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The Horizon Looks Different for Construction Defect Attorneys

By George Dale, Esq.
Managing Partner, Dale, Braden & Hinchcliffe

SB 800, also known as the Fix-It Bill, changes the way construction defect disputes are handled for homes first sold after January 1, 2003. SB 800 is the product of intensive negotiations between the consumer attorneys of California and the California Building Industry Association (CBIA). Attorneys must carefully consider their role in this new environment, and should work together with all the parties involved to make sure that this new bill makes a positive difference.

At the start of the 2001/2002 session, California legislators expressed a desire to address the rise in construction defect litigation, the resulting decrease in affordable attached housing, the crisis in contractors’ ability to obtain general liability insurance, and the strong efforts of the plaintiffs’ bar to overturn the Aas ruling (a decision that precludes recovery under negligence theories for defects that do not cause property damage). Governor Gray Davis signed the landmark legislation into law on September 20, 2002. While SB 800 is not the total solution, it will change the way construction defect litigation issues are handled.

How does SB 800 affect construction defect disputes? The simple answer is that it not only better defines what consumers can expect of their new homes, but it also encourages dispute resolution to avoid litigation. Although these benefits are predominately felt by homeowners and builders, subcontractors, design professionals and material suppliers are also positively affected. To take advantage of these potential benefits to consumers and participants in the homebuilding industry, one thing is clear: attorneys on both sides need to adjust how they represent parties in these matters.

Overview

SB 800 provides consumers and builders with a list of what is and what is not a construction defect, something that had never been achieved before. In addition, it gives builders an absolute right to repair problems before homeowners can file construction defect litigation. This will significantly impact the steady stream of lawsuits that has virtually halted the construction of townhomes and condominiums in California.

Specifically Speaking

The following is a brief description of what the bill accomplishes.

• Establishes builders’ liability standards for homes sold after January 1, 2003;
• Defines an exclusive remedy/measure of damages for defects;
• Does not apply to actions for breach of contract, actions for fraud, personal injury, class actions or statutory violations;
• Sets shorter time limitations regardless of when a problem is discovered;
• Provides specific affirmative defenses relating, but not limited, to the failure of a homeowner to promptly notify the builder of a problem, and a homeowner’s failure to properly maintain the property according to the builder’s standards;
• Requires an individual homeowner or association to give a builder specific notice of a claimed violation;
• Allows for an inspection by the builder, and affords an opportunity to repair the condition if a builder so chooses;
• If the homeowner is dissatisfied once any repair is complete, an expedited mediation is required before the homeowner can file a complaint or pursue arbitration; and
• A builder may customize its standards of liability by offering equal or greater protection in its own contract with homeowners.

The Attorney’s Role in These Disputes

Since construction defect cases began to increase in volume in the mid-1980s, the role of attorneys in these matters has evolved. In the early days, the attorney developed the facts, marshaled the best legal theories, and had a fair day in court, either through motions, settlements or trials. As these cases became more complex and overwhelming to the court system, the real claims resolution work moved to the ADR arena with oversight by the courts. As this happened, the ADR process became a cottage industry that took control of the process away from the parties and their attorneys. The process devolved into a series of mediations where the economics of the case almost always outweighed the true merits.

With great justification, the insurance and building industries began to shy away from building and insuring houses that generated litigation and liability, particularly that which was far in excess of any true building deficiencies. Eventually, the resultant loss of affordable housing became evident. In essence, the system, designed and intended to be efficient, crushed the housing industry in California for consumers and builders alike.

Was the alternative dispute resolution system, including attorneys for both sides, experts, Special Masters and claims adjusters, solely to blame for the housing crisis and lack of insurances? Of course not. There is no doubt, however, that the true intent of the system (to efficiently manage complex claims and compensate legitimate claimants) became lost in the morass, and the housing industry suffered.

Assuming that builders and carriers take full advantage of SB 800’s attributes, they can regain their business interests in controlling consumer claims against their industries. Consumers have a right to speedy claims resolution with a litigation backstop to prevent abuses by non-cooperative builders or carriers.

Construction defect litigation will certainly continue to exist under the new system. Not all builders will take full advantage of the SB 800 provisions. Some claims will be too large for expedited resolution and will need all parties under court supervision. Not all claimants will pursue these cases in order to recover their true damage; some will be in it to recover damages for bogus claims. Some claimants and their attorneys will assuredly lie in wait anticipating that builders and their claims teams will not be able to comply with the tough new timetables.

Early reaction from some attorneys entrenched in the current inefficiency has been telling—they don’t like it because they have become used to the slow and expensive pace that has hurt their own clients. These attorneys should reexamine their roles and their ethical obligations to keep their eye on the prize: the legitimate advocacy of their clients’ interests. Are their clients’ interests best expressed in the lengthy litigation process, or are they best served by taking advantage of SB 800?

Attorneys now have the opportunity to focus on what their true role should be: effective legal advocates for resolving disputes in a manner appropriate for their clients’ interests; not sheep being led about by the inefficient system. The California housing industry, including consumers, construction participants and insurers, needs this to work. The industry needs our help as attorneys to carry out the intent of this new law. Let’s not blow it again!