California Court Upholds Contractual Statute of Limitations Provision in AIA Standard Form

July 19, 2013

gavelCalifornia architects can breathe a little easier. Filed June 3, 2013, the Court of Appeals decision in Brisbane Lodging, LP v. Webcor Builders, Inc. held that the section 13.7.1.1 of the 1997 AIA Standard Form of Agreement between Owner and Contractor is enforceable.

This is good news for Design Professionals, as section 13.7.1.1 shortens the statute of limitations period to four years and effectively abrogates the delayed discovery rule in California.

Per an announcement email recently received from Jacqueline Pons-Bunney, a partner at law firm Weil & Drage:

The case involves a contract between an owner and a contractor for the construction of a hotel. The clause at issue reads:

“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.”

Substantial completion at the subject project was July 31, 2000. In early 2005, the owner discovered a break in the sewer line which caused waste to flow under the hotel. It was determined that the plumbing problem was a latent defect. Both the contractor and its plumbing subcontractor investigated the problem and attempted repairs. It was ultimately discovered that the plumbing subcontractor had installed ABS pipe rather than cast iron pipe for the sewer line, in violation of the Uniform Plumbing Code. The owner filed a lawsuit in May 2008.

California has two basic statutes of limitation governing construction defects:

  • CCP 337.1 provides that recovery for death, injury or damage caused by a patent deficiency in design, supervision or construction of an improvement to realty must be sought within 4 years of the date of substantial completion;
  • CCP 337.15 provides that latent deficiencies (i.e., discoverable with reasonable inspection), when read with CCP sections 337 and 338, must be filed within three or four years of discovery depending on whether the action rests in breach of warranty or negligence, but in any case within 10 years of the date of substantial completion.

The latter statute provides for a “delayed discovery” exception to the statute of limitations. The court held the AIA provision enforceable to limit the owner’s timeframe to file a lawsuit to the 4-year statute in CCP 337.1. The court put significant weight on the sophistication of the contracting parties, noting that there may be a different result if a contracting party was a homeowner, for example. The court disregarded the argument that upholding such a provision would be against public policy, citing the long-standing philosophy of the California courts to uphold the wishes expressed by contracting parties. Finally, the court did not find any persuasive support for the owner’s argument that the contractor’s investigation of the plumbing somehow waived the time limitations set forth in the contract.

The Gordon & Rees San Francisco office, which won the case, explained a bit more about the potential results of this precedent in a press release last month:

“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.”

Knowing your contract documents, both their provisions and their limitations, is an important part of risk management. Don’t forget to have your specialist insurance broker review your contacts! (And if this isn’t something your current broker does for you and your firm, call on your local a/e ProNet broker to see the difference this value-added service can make for you.)

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