Earlier this year, the Legislature enacted SB1271, which made a number of changes to the Purchaser Dwelling Act (the “PDA”). The PDA governs construction defect litigation involving single-family and multi-family homes. SB1271 went into effect on August 27, 2019.
The legislation arose out of recommendations from the Construction Liability Apportionment Study Committee. This committee was established by the Legislature in 2018 to study how liability for construction defects is apportioned and recommend changes to the law. SB1271 was the committee’s final product.
The new law makes the following changes to the PDA and construction-defect litigation:
Indemnity: One of SB1271’s foremost goals is to apportion liability for construction defects based on each party’s own share of fault for that defect. To that end, indemnity terms in contracts involving the construction or design of a dwelling must now be limited to the contracting party’s own negligence. A broader term that extends the contracting party’s indemnity obligation beyond its own negligence is invalid and unenforceable. This new rule applies only to construction contracts involving a dwelling and does not apply to construction contracts for commercial projects.
The legislation also extends the same basic rule to additional insured endorsements: the insurer is not obligated to indemnify an additional insured for the additional insured’s share of fault for a defect. That limitation, however, does not affect the insurer’s duty to defend the additional insured.
Right to Repair: The Legislature originally enacted the PDA to give the “seller” of a home notice and an opportunity to repair any construction defects prior to litigation. SB1271 extends this same right of notice and repair to any “construction professional” that may be responsible for the alleged defect. “Construction professional” includes contractors, subcontractors, suppliers, architects, and engineers that perform work on a home.
The homebuyer’s notice must include the street address of each home that is the subject of the notice and sufficient detail to allow the seller to identify the alleged defect. Once the seller receives a notice of defect from the homebuyer, the seller must forward a copy of the notice to all construction professionals who might be liable for any alleged defect. Each affected construction professional then has the same right as the seller to inspect the home, conduct testing on the home (including destructive testing), and make repairs or replacements to its work.
The seller remains liable, however, for responding to the homebuyer’s initial notice of defect within 60 days with a list of proposed repairs and replacements. Sellers should therefore be careful to make sure they collect all necessary information from their construction professionals well before the 60 day deadline.
Bifurcated Defect Litigation: A homebuyer that files a dwelling action must name the seller as defendant. The seller must then join, as third-party defendants, the “identified construction professionals.” Presumably, “identified construction professional” means those construction professionals that received the homebuyer’s notice of defect from the seller, i.e. those professionals that had an opportunity to inspect and conduct repairs. If the seller does not provide a construction professional with the homebuyer’s initial notice, the seller has arguably waived its right to join that construction professional as a third-party defendant in the dwelling action. Sellers should therefore take great care to ensure that they deliver the buyer’s notice to all construction professionals who might be liable for any defect.
SB1271 bifurcates dwelling actions (whether in court or in arbitration) into two phases:
First, the trier of fact must determine, for each alleged construction defect, whether a defect exists, everyone who is responsible for the defect, and the damages caused by the defect. The homebuyer has the burden of proof on all issues in this first phase.
Second, the trier of fact must determine each party’s pro rata share of fault for each construction defect. The seller has the burden to prove the proportion of fault for each construction professional. Each construction professional may be allocated only its portion of fault for each defect.
Attorneys’ Fees: The Legislature reinstituted a statutory attorneys’ fees provision for defect litigation under the PDA, allowing the court to award reasonable attorneys’ fees to the prevailing party on each contested issue. For litigation that involves only one buyer, the court may also award expert witness fees to the prevailing party on a contested issue.
SB1271 prescribes a test for determining the prevailing party on each contested issue. The homebuyer is the prevailing party on a contested issue if the relief obtained by the purchaser (not including attorneys’ fees and costs) is more favorable than the repairs, replacements and offers made by the seller before litigation. The seller is the prevailing party if the relief obtained by the purchaser is not more favorable than the repairs, replacements and offers made by the seller before litigation.
The statute then sets forth a number of factors for the court to consider in determining whether the fees incurred by the prevailing party on a contested issue are reasonable. Those factors include the seller’s pre-litigation offer, the homebuyer’s response to that offer, a comparison between the fees incurred in the entire litigation without the value of the relief obtained on a contested issue, and the amount of fees incurred in responding unsuccessful motions, claims and defenses.
SB1271 also extended the Construction Liability Apportionment Study Committee for another year, and the committee will continue to study liability issues on construction projects. Some legislators want to extend SB1271’s restrictions on indemnity clauses to all construction contracts, and a bill could be introduced as soon as next year.
In the meantime, please contact us if you have questions about how SB1271 impacts you.
If you have questions about this article, please contact the author Chris Hering.