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Construction Contracts Sometimes Go Bad

Jan 23 2017

The job is done - or so says the builder. You do a walk-through, everything seems OK. You close escrow, take possession and move-into your new home.

Construction Contracts Sometimes Go Bad

The job is done - or so says the builder. You do a walk-through, everything seems OK. You close escrow, take possession and move-into your new home.

As fate would have it, sometimes there are problems or "defects" in the construction and/or component parts of your home. Defects may be of different kinds and may include failure to comply with plans and specifications, failure to comply with building codes, standards, laws or simply poor workmanship, materials or related problems. In any case, you may be caught between the proverbial rock and a hard place since, even if the defects are not truly significant and you feel that you can live with them, the fact remains that once you know about them, you are obligated to disclose them when you sell the property.

Upon learning of defects, the best advice is to immediately document them both photographically (if feasible) and in writing. A letter, or at a minimum a "punch-list", should be promptly sent to the builder, alerting him to the problem and permitting a reasonable time to remedy the issues. If the builder replies, you must always reply in writing. If writing does not result in corrective action, you may wish to consider legal options. Creating an appropriate paper-trail is critical in such matters. The law in California provides a "two-fold" statute of limitations for bringing claims for construction defects. The first is a 4 year statute of limitations for "patent" or obvious defects. The second is a 10-year statute of limitations for "latent" or non-obvious or hidden defects. There is also potential cause of action for fraud, which runs 3 years from discovery of the fraud and potentially can outlast the 10-year statute of limitations. Builders will often use a marketing pitch that they offer a "1 or 2 year Warranty" on their homes. In reality, unless you have signed something to the contrary, you essentially have a 4 year warranty for obvious defects, and a 10 year warranty, for hidden defects as a matter of law. Some builders will even attempt to get a home-buyer to waive or reduce the statute of limitations by asking them to sign a particular contract limiting the statute of limitations to 1 or 2 years. There is some legal authority to suggest that such shortening of the statute of limitations, if properly done, may be enforceable. As the owner / buyer, you should be wary of such clauses since if you sign them, you are giving up significant rights. Also, frequently seen are binding arbitration clauses in many construction and other commercial and business contracts. Binding arbitration may be OK in some instances, but the owner / buyer should be aware they are giving up certain important rights by signing such clauses such as the right to a jury, right to appeal and in some instances right to discovery. Further, some experienced legal minds are of the opinion that binding arbitration is not the best forum for construction disputes as the arbitrators may be complicit, may render decisions favorable to builders (or their insurers) who they see on a regular basis or may simply render "split the baby" decisions, giving neither party adequate relief. Also, such claims as strict liability and punitive damages may be disallowed or may not be considered in binding arbitration.

When the file comes to the lawyer's office, he investigates the builder's licensing and insurance. The construction contract is reviewed. A site inspection is usually conducted with an independent general contractor or other experts who detail defects and costs of remedying defects. The lawyer usually sends a "demand letter" to the builder seeking to resolve the matter out-of-court. If that fails, the lawyer may recommend pursuit of binding arbitration or mediation, if the contract requires such procedures. Or, in the appropriate case, the lawyer may file suit for the owner / buyer against the builder and/or the subcontractors and may also file against the builder's license bonding company and related responsible parties. Generally, it is prudent for all concerned to conduct an early site inspection (which may lead to further site inspections), to isolate the issues in dispute, to disclose applicable insurance coverage and to seek prompt mediation of the case. Often, a retired judge or experienced attorney is appointed as "special master" to supervise proceedings and he seeks to bring parties together to fashion a settlement of the dispute. Creating an appropriate paper-trail is important from the beginning. Lawyers are skilled and experienced in drafting correspondence to preserve and advance the rights of the client. It is best to have an attorney review correspondence and/or write correspondence in the event of a dispute, particularly where the parties may not be on good terms.

C, C & R's and other topics in future issues.

David M. Trapani is a licensed attorney in California and has offices located in El Dorado Hills and San Jose, California. He graduated from Santa Clara University Law School in 1987. He can be contacted at (916) 337-3777 or at This e-mail address is being protected from spambots. You need JavaScript enabled to view it . This article is for general information only. It is not a substitute for legal advice for your particular situation and cannot be relied upon as a substitute for consultation with an attorney regarding your specific facts and no attorney client relationship is created hereby.

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