Construction Alert Newsletter

Construction Alert Newsletter

Winter 2001

McKenna & Cuneo, L.L.P. routinely provides its clients and contacts in the construction industry with recent developments in the law that may assist them in managing their day-to-day affairs. To that end, below are recent decisions that may affect how you do business in California.

"No Economic Loss" Rule

In perhaps the most important California case to come down this year in the construction industry, the California Supreme Court in Aas v. San Diego, et al. (2000 Cal. LEXIS 9048) emphatically held that homeowners and homeowners associations may not recover damages in negligence from developers, constructors, and subcontractors who built their dwellings for construction defects that have not caused property damage. Specifically, the plaintiffs in Aas sought "economic loss" damages for the alleged "diminution" in value of their residences. The court held that "economic loss" damages (i.e. those which do not cause property damage or personal injury) could not be presented at trial. This is a very positive development in California for developers, construction mergers, design professionals, contractors, subcontractors, and suppliers that engage in residential construction.

Arbitration of Disputes

In Villa Milano Homeowners Ass'n v. Il Davorge, 2000 WL 1661285 (Cal.App. 4 Dist) a California appeals court concluded that a developer cannot use a Declaration of Covenants, Conditions and Restrictions (commonly known as a "CC&Rs") to insert an arbitration clause restricting new home buyers' access to the courts. The Court ruled that the Homeowners Association's CC&R at issue were "unconscionable" because they were drafted by the developer and recorded "years before the purchasers ever came to buy". The court was especially concerned that there was no possibility that the buyers could negotiate the arbitration provision. As a result, should developers wish to encourage arbitration of disputes, the clause would be more easily defensible (and enforceable) if placed in the purchase agreements with homeowners and in construction contracts with contractors and subcontractors, rather than in the CC&Rs.

Attorneys' Fees to Third Party Beneficiary

In Sessions Payroll Management, Inc. v. Noble Construction Co. (2000 Cal.App. LEXIS 835), a California appeals court held that a party cannot recover attorneys' fees on a third-party breach of contract claim unless the third-party is specifically identified or contemplated within the attorneys' fees clause itself. The subcontract between the general contractor and the subcontractor contained two relevant clauses: (1) an attorneys' fees provision and (2) a provision stating that the payroll management company was a "third-party beneficiary" of the contract. The Sessions Payroll court held that since the contract did not demonstrate that the subcontractor and contractor intended to "benefit" the third party beneficiary (the payroll management company) by including the payroll management company within the contractual attorneys' fees clause, attorneys' fees could not be awarded to the general contractor. While initially a blow to the general contractor's ability to obtain its fees, construction professionals statewide should be comforted that the court has limited third-party attorneys' fees awards in this manner, which will severely limit the ability of third-party beneficiaries to obtain attorneys' fees in other types of construction contracts.

In-House Attorneys' Fees and Costs

It has long been the practice of California courts to deny litigants their "in-house" attorneys' fees. However, in PLCM Group, Inc. v. Drexler 22 Cal 4th 1084, 95 Cal.Rptr.2d 198 (2000), the California Supreme Court held that a corporation represented by in-house counsel may recover attorneys' fees and costs under California Civil Code §1717 (the statute providing for an award of reasonable attorneys' fees to the prevailing party). The case appropriately notes that when a corporation is required to use the time and talents of their in-house counsel for a "litigated matter" the time is taken away from other corporate business. The PLCM court then awarded the prevailing party attorney's fees based upon the "reasonable" in-house attorney hours multiplied by the prevailing hourly rate in the community for comparable legal services. As a result, in-house counsel for contractors, sureties, developers, design professionals and owners should track and later seek reimbursement of such attorneys' fees and costs, provided they meet the other standards identified in California Civil Code §1717.

Sufficiency of Surety Bonds

In Walt Rankin & Associates, Inc. v. City of Murrieta (2000 WL 1621686 [Cal.App. 4 Dist.]), a California appeals court recently held that a governmental entity awarding a public contract must take measures to ensure that a proposed payment bond surety is a "sufficient admitted surety" under Code of Civil Procedure §995.310. This case is extremely important to both general contractors and public entities alike. It is important to the public entity because the public entity may be held liable if the bond procured by the general contractor fails to meet the requirements of the California Code, and the surety, for whatever reason, has insufficient funds to pay subcontractors' and suppliers' payment bond claims. The case is perhaps even more chilling to the general contractor, in that the posting of an "insufficient bond" may serve as a basis for the denial of an award of a project after a successful low bid, and/or a forfeiture of monies under a bid bond. It is now expected that public entities will require that contractors and their bonding agents prove, upon submission of their bids or a short time thereafter, that the surety bond is issued by a California admitted surety under Code of Civil Procedure §995.310, which will undoubtedly cause more time and headache for both the contractor and the bonding agency at bid time.

As identified above, all these cases are extremely relevant to the day-to-day affairs of construction, design, and surety professionals. The attorneys within McKenna & Cuneo's California Construction Group are happy to discuss these developments in the law with you at any time. We also welcome your comments and appreciate any developments that you may forward to us for our attention.

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