Can parties waive both the commencement and length of the statutory limitation periods for construction defect actions? Yes, answered the Fourth Appellate District, by allowing the parties to contractually preclude the application of the “delayed discovery” rule that normally triggers the commencement of the limitation time period and affirming case law permitting the shortening of the 10-year latent limitation period to four years. The court did hold, however, that such waiver and shortening is permitted where there are sophisticated parties, in a commercial context, and perhaps that the contract must even be highly negotiated (or at least such negotiation is available).
On June 3, 2013, in Brisbane Lodging, L.P. v. Webcor Builders, Inc. (Cal. Ct. App., June 3, 2013, No. A132555) 2013 WL 2404154, the appellate court reviewed the trial judge’s granting of summary judgment in favor of the general contractor (“Webcor”) on the grounds that a provision in the 1997 version of the AIA 201 (General Conditions to the prime agreement between Owner and Contractor) unambiguously barred all claims, contract and tort, brought more than four years after substantial completion of the project, rather than four years after the Owner discovered the alleged breach or defect and within the 10-year statute of repose. The key language for both the trial court and the appellate court was found in provision 13.7:
“13.7 Commencement of Statutory Limitation Period
“13.7.1 As between the Owner and Contractor:
“.1 Before Substantial Completion. 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 ….” (AIA A201, Article 18.104.22.168 (Article 22.214.171.124), bolding and capitalization omitted.)
Noting that the waiver of the delayed discovery rule was a matter of first impression in California, the court assessed other jurisdictions that had previously permitted and enforced such a waiver, including Maryland, which, like California, followed the belated accrual rule. The court referred favorably to a 1999 Maryland opinion that had allowed the waiver, including the following public policy principals and persuasive arguments:
… [states have] adopted the delayed discovery rule for purposes of establishing an accrual date “to relieve the ‘blamelessly ignorant,’ [citation] of the ‘often harsh and unjust results which flow from [such] a rigid application of the statute of limitations.’ [Citation.]” …
…“here, the parties to the agreement are sophisticated business actors who sought, by contract, to allocate business risks in advance. [Emphasis omitted.] That is, rather than rely on the ‘discovery rule,’ which prolongs the parties’ uncertainty whether or if a cause of action will lie, the parties to this contract sought to limit that period of uncertainty by mutual agreement to a different accrual date.” [Citation] …
… [likewise the language is enforceable here], where the provision was freely entered into by parties represented by legal counsel engaged in a sophisticated commercial construction project.
… [as to latent defects based on negligence] By tying the running of the applicable statute of limitations to a date certain, the parties here negotiated to avoid the uncertainty surrounding 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, we conclude 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, concomitantly, rights are relinquished.
The result of the waiver: the effective shortening of the statute as the statutory limitations period began to run not from a later discovery of the defect, but instead from substantial completion of Webcor’s work on the project.
As for the negligence-based claims for latent defects, the court considered the claimed public policy protections to the sophisticated owner and reaffirmed a prior appellate decision as reasonable, allowing contracting parties “seeking to protect themselves ‘“from the damaging consequences of indefinite liability exposure,”’ [Citation omitted]” to shorten this 10-year period to a period equivalent to the applicable contract and patent defect statute of limitations (four years). As the court succinctly stated, “based on our review of relevant case authorities, both in California and uniformly throughout the nation, we conclude that Article 126.96.36.199 of the Brisbane/Webcor contract was a valid, enforceable provision freely entered into by sophisticated parties engaging in a commercial construction project,” and therefore all claims must have been brought within four years of substantial completion of the project.
Both owners and contractors will need to review their existing California agreements, particularly AIA or those using similar 13.7.1 AIA language, and evaluate the benefits and risks related to any actions that could or may be brought. Going forward, both owners and contractors must hone in on this and similar language and determine if it is truly a bargained for risk shift that they can secure and are willing to relinquish.