Orange County Branch Newsletter

March 2014

Law and CE News

How To Reduce the Risk of Stale Claims

After several years as an engineer in training, you passed the PE exam and were assigned your first project as a licensed professional engineer. Thankfully, the project was a huge success that helped launch your career. You forged strong business relationships based on the reputation of that first job and became a principal in your firm. It is the ten-year anniversary of this first project and you still feel a strong sense of pride when driving past the building on your commute. At work, you are stunned to receive a lawsuit naming you and your firm for the very same project! Is this even possible? Unfortunately, it is, because of the rules governing latent (hidden) construction defects. But we do have some good news—this scenario can now be avoided through careful contract negotiation.

The Statute of Limitations

Many people are familiar with the concept of statutes of limitation, which set the maximum amount of time to bring a lawsuit after suffering an injury. Generally speaking, statutes of limitation begin to run when an individual knows, or should know, that they have suffered harm. In situations involving property damage arising from design or construction defects, the statute of limitations begins to run, or is ‘triggered’, not on completion of a project, but by the discovery of a given defect or damage (the “delayed discovery rule”). However, what happens if a defect is not discovered for years following substantial completion? Is a design firm forever exposed to potential liability from defects that have yet to manifest?

The California Legislature answered this question with Code of Civil Procedure section 337.15, which allows an owner to file a lawsuit for hidden defects up to ten years after substantial completion. Section 337.15 is a “statute of repose” that sets an outer limit of time to bring a claim, regardless of discovery of a defect. Ten years after substantial completion, an owner can no longer bring a lawsuit against the original construction and design team, even if the owner later discovers a hidden defect.

The Legislature encourages parties to bring claims promptly on discovery, so the shorter time limits are controlling once the defect has been discovered. If a hidden defect emerges two years after substantial completion, an owner cannot wait until year nine to bring a claim. Once the owner has notice of the defect, they must file a lawsuit within the applicable statute of limitations (e.g., two years for professional negligence or four years for breach of contract).

Design professionals often face an uphill battle when arguing an owner had sufficient notice of a defect to trigger the shorter statute of limitations. The timing of the discovery of a defect can prove difficult to establish, especially when an owner claims multiple defects from multiple causes. As a result, many owners use the delayed discovery rule to escape the impact of statutes of limitation.

Protect Your Firm From Faded Memories and Lost Files Through A Well-Negotiated Contract

As a matter of public policy, the ten-year statute of limitations is meant to protect purchasers and owners who may lack knowledge about construction from defects that take time to manifest. However, many lawsuits are filed by sophisticated developers who may want your insurer to pay for normal wear and tear. This results in a difficult scenario for design professionals. After ten years, memories fade; files are lost or destroyed; and employees on the project no longer work at the firm. The ability of a firm to successfully defend against a claim of design defects erodes over time.

Fortunately, your contract can include a waiver of the delayed discovery rule, which may help you avoid claims of property damage made by owners on old projects. While contracts cannot absolve parties of all future liability for wrongful conduct, contracts may modify the statute of limitations. A 2013 California Court of Appeal decision, Brisbane Lodging, L.P. v. Webcor Builders, Inc., confirmed that contractual provisions that waive the delayed discovery rule are valid when the contracts are entered into by sophisticated parties. Brisbane and Webcor agreed that the statute of limitations would accrue (i.e., the clock begins to run) immediately following substantial completion of the project, regardless of when a defect is actually discovered. This served as an effective and valid wavier of the delayed discovery rule between these two entities. When such language is included in a contract, the owner is deemed to be “on notice” of any defects, even if the defect is still latent. Since the statute of limitations is already running, the owner’s right to file a lawsuit for professional negligence and breach of contract would expire within two and four years, respectively, after substantial completion. The delayed discovery rule, and the ten-year outer limit on claims, would no longer apply. However, it should be noted that there is no real statute of limitations for a latent defect if it causes an injury to a person – their injury is a “new” claim, and the statute starts to run at the time of the injury. In other words, one cannot effectively limit exposure to third party injury claims that might arise out of a latent defect by way of a contract limitation.

Well-negotiated contracts are essential to protecting the financial health and reputation of every engineering firm. Don’t let the ghosts of projects past come back to haunt you—or the young engineers in your firm. In ten years, you can then look back with pride on the memories of your successful project without the worries of stale claims.

Contact us at our Oakland, South Pasadena, Orange, or San Diego offices to discuss further:

Ryan J. Kohler, Esq.
1100 El Centro Street | South Pasadena, CA 91030
Phone:  (626) 243-1100 | Fax:  (626) 243-1111
[email protected]

Ryan E. Palumbo, Esq.
1999 Harrison Street, Suite 1700 | Oakland, CA 94612
Phone:  (510) 844-5100 | Fax:  (510) 844-5101
[email protected]

Nothing contained within this article should be considered legal advice.  Anyone who reads this article should always consult with an attorney before acting on anything contained in this or any other article on legal matters, as facts and circumstances will vary from case to case.

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