Economic Damages and the Right to Repair Act: You Can’t Have it Both Ways

“Eat Cake Dinasour” by St0rmz / Flickr.com (CC BY-SA 2.0)

In 2002, the California State Legislature passed Senate Bill 800 also known as the Right to Repair Act (Civil Code Sections 895 et seq.) in an effort to stem a then rising tide in residential construction defect litigation.

SB 800, which applies to newly constructed residential units including single-family homes and condominiums (but not condominium conversions) sold after January 1, 2003, was intended to curb residential construction defect lawsuits by giving developers and others in the construction chain an opportunity to repair construction defects before being sued in court. SB 800 also provides minimum construction standards and limits the time in which a homeowner can bring a claim for construction defects.

In Acqua Vista Homeowners Association v. MWI, Case No. D068406 (January 26, 2017), the California Court of Appeals for the Fourth District examined the circumstances in which homeowners  can sue a material supplier under the Right to Repair Act.

Acqua Vista Homeowners Association v. MWI, Inc.

Acqua Vista Condos,  a 382 unit condo high-rise comprised of two towers, was built in 2004 in San Diego, California. In 2009, the Aqua Vista Homeowners Association (HOA) sued the builder and others alleging various construction defects. Among the defendants was MWI, Inc. , which supplied cast iron pipe for the project.

According to the HOA’s complaint, the cast iron pipe, which was manufactured in China, violated the Right to Repair Act’s minimum construction standards which provide that: (a) “[t]he lines and components of a plumbing system, sewer system, and utility systems shall not leak” and; (b) “[p]lumbing lines, sewer lines, and utility lines shall not corrode  so as to impede the useful life of the systems.”

At trial, tracking the minimum construction standards of the Right to Repair Act, the jury was asked to determine if the cast iron pipe supplied by MWI “leaked” and whether they “corroded so as to impede the useful life of the plumbing/sewer system.” The jury answered both questions in the affirmative and found MWI liable for a whopping $23,955,796.28 in damages.

MWI appealed.

The Appeal

On appeal, the Court of Appeals examined seemingly contradictory language contained in Section 936 of the Right to Repair Act, which, on one hand, appeared to require that the HOA prove that MWI was either negligent or in breach of contract before being found liable, but, on the other hand, appeared to also indicate that the HOA might not need to prove that MWI was negligent or in breach of contract if it could show that MWI could otherwise be found to be strictly liable for the defective cast iron pipe:

Each and every provision of the other chapter of this title apply to general contractors, subcontractors, material suppliers, individual product manufacturers, and design professionals to the extent that the general contractors, subcontractors, material suppliers, individual product manufacturers, and design professionals caused, in whole or in part, a violation of a particular standard as a result of a negligent act or omission or a breach of contract.

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However, the negligence standard in this section does not apply to any general contractor, subcontractor, material supplier, individual product manufacturer, or design professional with respect to claims for which strict liability would apply.

Ok, that’s a lot to digest so let’s break it down:

1. First, in California, common law (i.e., non-statutory and non-contractual) liability for defective construction is not recognized for mere economic loss (i.e., damage to the product itself but no resulting damage to someone (i.e., personal injury) or something else (i.e., property damage). This is also known as the “economic loss rule.”
2. The Right to Repair Act abrogated the economic loss rule by setting forth minimum construction standards, and providing for liability for failure to meet those standards if a general contractor, subcontractor, material supplier, product manufacturer, or design professional “caused, in whole or in part a violation of a particular standard as a result of a negligent act or omission or a breach of contract.” In other words, so long as a minimum construction standard was not met, and that standard was not met because of the negligence or breach of contract by a general contractor, subcontractor, material supplier, product manufacturer, design professional, the general contractor, subcontractor, material supplier, product manufacturer, or design professional can be held liable even where a defect is only to the product itself. In other, other words, they can be found liable even where damages are only for economic loss.

And, that’s where the rub lies.

According to the HOA, the concluding language of Civil Code Section 936, that “[h]owever, the negligence standard in this section does not apply to any general contractor, subcontractor, material supplier, individual product manufacturer, or design professional with respect to claims for which strict liability would apply,” meant that the HOA did not need to prove that MWI was negligent  in order to be found liable under the Right to Repair Act so long as the HOA could show that MWI could have been found liable under common law strict liability.

The Court of Appeals, however, disagreed. Reading Civil Code Section 936 in context, the Court explained that if the legislature intended to allow the HOA to prove that liability based merely on the ground that MWI could have been found liable under common law strict liability, the legislature would have eliminated both the negligence standard as well as the breach of contract standard, and not merely the negligence standard. Rather, held the Court, what the legislature meant, was that the HOA could show that MWI was liable for common strict liability, but only if the HOA could also show that it suffered more than mere economic loss, which it could not do since the jury found only that the cast iron pipes “leaked” and that they “corroded so as to impede[ ] the useful life of the plumbing/sewer system” not that the defective pipe caused personal injury or property damage.

In other words, you can’t have your cake and eat it too.

Conclusion

For homeowners, HOAs, and others with claims against contractors, material suppliers and design professionals subject to the Right to Repair Act, Acqua Vista clarifies that you can sue someone in the construction chain if you can show that they were either negligent or in breach of contract, but if you are suing them for strict liability, you need to show either personal injury or property damage.