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Brisbane Lodging v. Webcor Builders: California Appellate Court Upholds Clause in Construction Contract Shortening Ten-Year Statute of Limitations for Latent (Hidden) Defects to Four Years

By Christopher M. Cotter

Christopher is a member of Snyder Law's Construction Law Practice Group.

A California Court of Appeal recently held that sophisticated parties can abrogate the common law "discovery rule" and limit the ten-year statute of limitations for latent (hidden) defects to four years. The fact that parties may contract around a statute of limitations is not groundbreaking news. However, the First District Court of Appeal's interpretation and enforcement of a standard AIA contract provision as nullifying the discovery rule and limiting the traditional ten-year limitations period for latent construction defects is.

California law generally recognizes two different time limitations for bringing a construction defect claim: (1) for patent defects (defects that are observable by reasonable inspection) a claim must be brought within four years of substantial completion; (2) for latent defects (defects that are not observable by reasonable inspection) a claim must be brought within four years of when the defect could have reasonably been or was actually discovered (the "discovery rule"), but in no event can a claim be brought more than ten years after substantial completion. Brisbane Lodging, L.P. v. Webcor Builders, Inc. (June 3, 2013) now provides authority empowering the parties to a construction contract to alter these traditional limitations periods.

It should be noted, however, that the power to alter a limitations period is not absolute. Public policy dictates when and how parties to a contract may limit the time to bring a claim and/or vitiate the common law discovery rule. For example, in Moreno v. Sanchez (2003) 106 Cal.App.4th 1415, unsophisticated homeowners hired a professionally licensed contractor to inspect their home, but the inspector failed to discover asbestos damage during his inspection. When the homeowners later discovered the damage they brought a claim against the inspector. The inspector relied upon a non-negotiated term in his form contract which purported to limit the time to bring claims to one year and argued that the homeowner's claims were time-barred. The Moreno Court disagreed, holding that public policy required the application of the discovery rule to the unsophisticated homeowners' claims.

The Brisbane Court distinguished Moreno because the parties involved, Brisbane Lodging, L.P. and Webcor Builders, Inc., were sophisticated parties and the terms of their contract were thoroughly negotiated. The Brisbane Court found no reason to interfere with the freely negotiated intentions of the parties so long as these threshold requirements were met. It would appear, then, that the Brisbane decision will primarily be relevant to the commercial and large-scale residential construction industries. Single-family homes and other projects involving unsophisticated developers will be largely unaffected.

This is not the only takeaway from the Brisbane decision, however. Brisbane's primary significance perhaps lies in the broad use of standard AIA contracts throughout the construction industry in California. As it stands today, most large-scale contractors use standard AIA construction contracts or some derivative thereof as a starting point in their negotiations. It is unlikely that very many of these "sophisticated" parties have given much thought to the limitations provision (Article 13.7.1.1 for the 1997 contract discussed in Brisbane) before now. The construction industry in California will no doubt be rummaging through their construction contracts to reevaluate the timeliness of all active and potential claims against them.

Furthermore, it goes without saying that if you are a contractor doing work in California and you have not done so already, now is the time to make sure you have a limitations provision in all of your standard contract documents. As the Brisbane decision demonstrates, the inclusion of this one modest provision can be the difference between costly litigation and business as usual.