The California Supreme Court recently issued its decision on a critical issue in the residential construction industry – the claims for construction defects that a California homeowner can bring against a builder or seller of new residential properties in California.

Holding

In McMillin Albany v. The Superior Court of Kern County, the Court held that California’s Right to Repair Act (California Civil Code, sections 895, et seq.) (the “Act”) is the exclusive remedy for homeowners claiming defective construction of new residences in California.

Why this Case is Important

After years of dispute at the trial court and court of appeal levels on whether homeowners were limited to statutory claims or if they could opt to alternatively plead common law claims or seek common law claims alone for construction defects, the Supreme Court took up the McMillin case to decide whether a homeowner’s common law action alleging construction defects is subject to the Act’s pre-litigation notice and cure procedures.

The Court looked at the causes of action available under the Act, the attendant damages scheme, and the legislative purpose behind the Act’s pre-litigation procedures, and found that the Act bars common law causes of action, and mandates pre-litigation obligations. This is a profound decision that will impact the area of construction defect litigation, narrowing the type of claims and exposure for homebuilders and contractors in California.

Background

California’s Right to Repair Act (“Act”) is a 15-year-old statutory scheme which contains an elaborate statutory framework delineating procedural and substantive rights of parties in disputes involving new residential construction in the state. Written in response to the California Supreme Court’s decision in Aas v. Superior Court (2000) 24 Cal. 4th 627, which held that tort theories could not support a claim for purely economic damages for construction defects, the Act provides California homeowners a statutory right to recover such damages. Additionally, as noted below, the Act sets forth a lengthy set of building construction standards, contains obligations that builders must fulfill, including warranties to be provided, contains elaborate pre-litigation procedures and deadlines, and procedures for lawsuits under the Act.

McMillin Homeowners’ Bring Claims of Both Common Law and SB 800 Violations

In McMillin, a group of homeowners sued the builder of their homes asserting both common law causes of action, and statutory causes of action under the Act. The builder claimed that the Act allows defendants to informally inspect and to test alleged defects before litigation and thus sought stipulation to stay the action to complete such inspections. The homeowners declined to stipulate. Further, Plaintiffs later dismissed their statutory causes of action, electing to proceed only on common law grounds. The developer, McMillan, then moved the trial court to stay the action until Plaintiffs complied with the pre-litigation procedures under the Act. Following the law of sister appellate districts, the trial court denied the stay.

Procedural History

On appeal, the Fifth District Court of Appeals declined to follow conflicting interpretations of the Act upheld by the Fourth District in Liberty Mutual Ins. Co. v. Brookfield Crystal Cove LLC (2013) 219 Cal.App.4th 98, and by the Second District in Burch v. Superior Court (2014) 223 Cal.App.4th 1411, and granted the stay.

As discussed below, the Court reviewed the Act and ultimately found that the Act is the “virtually exclusive remedy not just for economic loss but also for property damage arising from construction defects.” Accordingly, the defendant property developer was entitled to a stay of the litigation until plaintiffs complied with the Act’s pre-litigation notice, inspection and repair procedures.

California Supreme Court’s Examination and Finding that the Right to Repair Act is THE Remedy for Tort Claims

The Court reviewed the history of the Act and the underlying legislative history, as well as the specific damages scheme under the Act to develop its finding. The Court examined Civil Code Section 944, which provides that an aggrieved homeowner can claim damages for a builder’s failure to meet the building standards established in Sections 896 and 897. The Court found the lengthy list of building standards contained in Section 896, coupled with the catchall of Section 897, as evidence of the Legislature’s intent to supplant common law causes of action for construction defects in residential construction.

Further, the Court found that Section 943(a), which contains the phrase “no other cause of action for a claim covered by this title or for damages recoverable under Section 944 is allowed,” also supports its finding that Section 944 “defines the universe of damages that are recoverable under the Act” and Section 943 makes the Act, the “exclusive means” to recover such damages.

As such, the Act is the exclusive means of recovering damages for violations contains in Sections 896, and 897, and those sections are to be interpreted broadly to include almost all construction defect claims, a reading warranted by their text.

Pre-Litigation Procedures Must Be Followed For Any Claims of Construction Defects in Residential Construction

Armed with the interpretation above, the Court went further and analyzed the Act’s pre-litigation procedures and found that Civil Code Section 910 provides builders of residential construction a right to remedy the defects before litigation. The Court held that this goal of the Act necessitates a holding that common law claims are also subject to pre-litigation procedures because a determination to the contrary would frustrate the purpose of the law, the purpose of Section 910. Stated another way – the Court held that allowing homeowners to bring common law claims without first abiding by Act’s prelitigation procedures would thwart the Act’s purpose in providing builders a pre-litigation right to repair.

The Supreme Court’s full opinion issued on February 2, 2018, is available at: McMillin Albany LLC v. Superior Court, S229762 (2018) __ Cal.4th __.