In a case of first impression, the First Appellate District recently affirmed a judgment holding that standard AIA contract language, providing that all causes of action relating to the contract work accrue from the date of substantial completion of the project, abrogated the so-called discovery rule under which the statute of limitations on a cause of action for latent construction defects begins to run when the defects were, or could have been, discovered.

This is an important decision for the construction industry in California.  It is now clear that contract provisions can change current statutory law concerning when a cause of action for latent deficiencies accrues. A contract provision can substantially shorten the ten year statutory period of potential liability exposure.  This may or may not be in a party’s interests, depending on who the party is. Owners will not benefit from such a contract provisions, but designers and contractors likely will.

In 1999, Brisbane Lodging, L.P. (“Brisbane”) and Webcor Builders, Inc. (“Webcor”) entered into a contract for the design and construction of an eight-story Radisson Hotel.  The final contract was heavily negotiated between the parties and contained the 1997 American Institute of Architects Document A201General Conditions (“1997 AIA A201”), among other documents.  Article of the A201 addressed the commencement of the statutory limitations period for work completed prior to substantial completion of the project:

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…  1997 AIA A201, Article (“Article”).

The Radisson Hotel was substantially completed on July 31, 2000.  Brisbane first noted problems with the sewer line at the hotel in 2005, and again in 2007.  Brisbane ultimately discovered that, among other things, the plumbing contractor had used ABS pipe material rather than case iron pipe for the sewer line, in violation of the Uniform Plumbing Code.

In May 2008, Brisbane filed a complaint against Webcor for breach of contract, negligence and breach of express and implied warranties.  Webcor moved for summary judgment, contending that the action was barred by Article in that the statute of limitations began to run on the date of substantial completion.  Brisbane opposed the motion, arguing, among other things, that Article was too vague to be interpreted as a waiver of the provisions of California Code of Civil Procedure Section 337.15 (“Section 337.15”) , which sets a maximum 10-year period to sue for latent defects.

In granting Webcor’s motion for summary judgment, the trial court found that Article clearly and unambiguously abrogated the delayed discovery rule and the provisions of Section 337.15.  Thus, Brisbane’s action was untimely because the latest date on which it could have been commenced was four years after substantial completion of the project, or in July 2004.  The Court of Appeal affirmed, holding that Brisbane’s action was time-barred.

In so doing, the Court noted that, while the enforceability of the 1997 AIA 201 standard contract accrual waiver provision presented a question of first impression in California, numerous out-of-state authorities had, without exception, concluded that the same provision altered the normal rules governing accrual of causes of action, including the delayed discovery rule, and was valid and enforceable.  It found that Harbor Court Associates v. Leo A. Daily Co., 179 F.3d 147 (4th Cir. 199) ably represented the reasoning of these out-of-state cases.  In Harbor, the court noted that Maryland had expressed “considerable reluctance” to strike down voluntary bargains, especially in cases such as this, where the parties to the agreement are “sophisticated business actors who sought, by contract, to allocate business risk in advance”  Id. at 150-51.  In concluding that Maryland law would allow the parties to waive the delayed discovery rule by contract, it noted that all other states that had addressed the same issue had similarly allowed the delayed discovery rule to be waived or modified by contract.  Id. at 151.

In following these out-of-state authorities, the Court found that by tying the running of the applicable statute of limitations to a date certain, Webcor and Brisbane negotiated to avoid the uncertainty of the discovery rule for the security of knowing the date beyond which they would no longer be exposed to potential liability.  Like the out-of-state courts that have considered this provision, the Court concluded that sophisticated parties should be allowed to strike their own bargains and knowingly and voluntarily contract in a manner in which certain risks are eliminated and rights are relinquished.

The Court also found that Brisbane did not meet its burden of showing that Article was void as against public policy.  Instead, the Court pointed to legal authorities which reflected the broader, longstanding established public policy in California which respects and promotes the freedom of private parties to contract.  Furthermore, it was not unreasonable for the parties here—seeking to protect themselves from the damaging consequences of indefinite liability exposure—to shorten the 10-year period to a period equivalent to the applicable statute of limitations, or up to four years.

The Court further found Moreno v. Sanchez, 106 Cal.App.4th 1415 (2003), in which the court refused to enforce contractual language that had the effect of not only shortening the limitations period, but also waiving the delayed discovery rule, inapplicable here.  In Moreno, plaintiffs were unsophisticated in construction matters and relied on the expertise of home inspectors to discover latent defects in their home.  Furthermore, the Court agreed that Moreno “merely stands for the limited proposition that a cause of action may not accrue in a suit against a home inspector until the injury is discovered.”  Citing In re Brocade Communications Systems, Inc., 615 F.Supp.2d 1018 (N.D.Cal. 2009).

It should be noted that Article has been subsequently revised in the 2007 AIA A201.  The 2007 AIA A201 strikes out Article in its entirety and replaces it with the following:

The Owner and Contractor shall commence all claims and causes of action, whether in contract, tort, breach of warranty or otherwise, against the other arising out of or related to the Contract in accordance with the requirements of the final dispute resolution method selected in the Agreement within the period specified by applicable law, but in any case not more than 10 years after the date of Substantial Completion of the Work…2007 AIA A201, Article 13.7.

Apparently recognizing the awkwardness of former Section 13.7.1, which set a three part approach to time limits on claims, the 2007 drafters substituted a simpler rule of a maximum of ten years (or shorter if the jurisdiction has a quicker statute of limitations or state of repose) to bring suit or file for arbitration.  This claim limit mirrors a trend among many states to set ten years from project completion as a statute of repose.  This approach is consistent with the discovery rule and does not act as a waiver of Section 337.15.