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Howrey LLP
The
California Supreme Court has held that when construction
defects do not cause property damage, the plaintiff homeowner
and homeowners' association bringing actions in negligence
against the developer, contractor and subcontractor that
built the dwellings are barred from recovering damages for
economic loss. Aas v. Superior Court of San Diego County,
__ Cal.4th ___; 2000 Cal. LEXIS 9048 (2000).
Applying
the principles of the economic loss doctrine, as established
in Seely v. White Motor Co., 63 Cal.2d 9 (1965),
the Supreme Court held that a plaintiff suing for pure economic
loss, without suffering property damage, is limited to its
contractual and warranty-based remedies and cannot recover
such damages in negligence or strict liability. In so ruling,
the Supreme Court affirmed the Court of Appeal's decision
in Aas v. Superior Court, 64 Cal.App.4th 916 (1998).
The
plaintiffs in the consolidated Aas action consisted
of an individual homeowner (Aas v. Superior Court)
and a homeowners' association (Provencal Community Association
v. Superior Court), both of which had sued defendants
Lyon Communities, Inc. and William Lyon Co., the developer
and general contractor, for alleged construction defects.
Plaintiffs sought to recover the cost of repairing the alleged
defects. Plaintiffs alleged defects that violated building
codes but did not result in physical damage to the property.
Plaintiffs in the Aas action also sought damages for diminution
in value of their residence.
In
pretrial proceedings, defendants moved for orders in limine
to exclude evidence of alleged defects that did not cause
property damage. The Supreme Court affirmed the lower court's
ruling granting the motions in limine. Finding that liability
in an action brought in negligence is limited to damages
for physical injuries, the court reasoned that recovery
for economic loss is limited to contract and warranty actions
in which the manufacturer has agreed to accept liability
for the "lost benefit of the bargain, such as the cost
of repairing a defective product or compensation for its
diminished value."
The
court rejected plaintiff's argument that the holding in
J'Aire Corp. v. Gregory, 24 Cal.3d 799 (1979) allowed
for recovery of economic damages. In J'Aire, the
court permitted recovery of economic losses in a negligence
action despite the absence of physical or personal injury
on grounds that a special relationship, as established in
Biakanja v. Irving, 49 Cal.2d 647 (1959), existed.
The special relationship was defined by the J'Aire
court in a six-factor balancing test. The Aas court
found the facts before it did not "justify a broad
rule permitting recovery of repair costs unaccompanied by
property damage or personal injury." The court held
that when construction defects have not caused physical
damage, no special relationship could exist because under
the third J'Aire factor, there was a lack of certainty
that the plaintiff had suffered injury. The court found
that the fundamental prerequisite for a tort claim, the
existence of harm, was lacking because the harm alleged
was so speculative that it was not "cognizable in tort."
The
court rejected plaintiffs' reliance on Huang v. Garner,
157 Cal.App.3d 404 (1984) for the proposition that alleged
defects not causing property damage were of sufficient certainty
under the J'Aire factors to create a special relationship
allowing recovery of economic loss damages. Huang
involved an action by a real estate investor's claim against
a developer for alleged construction defects, some of which
had caused property damage. The Huang court reasoned
that under the J'Aire factors, notices of abatement
citing likely structural failure and requiring specific
repairs established the requisite "certainty"
of injury. The court disapproved of the holding in Huang
to the extent it allowed recovery of repair costs in an
action for negligence when there had been no property damage.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2000 Howrey LLP
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