Construction Defects Substantial Completion Statutory Period Triggered By Statute, Not Private Contract

CATEGORY: Public Education Matters
CLIENT TYPE: Public Education
DATE: Feb 28, 2020

Hensel Phelps Construction Co., a general contractor, entered into a construction contract with the developer of the mixed-use project in San Diego. The project included a residential condominium tower.  Smart Corner Owners Association would eventually manage and maintain the tower. Smart Corner was not a party to the construction contract, which obligated Hensel Phelps to construct the development, including the residential tower.

The contract also obligated Hensel Phelps to achieve “substantial completion” of the entire work under the contract within a time certain. The contract defined the term “substantial completion” using five criteria. The contract provided that minor corrective work or incomplete work would not be grounds for asserting that it did not achieve substantial compliance.

On May 24, 2007, the project architect signed the certificate of substantial completion. A Hensel Phelps representative signed the certificate, as did a representative of the owner.

More than ten years later, on July 6, 2017, Smart Corner provided notice to Hensel Phelps of its construction defect claim, which identified numerous alleged defects in the project’s construction. Smart Corner then filed a lawsuit alleging a single cause of action for construction defects under the Right to Repair Act.

After a year of litigation, Hensel Phelps filed its motion to dismiss the lawsuit on legal grounds, arguing that the 10-year limitations period under Civil Code section 941 barred Smart Corner’s claims. Hensel Phelps argued that the statute began to run on May 24, 2007, when the project architect issued the Certificate of Substantial Completion and Hensel Phelps satisfied the provisions for substantial completion under the contract. Hensel Phelps asserted that “substantial completion” under the statute had the same meaning as “substantial completion” in its construction contract with the developer, and that because the parties to the contract agreed that “substantial completion” occurred on May 24, 2007, Smart Corner’s claim was untimely.

Smart Corner disputed that Hensel Phelps could apply its contractual definition of substantial completion to the statute. The trial court agreed, denying Hensel Phelps’s motion and finding that the definition of substantial completion in the contract did not trigger the running of the statute.  Hensel Phelps appealed.

On appeal, the Court analyzed the interpretation of substantial completion in construction defect litigation, looking to the intent of the legislature in enacting the applicable statute. The Court concluded that the statute in question, Civil Code section 941, incorporates the phrase “substantial completion,” and identifies one single triggering event. The statute provides: “Except as specifically set forth in this title, no action may be brought to recover under this title more than 10 years after substantial completion of the improvement but not later than the date of recordation of a valid notice of completion.”

The Court then reviewed the contractual and statutory concepts of substantial compliance. Hensel Phelps contended that the statute adopts a concept of substantial completion as determined by the parties to its construction contract. Hensel Phelps further claimed that the contracting parties’ agreement on the date of substantial completion is “conclusive” and cannot be disputed in later litigation. However, the Court noted that the legal basis for Hensel Phelps’s contention was unclear and that Hensel Phelps did not cite any legislative history, case authority, or secondary sources to support its interpretation.

The Court then rejected Hensel Phelps’s argument, concluding that the date of substantial completion is an objective fact about the state of construction of the improvement, to be determined by the trier of fact and that it is a statutory standard, not a contractual one. The Court held that the parties to a construction contract may not independently determine when the statutory limitations period begins to run.

The Court noted difficulties in simply adopting a contractual concept of substantial completion, including that Smart Corner did not agree to the concept of substantial completion in Hensel Phelps’ contract, and that it would be unfair to hold Smart Corner to a standard to which it did not agree. Viewed as a whole, the Court concluded that the contractual concept of substantial completion is an imperfect fit for the standard of substantial completion under the statute.

The Court held that what matters is the actual state of construction of the improvement and whether it is substantially complete. The Court concluded that the plain meaning of the statute compels the conclusion that a recorded notice of completion is not the only way to trigger the running of the statute. The Court found that the contractually agreed-upon date of substantial completion may be persuasive indirect evidence of the state of construction, but it is not conclusive as to that fact.

As a result, the Court rejected Hensel Phelps’s appeal and its request to establish a bright-line rule that, once a certificate of substantial completion is issued the ten-year statutory period begins.

Hensel Phelps Constr. Co. v. Superior Court of San Diego Cty. (2020) 44 Cal.App.5th 595.