California Court Upholds Contract Clause Shortening Time Limits for Construction Claims

In a matter of first impression, a California Court of Appeal upheld and enforced standard AIA contract language effectively shortening to four years the ten-year time limit for bringing claims for latent construction defects. California now joins other states in allowing sophisticated parties to agree on when a claim accrues, limiting the "delayed discovery rule" and shortening the deadline for bringing construction claims.

Under California law, a claim for defective construction must be brought within four years after substantial completion of an improvement if the construction deficiency is patent (apparent by reasonable inspection). However, if the deficiency is latent (not discoverable by reasonable inspection), the "delayed discovery rule" extends the accrual of a claim until the defects were, or could have been, discovered. This extended deadline is capped by statute at ten years after substantial completion. As a result, the time limit for bringing claims for construction deficiencies in California is typically ten years after substantial completion of an improvement.

In Brisbane Lodging, L.P. v. Webcor Builders, Inc., 2013 Cal. App. LEXIS 439 (June 3, 2013), 2013 WL 2404154, the court examined Article 13.7.1 of the 1997 American Institute of Architects ("AIA") Standard Form of Agreement between Owner and Contractor and its accompanying general conditions, commonly used as the form construction agreement between property owners and general contractors. Article 13.7.1 of the 1997 form agreement provided that all causes of action related to the contract work would accrue from the date of substantial completion of the project. In effect, the clause required that all claims must be brought within four years after substantial completion, abrogating the so-called "delayed discovery rule" and the statutory ten-year time limit on claims for latent defects. The Brisbane decision upheld the enforceability of this clause, and held that the action for latent defects was time-barred because it was brought more than four years after substantial completion of the project.

Brisbane confirms that sophisticated parties to a negotiated contract may agree on the time for accrual of claims, and waive the extended claim deadlines allowed for delayed discovery of construction deficiencies. Parties to construction contracts should carefully consider the effect of such a clause. An agreement setting the claims accrual date significantly limits a property owner's rights, by shortening the time for bringing construction claims from ten years to four years. Conversely, a contractor's or designer's exposure for construction claims, typically lasting for ten years, would be shortened to less than half that time by such an agreement.

The rationale underlying the decision may be applicable beyond the construction context, allowing for waiver of the delayed discovery rule in other commercial contracts. However, the Brisbane holding does not indicate that such a waiver would be upheld in a consumer contract. Rather, the holding distinguished negotiated agreements between sophisticated parties from consumer contracts with homeowners, observing a policy of protecting homeowners who are reliant on the greater expertise of licensed professionals and skilled trades people. Residential developers would have difficulty attempting to rely on Brisbane to restrict homeowners' time limits for bringing claims.

In the commercial construction context, however, California now joins several other states which have examined and consistently upheld this contract clause and allowed sophisticated parties to waive the delayed discovery rule's extension of time limits for bringing claims (including Kentucky, Maryland, Massachusetts, New York, Pennsylvania and Wisconsin).