CALIFORNIA CONSTRUCTION LAW
APPELLATE COURT DECISIONS
William C. Last, Jr.
The following Compendium of construction law cases primarily focuses on California state appellate court decisions that were rendered during 2007. The Compendium does not include California regulatory decisions and Federal Board of Contract Appeal cases. It discusses a few federal cases that maybe applicable to California, but it is far from an exhaustive compendium of the federal construction cases that were rendered during 2007.
ARBITRATION RELATED CASES
This case concerned the purchase of a home from a developer and allegations of defective workmanship. The purchase agreement included an arbitration provision. The homeowner fought the developers demand for arbitration. The developer argued that the Federal Arbitration Act was applicable and any state law to the contrary was preempted since the transaction substantially affected interstate commerce. In essence, a substantial number of the materials that were used in constructing the house were manufactured out of state. The appellate court held that the developer met his burden of proof as to the interstate commerce issue and thus the Federal Arbitration Act was applicable
Shepard v. Edward Mackay Enterprises, Inc.,148 Cal. App. 4th 1092, 56 Cal. Rptr. 3d 326
(Cal. App. 2007)
Pacific Mechanical subcontracted with Wagner for certain shoring work. The subcontract included an arbitration requirement. The appellate court held that California has a strong public policy favoring arbitrating disputes and the statute of limitation defenses as to specific causes of action are not exceptions to the policy favoring arbitration. The court held, however, that a petition to compel arbitration has its own statute of limitations which is four years after a party refuses to arbitrate the dispute.
Wagner Const. Co. v. Pacific Mechanical Corp., 41 Cal. 4th 19, 58 Cal. Rptr. 3d 434,
157 P.3d 1029 (2007)
In this case the general contractor brought motion to compel arbitration of dispute with owner. The court denied the motion and denied owner’s request for attorney fees and costs. The Owner appealed. The appellate court held that the owner, who succeeded in obtaining an order denying general contractor’s motion to compel arbitration of a contractual dispute, was the “prevailing party” in the action on a contract. Even though the merits of the contractual dispute had not been resolved, there still was a basis for the contractual award of attorney fees and costs since the owner had obtained a simple, unqualified win on the only contract claim. The owner was thus entitled to attorneys fees and costs.
Otay River Constructors v. San Diego Expressway, 158 Cal.App.4th 796, 70 Cal.Rptr.3d 434 (Cal. App. 4th Dist. 2008)
CONSTRUCTION DEFECT RELATED CASES
In this case, a condominium owners association filed a construction defect action against multiple contractors and subcontractors. The majority of the defendants settled before trial. The trial court found that the latent construction defects caused $8,600,000 in damages to the Association. It gave the defendants credits for a prior good faith settlement between Escorial and other contractors. The credits reduced defendants combined obligation to $2,461,495. The court also ruled that Escorial could not maintain a nuisance cause of action for construction defects.
The appellate court concluded that Escorial did not state a valid nuisance cause of action; the good faith settlement proceedings were adversarial and fair; and the court gave proper settlement credits. The court also held that the statutes of limitations were tolled pursuant to the Calderon Act and as such, Escorial’s action was timely because the construction defects fell within the statute of limitations. The appellate court also held that the trial court properly rejected the contractor’s claim that it was exempt from liability because it complied with the project’s building plans. The court also held that expert costs that are associated with developing the remedial scheme could be recovered as tort damages.
El Escorial Owner’s Ass’n v. DLC Plastering, Inc., 154 Cal.App.4th 1337, 65 Cal.Rptr.3d 524 (Cal. App. 2d Dist. 2007)
In this case, a condominium homeowners’ association brought construction defect litigation against decking and flooring company, asserting negligence and breach of contract claims. The defendant filed a summary judgment on statute of limitations grounds. The appellate court held that the negligence cause of action statute of limitations was tolled by a signed agreement between the Association and the developer. As provided for by the statutory scheme addressing common interest developments such as condominiums. (Civ.Code, § 1350 et seq.), notice to the builder of defects tolls all statutes of limitations ” against all parties who may be responsible for the defects claimed, whether named in the notice [of defects] or not … for a period of 150 days or a longer period agreed to in writing by the association and the builder.”
Landale-Cameron Court, Inc. v. Ahonen, 66 Cal. Rptr.3d 776 (Cal. App. 2d Dist. 2007)
In complex construction defect litigation, the court ordered the parties to attend and pay for private mediation sessions. When an uninsured cross-defendant failed to attend a mediation session the court imposed a monetary sanction. The appellate court held that the court did not have the right to order a party to mediation and pay the mediator.
Jeld-Wen, Inc. v. Superior Court, 146 Cal.App.4th 536, 53 Cal.Rptr.3d 115 Cal.App. 4 Dist.,2007 (4th Dist. 2007)
CONTRACTORS LICENSE RELATED CASES
The contractor entered into a contract with a homeowner. While the contractor had worker compensation insurance, he was substantially and materially under reporting the wages he was paying to the insurer. The appellate court held that a contractors license is deemed automatically suspended when he failed to pay workers compensation premiums. In essence, notice to the contractor was not required.
Wright v. Issak, 149 Cal.App.4th 1116, 58 Cal.Rptr.3d 1 (Cal. App. 6th Dist. 2007)
In this case a licensed president of unlicensed corporate subcontractor sued to recover on payment bond. The appellate court held that the subcontractor corporation was more than a fictitious business name under which president did business. As such, the president could not be the actual contracting party with standing to sue for payment. Even though the president placed his individual contractor’s license number repeatedly on the relevant documents. The court also held that the substantial compliance rule was not available to subcontractor under the circumstances
Opp v. St. Paul Fire & Marine Ins. Co., 64 Cal. Rptr.3d 260 (Cal. App. 5th Dist. 2007)
CONSTRUCTION CONTRACT RELATED CASES
See earlier discussion of the case relative to the facts. In addition to the earlier discussion of the case, in this case the condominium association alleged that it was third party beneficiary of a warranty provision in a contract between decking and flooring company and condominium builder-developers. The appellate court held that there was no factual basis for association’s breach of contract claim against company since the association was not yet in existence when contract was executed nor was the contractor aware the work would be for a condominium project when he signed the contract.
Landale-Cameron Court, Inc. v. Ahonen, 66 Cal Rptr.3d 776 (Cal. App. 2d Dist. 2007)
Subcontract for work in California required subcontractor to submit the dispute to mediation or arbitration in Nevada before filing suit. The subcontractor filed the suit in Sacramento, California. The contractor sought to dismiss the action. They argued that the court abused its discretion by: (1) voiding the parties’ mediation agreement; (2) refusing to find that the subcontractor failed to arbitrate the dispute in Nevada as required by the subcontract agreement; and (3) failing to find that the Federal Arbitration Act preempts California Code of Civil Procedure section 410.42 The appellate court held that the case should not be dismissed. In part, the court held the California Code of Civil Procedure section 410.42 renders unenforceable any provision which purports to preclude a party from ‘obtaining a judgment or other resolution in this state or the courts of this state.’
Templeton Development Corp. v. Superior Court of Sacramento County, 144 Cal.App.4th 1073,
51 Cal.Rptr.3d 19 (3d Dist. 2006)
DAMAGES RELATED CASES
This is a fourth circuit Federal Court of Appeals case that concerns the infringement of an architectural copyright by a homeowner. A homeowner began construction of his home using architectural plans designed and copyrighted by Christopher Phelps & Associates, LLC. He did not have permission to use the plans. The architect commenced a lawsuit against the homeowner for copyright infringement. The architect sought damages, disgorgement of profits, and injunctive relief. A jury found that the homeowner infringed. The architect argued that the plans that were used were a derivative and also sought an injunction against the homeowner. The appellate court held that the trial court did not abuse its discretion by failing to grant a permanent injunction prohibiting the homeowner from ever leasing or selling the house. The appellate court felt that such an injunction would be overly broad and would unduly restrain the alienation of real property. Other injunctive relief, however, might be available in applying the general principles of equity.
Christopher Phelps & Associates, LLC v. R. Wayne Galloway, 492 F.3d 532 (4th Cir. 2007)
FALSE CLAIM STATUTES (ALSO ATTORNEYS FEES FOR PROMPT PAYMENT) RELATED CASES
This is a significant case which concerns the California False Claims Act. Fassberg Constructions contracted for the construction of residential units for Housing Authority of City of Los Angeles. The California False Claims Act provides that any person who commits certain acts against the state or a political subdivision is liable to the state or political subdivision for treble damages. The issue that appellate court examined concerned what is a false “claim.” A “claim” is defined to “include[ ] any request or demand for money, property, or services made to any employee, officer, or agent of the state or of any political subdivision.” ” ‘Knowing’ and ‘knowingly’ mean that a person, with respect to information, does any of the following: (A) Has actual knowledge of the information. (B) Acts in deliberate ignorance of the ** truth or falsity of the information. (C) Acts in reckless disregard of the truth or falsity of the information. “Proof of specific intent to defraud is not required.” The appellate court held that: (1) each request for progress payment was a “claim” under False Claims Act; (2) weekly payroll reports were not “claims”; (3) change order proposals were neither “claims” nor “false claims”; (4) housing authority was not entitled to recover damages under Act amount of underpaid wages; and (5) housing authority did not actually rely on general contractor’s certifications and thus could not recover amount of its deductive change order proposals.
Fassberg Const. Co. v. Housing Authority of City of Los Angeles, 151 Cal. App 4th 267,
60 Cal. Rptr. 3d 375 (2d Dist. 2007)
This is case is from the Federal Third Circuit and it concerns federal false claims. The defendant in this criminal case was an independent contractor who provided consulting engineering and construction management services to an organization (a regional airport) that received federal funding. The firm was accused of overbilling. The court held that the president of an engineering firm was guilty of violating 18 USC 666; which prohibits “theft or bribery concerning programs receiving Federal funds.” The case is unique since it usually applies to agents of an organization or governmental entity. The court held that engineering firm was an agent of such a organization. This case is a further expansion on the US District Attorney recent push to expand the criminal and civil prosecution federal false claims.
United States v. Vitillo, et al., No. 05-4330/4331/4332, 2007 U.S. App. LEXIS 15098 (3d Cir. 2007)
In this case, the general contractor filed an action that sought to recover retention and value of additional work. A day before the trial date, the City of Sunnyvale asked the court to allow it to file a belated false claims cross-complaint against the general contractor under the California False Claims Act. The City’s allegations were based evidence that the City obtained that tended to show that the contractor paid its subcontractors less than that shown on the bid documents and failed to credit the City for that savings. The trial court found in favor of the City on the false claim causes of action. The case was appealed. It was argued that the trial court failed to give jury instructions that defined the term “false.” The appellate court concluded that the word needs no definition. In addition the contractor argued that the belated cross-complaint should not have been allowed. The appellate court found in favor of the City on that issue. This case is significant for other reasons (subcontractor listing laws) which will be discussed in the later section of this Summary. The court ruled on an attorneys fee issue. Since the City was the prevailing party on the prompt payment claim, it was entitled to attorneys fees pursuant to the applicable statute. The argument was made that since there were other issues which did not allow for fees, the amount should be reduced. The appellate court held that if attorneys
fees entitled causes of action are litigated with other causes of action where fees are not applicable, attorneys fees should be awarded.
Thompson Pacific Const., Inc. v. City of Sunnyvale, 155 Cal.App.4th 525, 66 Cal.Rptr.3d 175 (Cal. App. 6th Dist. 2007)
GOVERNMENT DUTY RELATED CASES
This is a federal Court of Claims case that concerns a contract to design, build and lease back a VA clinic. The contractor designed and built the structure. The contract was terminated for cause during the leasing period. The government alleged that the contractor failed to correct certain structural deficiencies. The contractor objected to the termination. The VA argued that it could have terminated the contract for convenience. The court found that the defects were cosmetic and termination was improper. The court also found that the VA had a duty of good faith and fair dealing as to the contractor and that by denying meritorious claims in order
to gain negotiating leverage against contractor they breached it. Basically, the court found that since a contractor who submits a claim has an obligation to certify that it is being made in good faith, the government had a similar good faith obligation in reviewing it.
Moreland Corp. v. U.S., 76 Fed. Cl. 268, 2007 WL 1180489 (Fed. Cl. 2007)
INDEMNITY RELATED CASES
In this case a homeowners association contract with its management company included a clause that required the association to indemnify the management company. An association board member embezzled certain funds that were going to be used for construction defect lawsuit. The association sued the management company. The management company asserted that the indemnity clause released it from liability. Most indemnity clauses are based on the involvement of the party who has to duty to indemnify, the person who is to receive the indemnity and the person who is making against the person who is to be indemnified. In this case there the claimant is also the person who is seeking indemnity. The court held that since it was being argued that clause constituted a release of liability it was essentially an exculpatory clause. As such, it had to be strictly construed against the management company.
Queen Villas Homeowners Ass’n v. TCB Property Management, 2007 WL 604011 (Cal. App. 4th Dist. 2007)
A homeowners association sued the City relative to unstable soil. The City cross-complained against the developer of the project seeking contractual indemnity. However, the City had failed to tender the case to the developer prior to suing the developer. California Civil Code section 2778 obligates a party to defend and indemnify if the action is tendered to that party. The agreement with the developer obligated the developer to defend and did not include a tender obligation. Since California Civil Code section 2778 allows a party to amounts paid in good faith relative to the costs of defense, the City was entitled to recover the amounts paid and the defense costs.
City of Watsonville v. Corrigan, 2007 WL 1180446 (Cal. App. 6th Dist. 2007)
INSURANCE RELATED CASES
The insured was retained to design and build a single family residence. The contractor stole project funds. Work on the house stopped, resulting in weather related damage to the structure. The homeowner sued the contractor. The case was settled when the contractor assigned to the homeowner any rights he had against his insurance carrier. The homeowner then sued the insurer. The insurer successfully defended the claim by asserting the “Professional services” exclusion. Since the contractor also took on the design aspect of the project the court found that the exclusion applied and as result the carrier had no obligation to the insured, barred coverage
Stone v. Hartford Cas. Co., 470 F. Supp. 2d 1088 (C.D. Cal. 2006)
PREVAILING WAGES/CONSTRUCTION EMPLOYMENT RELATED CASES
Four workers sued employer for failing to pay prevailing wages on public works project. The employer was granted a motion for summary judgment on the grounds the workers were illegally in the U.S. The appellate court held federal Immigration Reform and Control Act of 1986 (IRCA) did not preclude workers from bringing claims, and IRCA did not preempt state prevailing wage laws.
Reyes v. Van Elk, Ltd., 56 Cal. Rptr. 3d 68 (Cal. App. 2d Dist. 2007)
ATTORNEYS FEES RELATED CASES
In this case, a decorative ironwork company brought action against homeowner for breach of a contract to build and install decorative ironwork at home. Specifically, the contractor alleged that the homeowner had not paid for the work and sought the balance plus prompt payment penalties for failing to make a progress payment. The prompt payment statute allows for attorneys fees if a progress payment is not paid. Since the amount due was for a final payment the statute the contractor relied on was not applicable. Thus, the contractor was not entitled to prompt payment statutory attorneys fees and interest.
Murray’s Iron Works, Inc. v. Boyce,158 Cal.App.4th 1279, 71 Cal.Rptr.3d 317 (Cal. App. 6th Dist. 2008)
PUBLIC CONTRACT RELATED CASES
A collective bargaining representative for state employed professional engineers challenging contracting practices used by Department of Transportation (Caltrans) since the passage of voter initiative that allowed state to use private contractors to perform architectural and engineering services on public works. The trial court denied petition and entered judgment for Caltrans and the Plaintiffs appealed. The Court of Appeal affirmed. The Supreme Court granted review, superseding the opinion of the Court of Appeal. The California Supreme Court held that the voter initiative impliedly repealed prior law restricting state’s authority to contract with private architects and engineers, and qualifications based selection procedure (QBS) Caltrans used to select private architectural and engineering firms was not superseded by initiative. Thus, Caltrans may continue to utilize “qualifications based” selection process.
Professional Engineers in California Government v. Kempton, 40 Cal. 4th 1016, 56 Cal. Rptr. 3d 814, 155 P.3d 226 (2007)
A contractor on public project to construct concrete foundations for piers to relieve pressure caused by moving hillside behind utility powerhouse brought action, alleging breach of contract and other causes of action, against municipal utility district after district refused to allow change order when contractor encountered rock that increased cost of drilling. The trial court entered judgment for contractor and the public entity appealed. The sole question on appeal was whether the entities contract “indicated” the subsurface conditions from which the contractor might draw a reasonable deduction of the actual conditions at the site of the work, thereby requiring SMUD to comply with Public Contract Code section 7104; which concerns the risk for unknown underground conditions. The appellate court held that the statute places the risk of unknown site conditions on the public entity and any disclaimers in the contract violated the statutes provisions.
Condon-Johnson & Associates, Inc. v. Sacramento Mun. Utility Dist., 2007 WL 1153772 (Cal. App. 3d Dist. 2007), opinion modified on other grounds on denial of reh’g, Condon-Johnson & Associates, Inc. v. Sacramento Mun. Utility Dist., 2007 WL 1334475 (Cal. A)
This case concerns whether or not San Francisco’s minority business enterprise ordinances are enforceable under Proposition 209. The appellate court has ruled that they are not, however there is a pending appeal before the California Supreme Court. Thus, this case cannot be relied on for any precedence until the California Supreme Court renders a decision. As of March 8, 2008, the Court was still receiving briefs.
Coral Const., Inc. v. City and County of San Francisco, 116 Cal.App.4th 6, 10 Cal.Rptr.3d 65 (Cal. App. 1st Dist. 2007)
SUBCONTRACTOR LISTING LAW RELATED CASES
In this case, the general contractor filed an action that sought to recover retention and value of additional work. A day before the trial date, the City of Sunnyvale asked the court to allow it to file a belated false claims cross-complaint against the general contractor under the California False Claims Act. The City’s allegations were based evidence that the City obtained that tended to show that the contractor paid its subcontractors less than that shown on the bid documents and failed to credit the City for that savings. The City argued it was entitled to Subcontractor Fair Listing penalties from the contractor. The trial court found in favor of the City on the false claim causes of action and the Subcontractor Listing law violations. The case was appealed. The appellate court found that the provision of the Subletting and Subcontracting Fair Practices Act permitting an awarding authority to impose monetary penalties for violationsof the Act did not allow for city, as awarding authority, to pursue a civil action for such penalties. Thus, the trial court lacked jurisdiction to impose such penalties Subcontractors Listing Law. In essence, the City could impose the penalties but they had to be assessed at the administrative level not at the time of trial.
Thompson Pacific Const., Inc. v. City of Sunnyvale, 155 Cal.App.4th 525, 66 Cal.Rptr.3d 175 (Cal. App. 6th Dist. 2007)
A 2007 California Attorney General Opinion was rendered relative to the California State University (CSU) systems use of selection criteria for a design-build project. The opinion has no legal precedential value.
The Attorney General was asked to render an opinion as to: (1) may the CSU use selection criteria to limit the number of qualified prospective contractors; (2) is the CSU required to notify all prospective qualified contractors of the criteria that will be used; and (3) to what the extent the Subcontractor Fair Listing laws apply to the process. Generally, the Opinion states that: (1) CSU may employ selection criteria to limit the number of qualified prospective contractors invited to bid a design-build project; (2) that the qualified prospective contractors must be informed of the criteria; and (3) the Subcontractor Fair Listing laws apply to the process once the subcontractors are listed.
Opinion of Edmund G. Brown, Jr. 2007, No. 06-102, February 15, 2007
This Compendium, copyright 2008, was written by William C. Last, Jr. of Last & Faoro. Mr. Last is an attorney who has been specializing in Construction Law for over twenty seven years. Mr. Last also holds a California A&B contractors license. If you have any questions Mr. Last can be contacted at 415-764-1990 or 650-696-8350. He has other articles on his web site: lhfconstructlaw.com. This bulletin is published periodically to provide general information about current legal issues. It is intended to provide general information about California appellate court construction law cases that were rendered during 2007. The summaries are provided without assurance that they describe all facets of each cases. There may be other cases which impact your business or there may be sections of these cases that are not specifically referenced in this summary. If you have a specific legal question or need legal advice, you should contact an attorney.