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June 2013

Gordon & Rees San Francisco Team Wins Construction Case Involving Issue of First Impression

Gordon & Rees San Francisco partners Sandy M. Kaplan, Gregory J. Gangitano and Don Willenburg recently won a decision allowing parties to contract for statutes of limitations to begin running sooner than as otherwise provided by law, and to end before a potential plaintiff is aware of facts giving rise to a claim. The case involved latent construction defects, but the decision applies to other claims and contracts as well.

In Brisbane Lodging, L.P. v. Webcor Builders, Inc. (June 3, 2013, Case No. A132555) -- Cal.App.4th --, 2013 Cal. App. LEXIS 439, Gordon & Rees client Webcor was the prime contractor for construction of a hotel pursuant to a written contract with the developer Brisbane. The contract contained a (formerly) standard American Institute of Architects (AIA) clause: “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.” Despite this being a standard clause, there were no reported California decisions interpreting it.

Construction of the hotel project was “substantially complete” in 2000. In 2005, the developer discovered problems with the hotel’s below-grade waste pipe system and notified Webcor. Webcor assisted with the investigation of the plumbing lines and placed the responsible subcontractor on notice. The issue was not resolved. The developer sued Webcor in 2008 seeking millions in damages.

Although the suit was timely under California’s 10-year statute of repose for latent construction defects (Code Civ. Proc., § 337.15), Webcor moved for summary judgment on the ground that all of the developer’s claims were time-barred under the contract. Construction partners Kaplan and Gangitano argued that the contract designated substantial completion of the project as the date upon which all statutes of limitations begin to run; that date was in 2000; and because the longest statute of limitations for the developer’s claim was four years for breach of contract, the latest date for the developer to file suit was 2004. The trial court agreed, and granted Webcor summary judgment. The developer appealed. Appellate partner Don Willenburg joined the Webcor defense team on the brief.

Developer Brisbane argued that the “discovery rule” should apply, under which a claim does not accrue until the claimant discovers facts suggesting there is a claim. The discovery rule is applied in a wide variety of legal settings. Here, the developer did not discover the problem deep in the below-grade piping for years. The developer argued that the contract was unfair and against public policy, because the effect was that its claim was time-barred before it even discovered the defect.

The Court of Appeal affirmed judgment in Webcor’s favor. First, the court held that parties were free to agree contractually to a “date certain” to “avoid the uncertainty surrounding the discovery rule for the security of knowing the date beyond which they would no longer be exposed to potential liability.” Echoing the Gordon & Rees brief on appeal, the court quoted much older decisions affirming “the utmost liberty of contract, and that . . . contracts when entered into freely and voluntarily shall be held sacred, and shall be enforced by courts of justice.” Second, the court recognized that while this particular 1997 AIA provision had not been interpreted by a California court, courts in other jurisdictions had enforced it. Third, the court rejected the argument that contractual limits were against public policy. Statutes of limitations are “not a right protected under the rule of public policy, but a mere personal right for the benefit of the individual, which may be waived,” the court wrote. “To the extent there is any recognizable public policy underlying statutes of limitations, it is to limit the time within which claims may be brought, not to lengthen the time period.” Finally, again echoing the Gordon & Rees brief, the court noted that even under the construction defect statute of repose, the “discovery rule” does not always apply, because there is a 10-year limit.

Brisbane Lodging sets an important precedent in California for construction contracts and potentially any agreement that shortens the time for bringing suit for unknown claims. Such a provision is especially likely to be enforced where, as here, agreement was negotiated at arm’s length with no undue influence, with the assistance of counsel, by sophisticated parties. In the context of construction, it is clear that contractors and developers now possess the ability to effectively shorten the 10-year statute by establishing substantial completion as the date upon which all applicable statutes of limitations begin to run. However, such a provision potentially provides parties with more time to sue for certain claims, such as payment disputes that arise during the early stages of construction. Whereas such a dispute could arise years before completion, a provision that designates substantial completion as the date upon which all limitations periods begin to run would likely provide a plaintiff in such a dispute with more time to sue than provided by law.

This decision may be cited but it is not yet final. It may be withdrawn from publication, or a petition for rehearing or California Supreme Court review could be granted.

Click here for a copy of the decision.

Sandy M. Kaplan
Don Willenburg