspects:  Soil testing, grading, foundations, fire-proofing, architectural drawings, framing, roofing, fenestration, plumbing, and electrical work.  Any or all of which can be improperly performed, manufactured, or installed, often causing widespread disaster.  In fact, some defects cause complete catastrophe, requiring major repairs that can cost more than the original project itself.  Liability can exist with any one of the parties involved in the process. 

Construction defect litigation is a growing and developing area of law.  A complete discussion of the many situations, claims, and procedures could fill volumes.  This article will not help, for example, with telling the difference between silty sand and sandy silt, or whether a torque test is required for a shear wall hold down.  It will however provide insight, allowing the reader to better recognize and react to potentially viable construction defect cases.
 

II.        GETTING STARTED

A.        The Applicable Law

Homeowners are often the first to recognize major defects.  After all, they live with them.  As a result,  this article assumes that homeowners are your potential clients. 

First, consider when the construction was completed.  If the homes at issue were built and first sold after 2003, you need to know the detailed changes in the law created by Senate Bill 800, now sections 43.99, and 895 through 945.5 of the California Civil Code (“CCC”).  Although several of the statutes have been amended (including special provisions for homes lost in the 2003 Cedar Fire in San Diego County, which are set to expire in 2008) the statutes are generally referred to as “SB 800.”

Despite the rather sweeping nature of the statutes, these laws apply only to “new residential units where the purchase agreement with the buyer was signed by the seller on or after January 1, 2003.”  Thus, all commercial (i.e., nonresidential) developments, and residential properties sold prior to 2003 are unaffected by SB 800. 

If applicable, several aspects of SB 800 must be kept in mind.  First, prior to filing a lawsuit, if a potential defendant is the builder, the homeowners must give notice, providing the builder with detailed information about the claim. CCC § 910.  The builder then has the right to inspect and even conduct testing of the property.  In addition, the builder can attempt to repair the problems. CCC §§ 917 and 919.  If the homeowners are not satisfied with the attempted repairs, they must mediate the matter prior to filing the lawsuit. CCC § 928.

The builder can then offer a cash settlement in exchange for a release from the homeowners.  CCC § 929.  If mediation/settlement is unsuccessful, only then may the homeowners proceed with filing a lawsuit.  Also note that the pre-litigation requirements imposed by SB 800 have teeth – failure to provide the builder with their statutory rights will not only stay the litigation, but the homeowners may have to reimburse the builder’s legal fees for obtaining the stay.  CCC § 930(b).

B.         Statutes of Limitations

Generally, construction claims are governed by the statutes-of-limitations one would expect – four (4) years for breach of a written contract (CCP § 338), two (2) years for breach of an oral contract (CCP § 339), and two (2) years for negligence causing personal injury (CCP § 335.1). 

As to claims specifically associated with “construction defects,” the statutes-of-limitations vary depending on whether the property falls within the provisions of SB 800 (i.e., new residential construction sold after 1/1/2003).  If the property does not, a lawsuit for damage to property caused by builder negligence must be filed within three (3) years of the date the homeowners knew, or should have known of the wrongful conduct.  CCP § 338(b).  In addition, homeowners have four (4) years from the date of substantial completion of the subject property to bring an action for patent defect or deficiency, and ten (10) years for any latent defect or deficiency.  CCP §§ 337.1 and 337.15. 

For properties covered by SB 800, the statutes-of-limitations are different and can vary depending on the nature of the claim or defect.  See e.g. CCC §§ 896 and 941.   In no instance, however, including properties within the purview of SB 800, may homeowners bring an action more than ten (10) years after substantial completion of the project.  CCC § 941.

C.        Investigating the Claim

1.            Investigation Techniques and Costs

Investigate early.  Nail down all of the defects and potentially liable defendants at the beginning.  Note that depending on circumstances, homeowners may be precluded from adding new parties after a certain time.

In addition, depending on the progress of the litigation, any new party may be entitled to continue the trial date in order to have sufficient time to “get up to speed” with the litigation. See Cal. Rules Court, Rule 3.1332 ( c)(5)(A).  Even if a new party does not seek a trial continuance, other defendants or cross-defendants may try seizing the opportunity, claiming they need additional time to incorporate the new party into their case.  See Cal. Rules Court, Rule 3.1332 ( c)(5)(B).

Identifying the defects will lead you to the potential defendants.  And of course the more viable defendants you join in the action, the more insurance policies and assets available to facilitate early settlement, or pay the verdict.  The nature of the defects signals the viability of the lawsuit, and the amount of recoverable damages.  For example, defects in grading or foundations causing houses to slip or crumble could require removing some or all of the subject homes, and will result in greater potential recovery than less significant defects, such as negligently built retainer walls. 

Fully investigating the claims requires hiring experts in multiple disciplines and various trades.  For example, investigating homes that are sinking into the ground (usually due to improper soils compaction and/or defective foundations) could  require an architect, a geotechnical engineer, a geologist, a structural engineer, a general contractor and/or a  grading contractor.  Such an investigation will require testing of soil composition and compaction, the manner and method of grading, the construction of the foundation, and whether the overall construction of the homes was appropriate given ground conditions.  Depending on the results of the investigation, potential defendants could include the architect, his/her consultants, the general contractor and several subcontractors. 

This type of investigating can be expensive, time consuming and, if the homeowners are still occupying their homes, very disruptive to your clients’ lives.  Occasionally, a portion of the property will have to be destroyed or opened (referred to as destructive testing) to investigate the problems.  Careful planning and coordination are necessary to minimize costs - in dollars, time and disruption.  

Your investigation will not only reveal the nature of the defects, but the cost to repair.  Traditionally, recoverable damages were the lesser of diminution-in-value to the properties or the cost-to-repair the defects.  Repair costs, however, are usually greater than diminution-in-value,  and homeowners generally should emphasize cost-of-repair as potential damages.  Depending on the circumstances, courts often allow homeowners to recover repair costs, despite lesser diminution-in-value.  See e.g. Raven's Cove Townhomes, Inc. v. Knuppe Development Co. (1981) 114 Cal.App.3d 783, 801 - 02.  In addition, CCC § 944 codified the determination of damages as, inter alia, the cost of repairs.

Moreover,  the expenses associated with investigating the defects and the cost-of-repair are often recoverable as part of the homeowners’ damages.  See Stearman v. Centex Homes  (2000) 78 Cal.App.4th 611.  These are often referred to as “Stearman costs” or “Stearman fees.”  The recovery of investigation costs was codified by SB 800 at CCC § 944.  [Note: As most construction contracts have attorney fees or litigation cost provisions, which award costs and fees associated with bringing an action to the prevailing parties, the homeowners may also be able to recover investigation expenses pursuant to contract]. 

2.            Experts

Experts are usually essential to establish liability.  See e.g. Miller v. Los Angeles County Flood Control District (1973) 8 Cal. 3d 689.   In addition, if the homeowners’ claim is against the architect or any other “licensed design professional” (as defined in California Business & Professions Code §§ 5500, 6700, and 8700), expert testimony is required to establish liability.  See e.g. Huber, Hunt & Nichols, Inc. v. Moore (1977) 67 Cal. App. 3d 278.

If the architect or other design professional was responsible for the defects, homeowners must comply with still another hurdle (not applicable to developers or contractors).  In that case, California law requires that the plaintiffs’ attorney consult with at least one design professional who is expert in the same discipline as the potential defendant.  See CCP § 411.35(b)(1); and Guinn v. Dotson (1994) 23 Cal.App.4th 262.  The attorney must also obtain an opinion from the consultant that there is “reasonable and meritorious” cause for filing of the lawsuit.  CCP § 411.35(b)(1).  In addition, the consultant must render an opinion that the defendant was negligent in performing the professional services.  Id. 

Having secured the consultant’s opinions regarding the merits of the claim and the defendant’s negligence, the attorney must sign a “certificate of merit.” This certificate must then be filed and served on the defendant along with (or even prior to) the complaint.  CCP § 411.35(a). 

If the statute of limitations is looming and you do not have time to obtain a consultation, you must file a certificate stating that you were unable to obtain a consultation prior to the running of the statute of limitations.  CCP § 411.35(b)(2).  You then have sixty days from the filing of the complaint to consult with the appropriate design professional, and file and serve a certificate of merit attesting that the action is meritorious and that the defendant was negligent in the performance of professional services.  

You do not have to reveal the name of your consultant, nor attach any additional information to the certificate.  However, failure to file a certificate is grounds for demurrer and/or a motion to strike.  CCP § 411.35(g).  And failure to comply with these filing requirements could constitute unprofessional conduct, and result in State Bar discipline.  CCP § 411.35(f).   

In addition to the experts mentioned above, homeowners may need others, including cost-of-materials experts and economists.  Keep in mind that experts can be expensive.  The hourly fee, especially for design professionals, can be as high as that of highest-paid hourly lawyers.  In that regard, it is very important at the outset of any construction defect case to clearly define and limit each expert’s role in the investigation and ensuing litigation.  Often, one expert can be qualified in several different disciplines (e.g., architect/general contractor).  Where practical, consider using an expert who is multi-qualified to help control costs.

As the homeowners’ attorney, you must be diligent in keeping expert costs to a minimum.  Review the invoices and demand, at least orally, an explanation of what was done and why.  Not only are construction defect cases multi-expert, multi-party and highly technical, they are document intensive, often necessitating the use of a separate facility to store and manage the documents (such as a depository).

As the homeowners’ attorney be judicious in deciding which documents which experts will receive for review.  Indiscriminately giving all documents to every expert can skyrocket costs.  You do not want to overwhelm your “soils” experts with detailed architectural drawings that they spend time reviewing to no avail.  On the other hand, too little access to important materials may result in documents not properly analyzed.  The associated level of understanding and judgment takes time to develop.  If necessary, consult with other plaintiff lawyers who are experienced in the construction defect field for guidance. 
 

III.       THE MAJOR PLAYERS

Generally, the defendants in a construction defect lawsuit fall into three broad categories - the developer, the design professionals (e.g. architects and engineers) and those involved with the actual construction (contractors, subcontractors, material suppliers, etc.).  Each “set” of potential litigants has its own idiosyncracies.

In most construction defect cases, the homeowners usually bring an action against the developer and/or general contractor.  The general contractor may then bring a cross-action against the various subcontractors it retained for the project.   Issues of contractual privity, duty (both contractual and tort-based), warranties (both express and implied), indemnity (both express and equitable), to name a few, all come into play in a construction defect action. 

A.        The Developer

Generally speaking, the developer acquires the raw land and improves (i.e., develops) it.  The developer finances, either directly or with investors, the subdividing of the property and preparations for later home construction.

Often, the developer takes the matter one step further and is responsible for actual construction of the homes.  It hires the contractor (although, often, the developer is also the contractor) and the architect, and ultimately is the one who sells the homes to individual homeowners.

Home building is big, big business.  Home building often involves enormous amounts of money and affects the lives of hundreds, if not thousands, of people (think “The American Dream.”).   Consequently, the courts rightfully consider the large-scale developer as they would  any other manufacturer of products for sale to the public. 

Provided the developer is engaged in the “mass production” of homes, homeowners  may assert a claim for strict liability, much as one would assert strict liability against an automobile manufacturer.  This was first articulated in Kriegler v. Eichler Homes, Inc. (1969) 269 Cal.App.2d 224, 227-28, and recently upheld by the California Supreme Court in Jimenez v. Superior Court (2002) 29 Cal.4th 473.

Who is and is not a “mass developer” or “mass producer” of homes remains a question of fact to be determined on a case-by-case basis.  See e.g. Fleck v. Bollinger Home Corp. (1997) 54 Cal. App. 4th 926, 934–35.  Clearly, however, a well-known builder (e.g., Centex Homes, Lennar, KB Homes) who constructs a development with hundreds of homes would be considered a “mass developer,” and therefore is strictly liable for any defects in the construction. 

When relatively few homes are involved, the issue becomes more complicated.  A cause of action for strict liability has been denied where the number of homes built was two.  Oliver v. Superior Court (1989) 211 Cal.App.3d 86.  It was upheld where the developer had only built eleven homes.  Fleck v. Bollinger Home Corp. (1997) 54 Cal.App.4th 926.

Investigate the developer’s history, with respect to the homes at issue as well as general background, to determine whether the developer is a “mass developer” engaged in home building on an industrial scale, or a small-time developer merely dabbling in occasional or sporadic home building.  See e.g. Siders v. Schloo (1987) 188 Cal. App. 3d 1217.  Use the internet, visit the developer’s website, and get into your car and put your eyes on the development.

In addition, if the developer is also the seller of the homes (which is often the case),  the developer may be liable under additional tort theories, including intentional torts.  For example, the developer may be liable for fraud for intentionally misrepresenting the condition of the property, concealing or otherwise attempting to hide defects, or failing to disclose defects which it knew or should have known existed and which would affect the purchaser’s decision to buy the property.  With respect to fraud, intentional misrepresentation, or any other fraud-based claim, the SB 800's statutory provisions do not apply.  CCC §§ 931 and 943.  Of course, where fraud-based causes of action are involved, the homeowners may seek punitive damages in addition to any compensatory damages.  See e.g. Walker v. Signal Companies, Inc. (1978) 84 Cal.App.3d 982.

B.         The Contractor

The general contractor is responsible for the actual construction of the homes. It determines the means and methods to be used in the construction of the project in accordance with the contract documents. In nearly every instance, the general contractor is responsible for soliciting the bids and retaining the various subcontractors and trades, supplying the material and equipment, and ensuring that the work is performed in a good and workmanlike manner.  See e.g. Pollard v. Saxe & Yolles Development Company (1974) 12 Cal.3d 374.  The general contractor should always work closely with the architect and the developer to ensure that the project is completed in a safe, timely and cost effective manner.  Occasionally, the general contractor is also the project architect and/or the developer, which makes coordination even easier.

 Consequently, a general contractor who fails to construct the homes in a defect-free manner, selects insufficient or improper materials, fails to follow the plans and specifications set forth by the architect and other design professionals, or otherwise fails to exercise due care in the construction of the homes is liable to the homeowners for resulting damages.  Moreover, general contractors are held to have impliedly warranted that the construction will be completed in a good and workmanlike manner, and as such can be liable for breach of implied warranty.  Pollard v. Saxe & Yolles Development Company, supra.

In addition, because the general contractor also is liable for the damages caused by the negligence of its subcontractors, the failure by any (or all) of the subcontractors to perform their duties in a good and workmanlike manner will rise up to the general contractor.  One note of caution: If the owner has knowledge of a defect prior to accepting completion, the contractor may have a complete defense to a negligence claim.  See e.g. Sanchez v. Swinerton & Walberg Co. (1996) 47 Cal.App.4th 1461.

Another item of caution: Contractual breaches do not necessarily result in a negligence claim. A general contractor’s breach of a contractual duty, without more, may not be sufficient to support a negligence claim, unless an independent tort duty (i.e., a duty other than those outlined in the contract) has been violated.  See e.g. Erlich v. Menezes (1999) 21 Cal. 4th 543.   Unless the breach of contract also violates some social policy that would warrant the imposition of tort remedies, the homeowners may be limited to breach-of-contract claims.  Id.  Whether an independent tort duty is owed is a question of law, dependent on the foreseeability of the risk and various policy considerations. Id.  

If the contractor’s failure to complete the work results in property damage, however, an independent negligence action is permissible.  See e.g. Aas v. Superior Court (2000) 24 Cal. 4th 627 [superceded in part by SB 800 statutes].  The issue of whether a homeowner could bring a tort claim without attending property damage was highly contentious.  In Aas v. Superior Court, supra, the California Supreme Court limited homeowners to a breach-of-contract claim in instances where the defects had not caused physical damage to the property (often referred to as the “economic loss rule”).  Partially in response to the Aas decision, the state legislature enacted SB 800, which establishes a detailed statutory scheme regarding construction defect actions. 

C.        The Subcontractors

The subcontractor is typically an individual or company that specializes in a specific area of construction (e.g., concrete, plumbing, electrical work, etc.).  It generally has contracted with the general contractor (or another subcontractor) to work on a given project in accordance with its specific specialty or trade.  In addition, a subcontractor may also be a materials supplier (e.g., lumber, concrete, etc.). 

Generally, the liabilities assumed by a subcontractor are similar to those assumed by a general contractor, only scope and scale tend to be less.   Subcontractors are not responsible for the project’s completion, only the completion of their own scope of work.  If the subcontractor completes its own specific work in a good and workmanlike manner, in accordance with the project’s plans and specifications, the subcontractor may not be liable to the homeowners.  Often, however, a gray area develops between the subcontractor’s work and that of others which requires it to be a party to the litigation.

D.        The Architect

Generally, the architect assumes three distinct roles in a construction project.  In the first instance, he or she prepares the initial plans and specifications. In this role, the architect is an independent contractor, and may be sued for negligence in the preparations of plans and specifications by his or her client.

Secondly, during the construction phase of the project, the architect is the homeowner’s agent, observing the construction work as it progresses, reporting back to the homeowner and responding to changes, modifications and events that occur “in the field.”  Thirdly, the architect is a quasi‑judicial officer who may act as arbiter in resolving disputes between the homeowner and the contractor.  See e.g. Huber, Hunt & Nichols, Inc. v. Moore, supra.

Some construction defect cases, especially those involving mass developments, may not involve an architect as a defendant, unless the architect was retained directly by the homeowners (as opposed to the developer).  Lawsuits involving architects and other design professionals, as primary defendants, typically involve issues ranging from design deficiencies to intellectual property disputes.   When architects are named as defendants by homeowners, it is typically because of a “failure to observe” by the architect.  Architects will be held to the standard of care applicable among the members of the profession in the community.  See e.g. Huber, Hunt & Nichols, Inc. v. Moore, supra.  In nearly every instance, this standard of care is established through expert testimony.  Id.

Although claims for strict liability and warranty may be filed against the contractor and/or the developer, because architects (and other design professionals) usually provide a service (as opposed to materials or product), California law generally precludes asserting a cause of action for strict liability or breach of implied warranty against them.  See e.g. Huang v. Garner (1984) 157 Cal.App.3d 404 [disapproved on other grounds in Aas v. Superior Court, supra].  SB 800 however establishes standards for residential design and construction, the violation of which gives rise to liability on the part of design professionals, including the architect.  CCC § 896.  If applicable, SB 800 can be argued to establish a type of statutory “strict liability” for architects. 

IV.        CONCLUSION

 Construction defect litigation is demanding, challenging, expensive and complicated, but when properly handled, it is also very rewarding.  Homes remain “The American Dream.”  To finally obtain one, and then fall victim to construction defects is a “consumer nightmare.”  When that nightmare affects the lives of hundreds of homeowners in a California mass development, it becomes a tragedy: A widespread wrong that can and should be prosecuted by consumer lawyers.



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