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2009 Annual California Construction Appellate Court Update

The following is a brief summary of appellate decisions that were rendered during 2008 that may impact the California construction projects:

CONSTRUCTION DEFECT CASES

  1. Greystone Homes v. MidTec, Inc., 168 Cal.App.4th 1194 (2008).

A builder may recover from a product manufacturer for economic losses caused by the manufacturer's violation of the standards set forth in the Right to Repair Act [Civ. Code §895 et seq.] through an equitable indemnity action, but a builder may not recover for those losses through a direct negligence claim against the manufacturer.

In Greystone, a residential developer (Greystone) alleged that it built homes using MidTec manufactured plumbing fixtures and then incurred costs replacing those fixtures after they were found defective. Greystone sued MidTec to recover those costs under negligence and equitable indemnity theories. MidTec filed a motion for summary judgment, arguing that the "economic loss rule" as set forth in Aas v. Superior Court bared Greysone's claim because no property damage had occurred. In its opposition Greystone argued that the Right to Repair Act (which abrogated Aas for homeowners in some circumstances) should allow it to proceed. The trial court granted the motion, noting that the Right to Repair Act applies only to homeowners (not developers), and that Greystone was not a homeowner.

Greystone appealed, arguing that if a homeowner could bring an action against it under the Right to Repair Act that this claim should flow down to the manufacture. The appeals court agreed in part. It held that the equitable indemnity claim was appropriate because it was derivative action (premised on the homeowners' losses), and that Greystone should therefore have an opportunity for the liability for those losses to be apportioned. But, the court would not validate the negligence claim because it was a direct action, seeking Greystone's own economic losses.

  • 2. Baker v. Osborne Development Co., 159 Cal.App.4th 889 (2008).

Builder could not compel arbitration in construction defect action; arbitration agreement was procedurally and substantively unconscionable. The warranty application form was presented to the buyers at or shortly before the close of escrow and contained an arbitration provision broadly referring to construction defects, and the parties' purchase and sale agreements contained an arbitration provision that was limited to the deposit of funds in escrow.

In Baker, a homeowner (Baker) sued a developer (Osborne) for construction defects in their Osborne built and sold home. Osborne sought a court order compelling the Bakers to arbitrate the case. Osborne cited a warranty it had marketed to Baker, which had been issued by third-party warranty firm. Baker had signed an "application" for this warranty at the time of closing. The application referenced an arbitration provision but did not include the provision itself. The provision was contained in a booklet mailed to Baker thereafter. Notwithstanding the fact that the warranty was issued by a third party, the arbitration provision purported to apply to construction defect disputes between Baker and Osborne. No applicable arbitration provision was included in the real estate sales contract or another warranty issued directly to Baker from Osborne. Baker argued that the arbitration provision was unenforceable on the grounds that it was unconscionable. The trial court agreed, and the appeals court affirmed.

The appeals court held that the arbitration provision was both procedurally and substantively unconscionable. It was procedurally unconscionable because it was hidden in a booklet not available when Baker executed the warranty application, and was in a document which purported to be an "application" for a warranty from a third-party. It was substantively unconscionable because it was solely intended to benefit Osborne, as Osborne would have no reason to sue Baker after the close of escrow.

CONTRACTOR LICENSING

  1. Goldstein v. Barak Construction, 164 Cal.App.4th 845 (2008)

Claims brought under the Contractors' State License Law against an unlicensed contractor may appropriately form the basis for a right to attach order since an agreement for the performance of services lies at the heart of such a claim.

In Goldstein, a homeowner (Goldstein) sued a "contractor" (Barak) for defective work and abandoning the project. Goldstein also alleged that Barak was not licensed at the time the project commenced, and sought to recover all sums paid Barak pursuant to B&P Code §7031 (homeowners have a claim for reimbursement of funds against unlicensed contractors). Barak admitted he was not licensed until after the project had begun, but asserted that "very little" work was during that time.

Goldstein filed a motion for a "right to attach" order, seeking to freeze Barak's assets. Such orders are typically only granted when the debt in question arises from a contract. Barak argued that this claim arose from a "punitive" statute (i.e. Section 7031) and not a contract. The court disagreed and held that Goldstein's claim was "fundamentally contractual in nature since it [was] based on an unlicensed contractor's agreement with the beneficiary to provide services, and the beneficiary's agreement to pay for same. Had the unlicensed contractor not received payment for unlicensed services, the beneficiary would have no cause of action to recoup such payments under section 7031". The court granted the motion and issued the right to attach order.

  1. Great West Contractors Inc. v. WSS Industrial Construction Inc., 162 0Cal.App.4th 581 (2008)

A subcontractor who submitted a bid to the general contractor before it obtained a corporate contractor's license and who performed some work on the project before the license was issued was barred from bringing suit against the general contractor because the subcontractor was unlicensed during a period in which it performed services that could only be performed by a licensed contractor, and the Construction Services Licensing Law requires that subcontractors be licensed at all times.

In Great West Contractors, Inc., a steel subcontractor (WSS) applied for its corporate contractor's license on August 20, 2001, and then on August 28, 2001 submitted a bid for a public project on which general contractor Great West was the prime contractor. In October 2001 WSS prepared some shop drawing and special ordered anchor bolts, and billed for the same at the end of the month. This work was a part of its subcontract scope of work. On December 1, 2001 WSS executed its subcontract, which incorporated its proposal. WSS'S license was not issued until December 21, 2001. In early January 2002 WSS inserted its new contractors' license number into the subcontract and submitted it to Great West.

WSS eventually sued Great West (and its surety) for payment. At trial Great West asserted that WSS should be barred from payment because it was not licensed when it commenced work (i.e. prepared the shop drawings and ordered anchor bolts in October 2001). WSS argued that this work does not constitute performance of its subcontract under B&P §7031 (which bars unlicensed contractors from making claims for payment) by arguing that the drafting of shop drawing and the ordering of materials were not activities which required a contractor's license.

The court disagreed holding that preparation of shop drawings were contractor activities because acting as a contractor includes the offering to do work, and because the public expects that the parties designing the steel is qualified to be licensed. Likewise, the court held that the ordering of materials is an activity which requires expertise and attention and is therefore a license activity.

FALSE CLAIMS

  • 1. Allison Engine Co., Inc. v. U.S. ex rel. Sanders, 128 S. Ct. 2123, (2008)

To show a violation of the False Claims Act plaintiff must show that a defendant intended that the government itself pay the claim, or establish that conspirators agreed that a false record would have a material effect on the Government's decision to pay the false claim.

  • 2. Arntz Builders v. City of Berkeley, 166 Cal.App.4th 276 (2008)

Claims procedure established by contract supplanted a claims procedure established by Government Code §910

In Arntz Builders, the issue was whether or not claims provisions in a public construction project supplanted the otherwise mandatory claims provisions in Government Code §910, or should be followed in addition to them. A general contractor (Arntz) built a library for a city (Berkeley). The prime contract included contractual claims provisions (as authorized by Government Code §930.2 and 4) providing that if Arntz wanted to make a claim for additional costs that it had to follow a detailed procedure as set forth in the general conditions.

During the project disputes arose regarding alleged additional costs incurred by Arntz arising from changes in materials, costs, and scheduling, and Arntz asserted claims for the same. There were questions between Arntz and the City regarding whether or not Arntz claims were asserted in conformance with the claims provision on the contract. In the meantime, Arntz also asserted a claim pursuant to the statutory government claims provisions set forth in Government Code §910. Thereafter Arntz filed a lawsuit against the City. At trial the City argued that Arntz's claims were barred because they had failed to comply with the Government Code §910 requirements. The trial court agreed and entered judgment in favor of the City, from which Arntz appealed.

The appeals court reviewed both the contractual and statutory claims provisions and held that "A contractual claims provision shall exclusively govern the claims to which it applies unless the contract expressly requires that the presentation of a statutory claim as well." As such, unless a contractual claims provision expressly states otherwise, a contractor need only follow the contractual provision, and need not file a Government Code claim in addition. As such, Arntz compliance with Government Code §910 was not relevant. The court advised public entities that if they saw it as prudent they could include contractual provisions which required contractors to also comply with the statutory claims provisions.

•3. Consulting Engineers and Land Surveyors of California v. California Dept. of Transp.,(2008) 167 Cal. App. 4th 1457

In 2000 with Proposition 35 voters modified to the California constitution to allow public entities to contract with qualified private entities to perform architectural/engineering services instead of using public employees as would be otherwise mandated. Then in 2006 the California Legislature passed Senate Bill 1026 providing that certain HOV lane occupancy construction projects must be designed by public employees (Caltrans) on a design-build basis. This bill was later codified as Public Contract Code §20209.2-.44.

A professional group for private engineers sued Caltrans seeking a court determination as to the constitutionality of Senate Bill 1026 and whether or not it violated Proposition 35. The trial court ruled the bill unconstitutional and entered judgment in favor of the engineers' group, and the ruling was appealed.

On appeal it was argued that the bill was constitutional because Senate Bill 1026 was for design-build work, and Proposition 35 includes a provision which addresses design-build procurement and appears to give legislatures the authority to dictate that public employees be used for design-build work. The appeals court disagreed with this reading of Proposition 35. It noted that the stated purpose of Proposition 35 was to promote fair competition for public works projects and to ensure that quality professionals were used, and that interpreting into the law the "escape hatch" suggested would eviscerate the electorate's intent. As such, the portions of the codified version of Senate Bill 1026 which mandated the use of public employees on the relevant Caltran's projects were deemed unconstitutional.

CALIF. PUBLIC WORKS

  • 1 Titan Elec. Corp. v. Los Angeles Unified School Dist.,(2008)

District substantially complied with statutory requirements for approving the substitution of a subcontractor even though the newly substituted subcontractor had finished the work before the substitution was approved.

MISCELLAENOUS CONSTRUCTION CASES

  • 1 Murray's Iron Works Inc. v. Boyce No. (2008) 158 Cal.App. 4th 1279

Statute imposing penalty for the wrongful withholding of "progress payments" [Civ. Code §3260.1] was inapplicable because payment that was due when project was completed was a final payment rather than a "progress payment"

  • 2 S&S Cummins Corp. v. West Bay Builders Inc. ( 2008) (cert for part. pub.)

A subcontractor prevailed in an action against a general contractor who refused to release the subcontractor's share of "retention proceeds" paid on a public works contract. The subcontractor appealed the trial court's calculation of statutory prompt payment charges. The court of appeal affirmed the judgment, holding that the trial court did not err in concluding that the two percent per month charge set forth in Public Contract Code § 7107 should be applied on an annual basis rather than compounded on a monthly basis and that the two percent per month statutory charge ceases accruing on entry of judgment.

In S&S Cummings, West Bay was the prime contractor on a public works project, and S&S was an electrical subcontractor. The project was subject to delays and finished nearly 400 days behind schedule. The prime contract included a liquidated damages provision and project owner withheld retention from West Bay as such damages. In turn, West Bay blamed a portion of the delay on S&S, and withheld its retention.

Eventually West Bay and the project owner resolved their dispute and West Bay's retention was released. But, West Bay did not thereafter release S&S'S retention. S&S filed a lawsuit seeking, among other things, prompt payment penalties pursuant Public Contract Code §7107, which provides for a 2% penalty when a prime contractor wrongfully withholds retention from a subcontractor on a public works project.

The trial court entered judgment in favor of S&S, including an award of prompt payment penalties. In calculating such penalties the court would only allow S&S to compound them yearly (not monthly). The court would also not allow S&S to include in the judgment a term providing that the penalties would continue to accrue after the judgment was entered.

S&S appealed these decisions. The appeals court affirmed the trial court's rulings. In respect to compounding, the court held that a monthly compounding would translate into a harsh result because construction litigation can drag on for years, which would result massive compounding. In respect to accrual after judgment, the court held that allowing accrual after judgment would not be consistent with other statutes governing judgments whereby the damages awarded end at time of judgment. Likewise, it would not harmonize with the rule that judgment amounts are limited to 10% per annum interest.

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