Sophisticated Parties May Shorten the Statute of Limitations for Construction Defect Claims

Brisbane Lodging L.P. v. Webcor Builders, Inc. (2013) 216 Cal.App.4th 1249

By: Jon A. Turigliatto and David A. Napper
November 19, 2014

The recent decision by the First District Court of Appeal in Brisbane Lodging L.P. v. Webcor Builders, Inc. (2013) 216 Cal.App.4th 1249 is now final and is citable authority in California as the appellant did not petition the decision for review by the California Supreme Court. The decision is noteworthy for contractors and builders across the State as the Court has held that parties can contractually agree to limit the statutory limitations period for construction defect claims and the date on which the limitations period commences. Despite some limitations set forth below, the Court established important precedent by enforcing certain contract language in a standard AIA form general contract to shorten the statute of limitations for construction defect claims to four (4) years from the date of substantial completion of the project. A brief synopsis of the facts, court’s reasoning, and impact is set forth below.

The owner, Brisbane Lodging L.P. (“Brisbane”) engaged Webcor Builders, Inc. (“Webcor”) to design and build a Radisson hotel. After extensive negotiations that included assistance of legal counsel, they entered into an American Institute of Architects (“AIA”) Standard Form of Agreement Between Owner and Contractors (Cost Plus fee). The Agreement incorporated the AIA Document A201 General Conditions (1997). The general conditions provision at issue sets forth as follows:

13.7.1: Commencement of Statutory Limitation Period [as between Owner and Contractor]

Section As to acts or failures to act occurring prior to the relevant date of substantial completion, any applicable statute of limitations shall commence to run and any alleged cause of action shall be deemed to have accrued in any and all events not later than such date of substantial completion. [AIA A201, Article 13.7.1]

Several years after the project’s completion in 2000, an investigation revealed plumbing deficiencies. Brisbane initiated construction defect litigation against Webcor for construction defects in May 2008, almost eight years after the hotel was substantially completed in July 2000. Webcor moved for summary judgment asserting that the action was time-barred by section which limited the time for Brisbane to commence an action for latent defects to four years from the date of completion. Brisbane contended that the provision was not enforceable because it violated California’s public policy.

The Court of Appeal ruled that public policy principles applicable to the freedom to contract afford sophisticated contracting parties the right to abrogate the delayed “discovery rule” for latent construction defects by agreement. The “discovery rule” operates to toll the statute of limitation for construction defects until they are reasonably apparent. By statute, an owner must bring a claim for latent defects based on breach of contract within four (4) years from the date of discovery of the defect and within ten (10) years of the date of substantial completion. Brisbane asserted that it had brought its claim within four (4) years of its discovery of the defective construction.

In Brisbane, the Court held that the Agreement was extensively negotiated by the parties with the assistance of counsel. As a matter of first impression, the Court enforced the AIA standard contract provision to limit the time for sophisticated parties to commence any claims arising out of or relating to the contract. The Court held that the statute of limitations commenced on the date of substantial completion and that all claims (patent or latent) were required to be presented within four (4) years from that date. The Court emphasized that a provision limiting the statutory period for bringing a claim is enforceable in circumstances wherein the contract was freely entered into by parties with equal bargaining power and that were represented by legal counsel.

While Brisbane Court addressed the specific time limiting provision in a standard AIA form contract, the impact of the decision is that it permits sophisticated parties to contractually restrict the time period for bringing construction defect claims. In this regard, commercial contractors can potentially reduce their exposure by including time limiting provisions within their Prime Contracts. However, to be enforceable, the contract provision must be agreed to by parties with equal bargaining power, free from claims of misrepresentation or undue influence, the parties must be represented by legal counsel and must be engaged in a sophisticated commercial construction project.

The decision will have an immediate effect on commercial projects constructed pursuant to the specific AIA form contract and general conditions that was at issue in Brisbane. However, it is notable the 2007 version of the AIA A201 General Conditions was substantially revised from the 1997 version at issue in Brisbane. The 2007 version clearly sets forth an outside limitations of ten (years) from the date of substantial completion:

“Section 13.7 Time Limits on Claims: The Owner and Contractor shall commence all claims and causes of action, whether in contract, tort, breach of warranty or otherwise, against the other arising out of or related to the Contract in accordance with the requirement of the final dispute resolution method selected in the Agreement within the time period specified by applicable law, but in any case not more than 10 years after the date of Substantial Completion of the work. The owner and Contractor waive all claims and causes of action not commenced in accordance with this Section 13.7.”

The revision to section 13.7 renders Brisbane ineffective for commercial projects constructed pursuant to the 2007 AIA A201 contract and general conditions. However, the far reaching implication of the decision is the affirmation of public policy in favoring the rights of sophisticated parties engaged in commercial construction to negotiate and contractually limit their liability for construction defect claims.

About the author

Jon A.Turigliatto

Mr. Turigliatto is a Partner at Chapman Glucksman Dean Roeb & Barger.

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