Reminder to Builders That Construction Liability Could Extend Beyond 10 Years

California law provides contractors and developers protection against indefinite liability exposure by limiting the time within which an action may be brought for construction defects. Generally, an action for patent defects (defined by statute as “a deficiency which is apparent by reasonable inspection”) must be brought within four years from substantial completion of an improvement. An action for latent defects (defined by statute as “a deficiency which is not apparent by reasonable inspection”) must be brought within three or four years from the date of discovery of the defect but in any case within ten years from the date of substantial completion of the improvement.

The ten-year statute of repose for latent construction defects is commonly regarded as an “absolute” limitations period, meaning that the ten-year limitations period applies regardless of when the defect was discovered. Thus, it is a marker upon which a contractor or developer may rely in making insurance coverage and other business decisions.

However, while the legislature created the ten-year period to address “economic effects of indefinite ‘long tail’ defect liability on the construction industry” (Lantzy v. Centex Homes (2003) 31 Cal. 4th 363, 374), there are a number of exemptions to the limitations period, including actions based on willful misconduct or fraudulent concealment, or a cross-complaint for indemnity in an action that is commenced within the ten-year limitations period. In addition, courts have created an exemption based on principles of equitable estoppel. The legislature and courts view the exemptions as a reasonable balancing of the need for consumer redress and construction industry economic stability.

Willful Misconduct

Understanding how some of the exemptions work can help contractors and developers avoid their potential pitfalls. For example, in one case, the court determined that plaintiffs had sufficiently pleaded a claim for contractor/developer willful misconduct where experts identified alleged defects, stated that the defects involved conspicuous failures of subcontractors to comply with the building code, and expressed the opinion that the defects could not be present without the tacit or express approval of the contractor/developer. Thus, a court may charge a contractor/developer with willful misconduct where it has not actively participated in the acts causing harm and allowed plaintiffs to move forward against the contractor/developer despite that the ten-year limitations pCeriod had expired.

Cross-Complaint for Indemnity

Likewise, where a plaintiff sues for alleged defects, a defendant may bring a cross-complaint for indemnity even where the ten-year limitations period has passed, so long as the plaintiff filed its action prior to the expiration of the ten-year limitations period. In theory, liability based on a claim for indemnity could extend for years past the end of the ten-year limitations period. Such an exception is of particular relevance to subcontractors, who may not be named in the original complaint.

Equitable Estoppel

Finally, a court may employ equitable estoppel to extend the “absolute” ten-year limitations period. “Equitable estoppel addresses circumstances in which a party will be estopped from asserting the statute of limitations as a defense to an admittedly untimely action because his conduct has induced another into forbearing suit within the applicable limitations period. It…takes its life from the equitable principle that no man [may] profit from his own wrongdoing in a court of justice.” Bomba v. W. L. Belvidere, Inc. (1978) 579 F.2d 1067, 1070.

Even though Bomba purports to require some contractor/developer wrongdoing, ” ‘[a]n estoppel may arise although there was no designed fraud on the part of the person sought to be estopped. To create an equitable estoppel, ‘it is enough if the party has been induced to refrain from using such means or taking such action as lay in his power, by which he might have retrieved his position and saved himself from loss.'” Vu v. Prudential Property & Casualty Ins. Co. (2001) 26 Cal.4th 1142, 1152-1153. Accordingly, (1) if a contractor or developer represents, while the limitations period is still running, that all actionable damage has been or will be repaired, thus making it unnecessary to sue, (2) the plaintiff reasonably relies on this representation to refrain from bringing a timely action, and (3) the representation proves false after the limitations period has expired, the contractor or devleoper may be equitably estopped to assert the statute of limitations as a defense to the action. Thus, in such circumstances, a contractor or developer may find itself defending against an action after expiration of the ten-year limitations period.

In sum, while the ten-year statute of limitations provides some protections against never-ending construction defect liability, the exemptions make up an important component of the “absolute” ten-year limitations period and knowing the exemptions is the first step to avoiding them.

ERRATA – Land Use Note – Stimulus Package Moved to Jan. 14, 2010

Note that the first public hearing at the Planning Commission on the Mayor’s Real Estate Simulus Package has been moved to January 14, 2010.


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