Alert: Court Resolves Time Limits for Filing Construction Defect Claims

August 19, 2003

Owners oftentimes wait until their contractor abandons repair efforts before suing for construction defects. But what happens when the contractor says it will correct a defect, then repeatedly attempts to repair the defect over many years, and finally refuses to make further repairs after the applicable statute of limitation or the 10-year absolute cutoff (statute of repose) lapses? In the past, there was a split in authority in California as to whether the 10-year statute of repose for such actions was equitably tolled—extended under legal principles of fairness—during the repair period.

Recently, however, the California Supreme Court issued a decision in the case of Lantzy v. Centex Homes (Aug. 4, 2003) that resolved the conflicting authority. Lantzy holds that the statute of repose for latent construction defects—defects that are "not apparent by reasonable inspection"—is not equitably tolled or extended during periods of repair, and that owners' claims brought more than 10 years after "substantial completion" are time-barred, despite extended periods of contractor repairs. Additionally, the California Supreme Court implied in Lantzy that statutes of limitation for patent defects—defects that are "apparent by reasonable inspection"—are similarly not subject to equitable tolling during repairs.

This new case serves as a powerful reminder to owners and construction participants protected by statutes of limitation and the statute of repose—contractors, design professionals, surveyors and construction managers among others—to be keenly aware of the deadlines for filing a lawsuit for construction defects and the level of conduct that may serve to extend those deadlines under principles of legal fairness.

In Lantzy, the California Supreme Court supported its decision by initially reviewing the statutory scheme in California for actions based on latent construction defects-three-year statute of limitation for negligence actions from discovery of the latent defect; four-year statute of limitation for contract actions from discovery of the latent defect; and 10-year statute of repose for all construction defect actions from "substantial completion." It then focused on the legislative intent and public policy underlying the statute of repose.

According to the Lantzy court, the statute of repose is intended to "protect contractors and other professionals and tradespeople in the construction industry from perpetual exposure for liability for their work" and "[a] broad tolling-for-repairs rule would contravene the Legislature's clear intent . . . to ensure a generous but firm cutoff date for latent defect suits."

Based on these findings, the Lantzy court made clear that owners' claims for latent defects must not only be brought within the applicable statute of limitations, they must now also be brought within 10 years of "substantial completion," even if the contractor is attempting to repair the defects.

However, the Lantzy court left open one remaining exception to this 10-year cutoff. Contractors, or any other construction participant protected by the statute of repose, can still be legally precluded from relying on the 10-year cutoff as a defense to latent defect claims. The Lantzy court explained that a "defendant whose conduct induces plaintiffs [in a latent defect case] from filing suit within the 10-year period might be precluded from asserting that the statute of limitations had expired." Promises from the contractor to repair the defect and representations that there was, in fact, no defect, were held by the Lantzy court to be insufficient. Thus, although the 10-year statute of repose cannot be equitably tolled, a defendant can be prevented from asserting the statute of repose for latent defects as a defense if the defendant's conduct caused the plaintiff owner to reasonably rely on the conduct and refrain from bringing a timely action.

Lessons Learned
Lantzy leaves several key issues unresolved. For instance, are the cross-claims of a defendant construction participant against other construction participants who may be responsible for the defect time-barred if the statute of repose is extended as to the defendant by virtue of the defendant's conduct? The Lantzy court acknowledged the existence of this unresolved issue, but did not specifically address it. Additionally, can the Lantzy court's reasoning be applied to the three-year and four-year statutes of limitation applicable to patent deficiencies, as intimated by the court?

Despite these unanswered questions, owners will still frequently contact construction participants to provide an opportunity to cure defects. Indeed, recently-enacted statutes require this, among other things, as a prerequisite to filing a lawsuit in certain residential contexts. Outside of this statutory context, however, an owner's decision to allow repairs or a construction participant's decision to make repairs presents a number of issues that each must carefully evaluate.

Owner Tips/Considerations
Steps owners should take or consider taking include:

• Immediately determine when the defect was discovered or should have been discovered.
• Immediately determine the date of "substantial completion" for the defective work and the constructed project.
• Provide prompt written notice to the construction participant(s) who may have responsibility for the defect.
• Do not let the applicable statute of limitation or the statute of repose lapse in reliance on promises or attempts to correct the defect.
• Except as may be required under recently-enacted statutes governing certain residential projects, consider whether to provide an opportunity to construction participant(s) to make repairs before filing suit.
• Consider whether to enter into tolling agreements with construction participant(s) to toll the applicable statute of limitation and statute of repose.

Construction Participant Tips/Considerations
Steps construction participants should take or consider taking include:

• Immediately determine when the defect was discovered or should have been discovered.
• Immediately determine the date of "substantial completion" for the defective work and the constructed project.
• When communicating with an owner, consider providing written notice that the construction participant fully reserves its rights, and nothing the construction participant says or does should be construed by the owner to extend or otherwise affect the applicable statute of limitation and the statute of repose.
• Consider whether to enter into tolling agreements with owners.
• Consider whether to enter into tolling agreements with other construction participant(s) who may be responsible for the defect.

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For more information on this decision and its implications, please contact your Farella Braun + Martel construction attorney, or Scott Douglass at sdouglass@fbm.com or 415.954.4498.

This law update is published as a service to our clients and friends. It should be viewed only as an overview of the law, and not as a substitute for legal consultation.