New Case Holds Sophisticated Parties May Contractually Waive the Delayed Discovery Rule Applicable to Actions for Latent Construction Defects in California

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In Brisbane Lodging, L.P. v. Webcor Builders, Inc., 216 Cal.App.4th 1249 (2013), a California appeals court upheld a contract clause waiving the delayed discovery rule applicable to actions for latent construction defects. Although an issue of first impression in California, the decision follows unanimous case law on the same issue from other states, including Kentucky, Maryland, Massachusetts, New York, and Pennsylvania.

 

An owner, Brisbane Lodging, entered into a contract with a prime contractor, Webcor Builders, for the design and construction of a hotel. The parties were represented by counsel, participated in “extensive” contract negotiations, and revised early contract drafts. The final contract between the parties contained the 1997 American Institute of Architects Standard Form Agreement between Owner and Contractor, the AIA Document A201 General Conditions, and other attachments. Article 13.7.1.1 of the AIA A201 General Conditions established the limitations period to assert any claim for acts or omissions occurring before substantial completion of the project as follows:

 

“As to acts or failures to act occurring prior to [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]."

The date of substantial completion of the project was July 31, 2000. In early 2005, Brisbane discovered a broken sewer line. Webcor made repairs, but the sewer line continued to fail. In May 2008, Brisbane sued Webcor for latent construction defects, asserting causes of action for breach of contract, breach of warranty, and negligence. Webcor moved for summary judgment on the grounds that the suit was time-barred. Specifically, under Article 13.7.1.1, the three-year statute of limitations for tort claims expired on July 31, 2003 (three years after substantial completion), and the four-year statute of limitations for contract claims expired on July 31, 2004 (four years after substantial completion). Brisbane argued that its suit was timely based on the delayed discovery rule, which provides that claims for latent construction defects do not accrue until the defects are or reasonably should have been discovered. The trial court found that Article 13.7.1.1 was valid and enforceable and granted summary judgment in favor of Webcor.

 

The court of appeals affirmed, holding that Article 13.7.1.1 was enforceable as part of a contract freely entered into by sophisticated parties for the purpose of tying the applicable limitations period to a date certain. The court focused on the parties’ equal bargaining position, lack of special relationship, and experience in such transactions. The court also noted that courts in other states have examined Article 13.7.1.1 under similar circumstances and unanimously found it to be valid and enforceable.

 

The court rejected Brisbane’s argument that enforcing Article 13.7.1.1 is against public policy. The court commented that the public policy underlying the delayed discovery rule is directed to situations in which one party has an unfair advantage over the other party, and found there was no such unfair advantage in this case. The court also noted California’s established policy in favor of permitting private parties to contract. Where parties are on an equal footing and engage in considerable give and take over a contract’s terms, the parties should be free to allocate risk as they see fit. The court distinguished Moreno v. Sanchez, 106 Cal.App.4th 1415 (2003), cited by Brisbane, on the grounds that Moreno involved a special relationship between parties in an unequal bargaining position, namely individual homeowners relying on the specialized skill and knowledge of the home inspector with whom they contracted. Further, the contract in Moreno not only waived the delayed discovery rule, but also shortened the applicable statute of limitations to the disadvantage of the homeowners.

 

The take-away from this case for clients and friends is a reminder and emphasis on the importance of contract negotiations and drafting.