Say it Ain’t So Joe! – Developer Learns There is More Than One Meaning for SOL

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I was in trial last month.

I couldn’t have asked for a better judge. Smart, fair . . . and witty.

During the pretrial conference, opposing counsel and I were arguing over whether there was a difference between Shoeless Joe Jacksonfederal and state law concerning a particular legal issue (oh, the interesting things we lawyers talk about). I was arguing there was a distinction and opposing counsel was arguing they were the same . . . or, at least, should be the same.

After we finished our arguments, the judge turned to my opposing counsel and said: “You know, this reminds me of the Black Sox Scandal, as “Shoeless Joe” Jackson is leaving the courthouse after being found to have thrown the 1919 World Series and a young boy tugs at his sleeve and says ‘Say it ain’t so Joe?!’”

“Well, it’s so.”

In Brisbane Lodging, L.P. v. Webcor Builders, Inc., Case No. A132555 (June 3, 2013), a disappointed developer who tried to argue that California’s 10-year statute of limitations for latent defects couldn’t be . . . or, rather, shouldn’t be . . . limited by a provision in a construction contract providing for a shorter limitations period learned to its chagrin that it was unfortunately so.

The AIA A201

In 1999, Brisbane Lodging, L.P. (“Brisbane”) and Webcor Builders, Inc. (“Webcor”) entered into a contract for the design and construction of a 210-room, eight story hotel to be known as the Sierra Pointe Radisson Hotel. The contract, an AIA A201 Standard Form of Agreement Between Owner and Contractor (Cost Plus Fee) contract (“AIA A201″), was extensively negotiated by the parties who were represented by counsel.

One of the provisions of the AIA A201 addressed the commencement of the statute of limitations (or “SOL” as we attorneys sometimes call them) for work completed prior to substantial completion of the project, and which provided:

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 . . . .

After the contract was negotiated and signed, work commenced, and the project was substantially completed on July 31, 2000.

The Latent Defects

In early 2005, Brisbane discovered a sewer line break in the kitchen which was causing waste water to flow under the property. Webcor visited the property, and Therma Corporation (“Therma”), Webcor’s plumbing subcontractor, made repairs to the sewer line.

In late 2007, Brisbane told Webcor that it was still having problems with the sewer line. Webcor had Therma return to the property and run a video camera through the sewer line. During the video inspection the camera fell out of the pipe (indicating that the pipe had become disconnected) but Therma did not provide this information to Brisbane.

Ultimately, Brisbane discovered that Therma had used ABS pipe for the sewer line rather than cast iron pipe as required under the Uniform Plumbing Code. In May 2008, Brisbane filed a lawsuit against Webcor for breach of contract, negligence, and breach of implied and express warranties.

The Court of Appeals Decision

In the trial court, Webcor filed a motion for summary judgment arguing that under the AIA A201 the statute of limitations began to run on the date of “substantial completion” which was July 31, 2000, and that Brisbane failed to file its lawsuit within four years of that date, and instead filed its lawsuit almost eight years later, in May 2008. The trial court granted Webcor’s motion and Brisbane appealed.

On appeal, Brisbane made two arguments: (1) That, under the “delayed discovery rule,” its claim did not begin until Brisbane discovered the defect, and that it did not discover the defect until at the earliest 2005 and filed its lawsuit three years later; and (2) That the shorter limitations period in the AIA A201 was void against public policy because California has a 10-year statute of limitations for latent defects. The California Court of Appeals for the First District disagreed.

While recognizing that under the delayed discovery rule a cause of action does not begin until the “plaintiff either (1) actually discovered his injury and its negligent cause or (2) could have discovered [the] injury and cause through the exercise of reasonable diligence,” and recognizing that enforceability of the AIA A201′s shorter limitations period was “a question of first impression in California,” the Court held that because “sophisticated parties should be allowed to strike their own bargains” that the shorter limitations period was enforceable.

Further, the Court held that statutes of limitations are “not a right protected under the rule of public policy,” but, rather, that there is a “broader, longstanding established public policy in California which respects and promotes the freed of private parties to contract.” Thus, explained the Court, “we disagree with Brisbane’s position that public policy supports an iron-clad, universal rule that in all cases involving latent defects, the applicable statute of limitations cannot begin to run until he defects were or should have been discovered, notwithstanding a contractual agreement to the contrary.”

The Take Away

Brisbane is one of the more important cases to come out from the Court of Appeals in recent years. AIA contract documents are widely used in the industry, and this is the first reported case in California holding that the shorter limitations period in the AIA A201 (and, presumably, similar provisions in other contracts) will be enforced by the courts, at least when it comes to agreements between sophisticated parties.