Are You a Sophisticated Party? Time to Examine the Accrual Date for Construction Defect Claims in Your Contract.

By: Michael E. Zárate and William C. Last, Jr.

Attorneys at Law 

 

If you're a party that's been around the block, it is highly likely that you're familiar with negotiating construction contracts, and many of the clauses that are typically included. One clause concerns the time limit to file a construction defect claim.

A recent California decision, Brisbane Lodging, L.P. v. Webcor Builder, Inc. et al., No. A13255, 2013 WL 2404154 (Cal. App. 1 Dist., June 3, 2013), states a sophisticated party may contractually fix the accrual date for construction defect causes of action.

Generally, a cause of action does not exist until last element of a cause of action has occurred. Usually, a cause of action will accrue with the wrongful act. Many causes of action, however, do not accrue until a party has suffered some injury or monetary loss.

California statutes and judicial decisions have tempered this established principle through various exceptions, including one of the most important, the "Delayed Discovery Rule." Under this exception, a construction defect claim arises when a party: 1) actually discovers an injury and its negligent cause; or 2) could have discovered injury and cause through the exercise of reasonable diligence.

The California Legislature reacted to the Delayed Discovery Rule by enacting a four-year statute of repose for patent deficiencies in 1967 and a ten-year statute of repose for latent deficiencies in 1971. A patent deficiency is defined as one "apparent by reasonable inspection." A latent deficiency is identified as a "deficiency which is not apparent by reasonable inspection." The four-year and ten-year statutes of repose provide the outside limits as to when a construction defect cause of action must be filed for each type of defect.

A Statute of Repose is a law that has been enacted by the state legislature and signed by the governor that sets a limit on the right to file a claim on a particular legal cause of action (legal theory) against a defendant. The final date for filing suit runs from a defined event (e.g. completion of the construction) rather than the discovery of the right to commence the action. Statutes of Repose set a final deadline for filing the action and, if it is not filed by that deadline, the prospective defendant will know that it is no longer exposed to a possible lawsuit.

The Brisbane Court has now made clear that parties may contractually establish the accrual date for construction defect actions involving both patent and latent statutes of repose; however, this rule only applies to "sophisticated contracting parties."

What is a "sophisticated party"? The Brisbane Court's clarifying remarks demonstrated that the contract between the Brisbane parties was on equal footing, involved extensive negotiations (including revisions to the contract by striking out unacceptable provisions and inserting additional terms), the allocation of business risks in advance and legal representation. What degree each of these factors played into the final decision is unknown but provides some guidance, and warning, to future contracting parties.

It is also interesting to note that the contract in Brisbane involved 13.7.1.1 of the 1997 AIA A201 General Conditions; however, there is no conflicting evidence that the rule recently established would not apply to documents other than the AIA Standard Document set. The right to set or adjust the accrual date for construction defect claims appears to apply to all construction contracts as long as sophisticated parties are involved. Also, despite the Brisbane ruling, the traditional four-year and ten-year statute of limitation periods for patent and latent defects still apply even if the party filing a lawsuit was not a party to the contract. Only the moment at which the patent and latent causes of action arise may be changed by contract.

Conclusion

California Courts will recognize and enforce fixed accrual dates for construction defect causes of action contractually agreed to between sophisticated parties. An accrual date for construction defect claims is just one of many clauses that may be included in a typical construction contract between sophisticated parties. It is a wise party who reviews its contracts with legal counsel to ensure that it is responsive to recent changes in the law.

 

This article, ©2013, was written by William C. Last, Jr. and Michael E. Zárate. Mr. Last is an attorney who has been specializing in Construction Law for over 30 years. In addition to belonging to a number of construction trade associations, Mr. Last holds a California "A" and "B" license. He can be contacted at 415-764-1990 or 650-696-8350. A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.