Special Report

A Modest Appraisal of Senate Bill 800 - Part 2

James Acret is a contributing author to CEB’s California Construction Contracts and Disputes 3d edition. He is of counsel to Thelen Reid & Priest, LLP.

This is the second part of an article that considers the ramifications of Senate Bill 800; a Bill that makes revisions to the substance and process of the law governing construction defects. For Part 1 see Issue V of Case n’ Point.

Chapter 4 - Prelitigation Procedure
Under Senate Bill 800 §910, a homeowner must initiate the prelitigation procedure before filing an action for violation of the Chapter 2 standards. The procedure does not apply to a defect governed by an enhanced protection agreement.

Under §911, "builder" is defined to mean a builder, developer, or original seller. The developer and the builder may be different companies, as when lots in a subdivision are constructed by a developer and then sold to an on-lot builder. Doubtless, cases will also arise where the "original seller" is neither the builder nor the developer. As a result, the prelitigation procedure may ensnare multiple parties on the producer side as well as on the consumer side, and one can envision the possibility of two, or even three, separate inspection and repair protocols proceeding simultaneously.

There are 20 separate deadlines in Chapter 4 ranging from 48 hours for a builder to restore property to its pre-testing condition to 120 days for the completion of repair efforts. If a builder misses any deadline, repair privileges under Chapter 4 are nullified.

A simplified version of the repair protocol follows:

• Claimant gives written notice to builder alleging violation of Title 7, describing the claim in reasonable detail, and requests copies of construction documents.
  
• Within 30 days builder provides copies of all plans, specs, soils reports, calcs, maintenance recommendations, and warranties.
  
• Builder completes initial inspection and testing within 14 days after acknowledging receipt of the notice of claim. Inspection may be observed and videotaped by claimant. Inspection and testing may not be used to support a "spoilation" defense.
  
• Three days after first inspection, builder may require an additional inspection and testing to be completed within 40 days, and may notify subcontractors, design professionals, manufacturers, and suppliers so they can attend the inspections.
  
• Within 30 days after inspection, builder may offer to repair, supply a repair protocol and identify the contractors who will perform the repair. Homeowner then has 30 days to authorize the repair or request alternative contractors. In the latter case, the builder may have an additional inspection within 20 days, and present a new choice of contractors within 35 days. Homeowner will authorize builder to proceed within 20 days.
  
• At time of offer to repair, builder will also offer to mediate within 15 days. (Four-hour mediation paid for by builder.) Repair will commence within 14 days and every effort shall be made to complete repair within 120 days. Repair may be photographed and videotaped.
  
• If a statute of limitations runs out during the repair process, the period for filing an action is extended to 100 days after completion of the repair regardless of whether the particular violation is the one being repaired. However, if a builder fails to acknowledge the claim or elects not to go through the statutory repair process, the time for filing an action is extended to 45 days after the expiration of the builder’s time for responding to the notice of claim. If the builder invokes mediation, the time to file an action is extended to 100 days after the completion of the mediation.
  
• After the repair is completed, the homeowner shall request mediation. (Four hours, paid for by builder.) The builder may make a cash offer. If the offer is rejected the claimant may file suit.
  
• If claimant does not comply with the repair protocol, builder may move to stay proceedings until requirements have been satisfied.
  
• Under §912(g) and (h), builder shall provide original homebuyer with a written copy of Title 7 of Part 2 and instruct the original purchaser to provide the document to any subsequent purchaser.

Note: The statute makes references to this "part" which are confusing. Title 7 of Part 2 of the Civil Code is the part that deals with real property including life estates, leases, reversions, remainders, powers of appointment, mobile home leases, evictions, floating homes, easements, servitudes, future interests, and real estate sales contracts.

Chapter 3. Obligations
One-year express warranty
Section 900 requires a builder to provide a homebuyer with a minimum one year express warranty covering the fit and finish of cabinets, mirrors, flooring, walls, countertops, paint, and trim. If a builder fails to provide the express warranty required by this section, the warranty for these items shall be for a period of one year. Any fit and finish matters covered by this warranty are not subject to the provisions of this title. The mind boggles. The warranty that the builder did not provide is for one year!

Enhanced protection agreement
Under §§901-905 a builder may offer greater protection in its express contract with the homeowner than that set forth in Chapter 2. If such an "enhanced protection agreement" is in place, Chapter 2 no longer applies. The builder shall provide the homeowner with a complete copy of Chapter 2 and advise the homeowner that he has elected not to be subject to its provisions. Subsequent owners shall be deemed in privity with the builder, if the builder has recorded the enhanced protection agreement "on title" or provided actual notice.

If a homeowner claims that the enhanced protection agreement is not equal to a standard established by Chapter 2 the homeowner must give written notice to the builder of its intention to seek to enforce the Chapter 2 standard. The builder has the right to have the matter "bifurcated" and to have the issue determined within 60 days, failing which the Chapter 2 standards apply.

Consequences of employing an enhanced protection agreement
A builder can pick and choose the standards to which an enhanced protection agreement might apply and thus pick and choose the elements of the structure to which Chapter 2 will apply. A builder would be unlikely to want to supplant any of the short statutes of repose that are established in Chapter 2.

By offering an enhanced protection agreement as to any particular construction defect, a builder would take that defect entirely out of Title 7, since an action to enforce an enhanced protection would be enforcement of a contract or an express contractual obligation and under §942 such an action is not subject to Title 7. By nullifying Title 7, a builder would lose the short statutes of repose, the limitation of damages to costs of repair, and the right to repair, but would avoid the form of strict liability established by §941.

The existence of an enhanced protection agreement does not appear to affect the application of Title 7 to claims against subcontractors, suppliers, and design professionals. This presents the reverse of the anomaly created by §936 under which design professionals and subcontractors are liable at common law for construction defects not listed in Chapter 2. Under an enhanced protection agreement, it is the builder who would be liable under common law for a Chapter 2 defect and the subcontractors, suppliers, and design professionals whose liability would be as provided in Title 7. The anomaly would raise a similar issue: in a builder’s action for indemnity against a subcontractor, supplier, or design professional would the obligation to indemnify be limited by the short statutes of repose and the limitation on recoverable damages found in Title 7?

Sophisticated builders and developers will establish a matrix of construction defects to help them evaluate the relative advantages of proceeding under Title 7 or under common law. If it is determined that a defect is best handled under common law from the developer’s point of view, then the developer will impose an enhanced protection agreement as to that defect. Title 7 will continue to apply to those defects that are not included in the enhanced protection agreement.

Gaming the System: Exemptions, Exclusions, and Loopholes
Title 7 is rich in exemptions, exclusions, and loopholes. Eighteen separate provisions exempt certain defects, parties, or claims from some or all of its provisions.
Section 896. Title 7 does not apply to condominium conversions.
Section 896(g)(3)(E). Title 7 does not apply in an action seeking recovery solely for a defect in a manufactured product located within or adjacent to a structure.
Section 900. Any fit and finish matters subject to an express written warranty are not subject to Title 7.
Section 902. Chapter 2 does not apply if an enhanced protection agreement is in place.
Section 912(i). A builder who fails to comply in a timely manner with any element of the prelitigation procedure "is not entitled to the protection of this Chapter."
Section 915. If a builder elects not to go through the prelitigation process set forth in Chapter 4, then Chapter 4 does not apply.
Section 916(d). If the builder fails to inspect or test the property within the time specified, claimant is released from the requirements of §916.
Section 925. If the builder fails to complete the repair within the time specified, the claimant is released from the requirements of Chapter 4.
Section 931. Causes of action or damages not covered by this Title include personal injuries, class actions, other statutory remedies, and fraud-based claims.
Section 931. Named and unnamed class members need not comply with the Chapter 4 prelitigation procedure if their claims address solely the incorporation of defective materials or equipment into a residence.
Section 936. Title 7 does not apply to a subcontractor, material supplier, manufacturer, or design professional to which strict liability would apply.
Section 936. All actions by a claimant or builder to enforce an express contract, or any provision thereof, against a subcontractor, material supplier, individual product manufacturer, or design professional "is preserved."
Section 941(e). Statutes of repose established by Title 7 do not apply to an action by a claimant "for a contract or express contractual provision."
Section 942. Title 7 does not apply to an action by a claimant to enforce a contract.
Section 942. Title 7 does not apply to an action by a claimant to enforce an express contractual provision.
Section 942. Title 7 does not apply to an action for fraud.
Section 942. Title 7 does not apply to an action for personal injury.
Section 942. Title 7 does not apply to any action for violation of a statute. It is surprising that Title 7 does not apply to violations of statutes when Chapter 2 specifically identifies certain building code violations as actionable defects. Building codes are statutes! Perhaps courts will resolve this absurdity by reasoning that the word "statute" as misused in Title 7 does not apply to ordinances adopted by local agencies. To make that work, the courts would also have to acknowledge that as misused in Title 7, the word "statute" does not apply to the California Building Code which, pursuant to statute, is enacted as Title 24 of the California Code of Regulations.

Sections 931 and 942 clearly contemplate that other causes of action will be administered concurrently with claims that fall under Title 7. So courts must supervise the Title 7 protocol while at the same time adjudicating causes of action that are excluded from the application of Title 7.

To understand how this would work in practice, consider a short list of construction defects culled from among those referred to in the Aas case.

- Plumbing leak washes out soils.
- Pipe is defective but doesn’t leak.
- Inoperable garbage disposal.
- Improper nailing pattern in shear wall.

Counsel for homeowner will have the opportunity and the duty to decide how to classify each defect and plead accordingly either so that the defect will either fall within, or be excluded from, Title 7. If the four-year statute of repose has expired, it is crucial from the homeowner’s standpoint to keep the plumbing leak out of Title 7. Since the defective pipe is not a Chapter 2 defect, it should be kept out of Title 7 in order to avoid the defense that it is not an actionable defect. Since the inoperable garbage disposal is cheap to repair but has caused considerable annoyance and possible other damages, it should be kept out of Title 7. Since the improperly nailed shear wall has caused no physical injury, it must be kept within Title 7 to avoid the economic loss defense.

Counsel will therefore consult the list of loopholes and use one or more of them to keep the plumbing leak, the defective pipe, and the inoperable garbage disposal out of Title 7 by appropriate pleading and the introduction of appropriate evidence. Counsel would, however, plead and prove the improper nailing pattern in the shear wall as a violation of a Chapter 2 standard.

"Rights" Continue to Apply
Perhaps the most mysterious sentence of Title 7 is:

§942(a)…In addition to the rights under this title, this title does not apply to any action by a claimant to enforce a contract or express contractual provision, or any action for fraud, personal injury, or violation of a statute….

According to ordinary semiotic rules, to add is to augment. So in its semiotic significance the phrase doesn’t make sense – like saying in addition to broccoli, we do not have vegetables. It is tempting to ignore the introductory phrase as unintelligible and meaningless. But the rules of statutory construction do not allow us to ignore it, so we must ascribe meaning.

Respect for probable legislative intent would suggest that we understand the language thus:

Except for the rights under this title, this title does not apply to any action by a claimant to enforce a contract…or any action for fraud….

If this interpretation is correct, we must identify the rights that Title 7 establishes. Some provisions fall comfortably under the rubric "rights:"

Rights Established by Title 7
- Homeowner’s right to recover for economic loss.
- Homeowner’s right to impose strict liability on builder and developer.
- Homeowner’s right to recover from a design professional or a subcontractor who contributes to a Chapter 2 construction defect.
- Homeowner’s right to a one-year warranty.
- Builder’s right to inspect and repair.
- Builder’s right to impose an enhanced protection agreement.
- Rights to mediation.

Preserved Rights
Although defenses and statutes of limitations would not ordinarily be included in any discussion of "rights," ingenious builders will contend that the following "rights" are preserved.

- "Right" to rely on statute of repose.
- "Right" to limit homeowner’s recovery to costs of repair.
- "Right" to immunity from liability for construction defects not included in Chapter 2.
- "Right" to assert affirmative defenses.

Counsel on both sides will introduce evidence and proffer jury instructions contrived to secure the advantages and avoid the disadvantages of having a construction defect claim controlled by Title 7 or by common law. The construction defect bar and its claims jockeys will prepare computerized matrixes to facilitate classification. Courts will be forced into a nightmarish thicket of confusion and contradiction. Juries will make findings as to whether a particular defect is a Chapter 2 defect and whether it is taken out of Chapter 2 because of fraud, breach of contract, or statutory violation. Instructions as to the statute of limitations, the right to repair, and damages will branch out from these findings.

The building industry has access to superb legal talent. It is surprising that those who negotiated the provisions of SB 800 would have overlooked the loopholes that allow homeowners to nullify the application of Title 7 virtually at will.

Ironically, the trial lawyers also overlooked a loophole. It is within the power of a builder, preemptively, to nullify Title 7 as to selected defects by imposing an enhanced protection agreement. However, if courts accept the "rights" analysis above, an ingenious homeowner could still claim its "rights" under Title 7 even for a defect that an ingenious builder has removed through an enhanced protection agreement.

Cleanup and Reform
In SB 800 the legislature expressed its intention to expedite and simplify the just resolution of construction defect claims. Instead of expedition the legislation will cause delay and, instead of simplicity, complexity. Contradictory, ambiguous, and unintelligible provisions will cause endless confusion, delay, writs and appeals. Think for a moment of the years of litigation and the multitude of published decisions dealing with good faith settlements (Code of Civil Procedure §877.6). This carefully drafted and short statute is to SB 800 as a goldfish is to a school of piranha.

It is unfortunate that the authors undertook to draft such important and complex legislation before they acquired a working legal vocabulary. Some obvious solecisms – "part" for "title," "spoilation" for "spoliation," "damages" for "damage" and the reverse – will be corrected by the inevitable cleanup bill. But trial lawyers and builders have the political strength to block any reforms that prevent them from gaming the system. So reform is unlikely. The builders and the trial lawyers got what they wanted from the legislature. We all have to live with it.

California Construction Contracts and Disputes
3d edition, 1166 pages, 2 looseleaf volumes, updated 12/02, RE-33160, $199