Contract’s Definition of “Substantial Completion” Does Not Apply to Third Party for Purp


Those of you in the construction industry know that the two primary statutes of limitation are the 4-year year statute of limitations for patent defects and 10-year statute of limitations for  latent defects. Both statutes begin to run on “substantial completion.”

In Hensel Phelps Construction Co. v. Superior Court of San Diego, Case No. D076264 (January 22, 2020), the 4th District Court of Appeal examined whether the term “substantial completion,” as used in Civil Code section 941, which applies to residential construction, can be defined by the parties’ contract and applied to third-parties.

The Hensel Phelps Case

Hensel Phelps Construction Co. entered into a prime construction contract with the owner and developer of a mixed-use project in San Diego. Hensel Phelps was the general contractor on the project. The project included a residential condominium tower which would eventually be managed and maintained by Smart Corner Owners Association. Smart Corners was not a party to the contract.

Under the terms of the prime contract, “Substantial Completion” was defined as “that stage in the progress of the Work” when:

  1. “Such Work or component is sufficiently complete in accordance with the Contract Documents to permit lawful occupancy and use thereof for its intended purpose”;

  2. [A] temporary certificate of occupancy has been issued with no material conditions (i.e., conditions that would impair the issuance of a permanent certificate of occupancy) that in Owner’s reasonable judgment are not susceptible of being completed in a timely manner”;

  3. “All Project utilities have been properly installed and approved by the applicable utility companies”;

  4. The Architect has issued its Certificate of Substantial Completion”; and

  5. “Contractor has certified that all remaining Work (as such remaining work is mutually determined by Contractor, Architect, and Owner in their final review of the Project) will not interfere with Owner’s use or enjoyment of the Project and is capable of being completed and will be completed within sixty (60) consecutive calendar days following the date on which the Architect shall have issued a certificate of Substantial Completion.”

On May 24, 2007, the project architect signed a Certificate of Substantial Completion. On that same date, Hensel Phelps, the owner, and a Smart Corner representative wrote to the City of San Diego and requested a temporary certificate of occupancy and the City granted a temporary certificate of occupancy for 30 days.

On July 10, 2007, the owner recorded a notice of completion. This was preceded by a certificate of occupancy issued by the City for two dozen individual condominiums and the common area on July 6, 2017 and a certificate of occupancy for the project generally on July 17, 2007. The City continued to issue certificates of occupancy for individual condominiums thereafter.

On July 6, 2017, Smart Corner provided notice to Hensel Phelps of various construction defect claims including defects in the project’s windows, doors, railings, private decks, waterproofing, concrete, bathtubs and showers, plumbing, venting, roof, and parking structure. Hensel Phelps refused to participate in prelitigation dispute resolution and Smart Corners filed suit.

During the litigation, Hensel Phelps filed a motion for summary judgment arguing that 10-year statute of limitations under Civil Code 941 began to run on May 24, 2007 when the project architect issued its Certificate of Substantial Completion. In its opposition to the motion, Smart Corner argued that: (1) Hensel Phelps could not apply its contractual definition of “Substantial Completion” to the dispute; and (2) Even if it could, there were triable issues of fact as to whether Substantial Completion had been satisfied since the project had failed a number of important inspections after the City issued its temporary certificate of occupancy.

The trial court agreed and denied Hensel Phelp’s motion and Hensel Phelps appealed.

The Appeal

On appeal, the 4th District Court of Appeal explained that the 10-year statute of limitations set forth in Civil Code Section 941 was enacted in 2002 as part of the Right to Repair Act, and while similar to the general 10-year statute of limitations set forth in Code of Civil Procedure Section 337.15, does not include the four “triggering events” which begin the running of the 10-year limitations period. Rather, Section 941 includes a single “triggering event,” namely, “substantial completion of the improvement but not later than the date of recordation of a valid notice of completion.”

As to Hensel Phelp’s claim that the definition of “Substantial Completion” contained in its prime contract defines the triggering date under Civil Code Section 941, the Court of Appeals explained that the Hensel Phelp’s argument was without legal support:

Hensel Phelps does not cite any legislative history, case authority, or secondary sources that support its interpretation. It cites commentary on form contracts published by the American Institute of Architects (AIA) for the proposition that substantial completion is an important concept in private construction contracts . . . [but] [o]ther than noting these facts, Hensel Phelps does not explain why we should interpret section 941 as incorporating the date of substantial completion as determined by the parties to Hensel Phelps’s private construction contract. The statute itself does not provide any indication that it has adopted any AIA standards or the specific determination of private parties under a construction contract. The available legislative history does not mention the AIA in connection with substantial completion. Numerous California authorities have interpreted the phrase “substantial completion” since it was first used, but none of these authorities references the AIA’s discussion of substantial completion. Given the decades-long history of these statutes, and the decades-long use of AIA forms, the absence of any legal authority connecting the two is striking.

Further, explained the Court of Appeal, citing to cases in Wisconsin and Louisiana, courts outside the state have rejected the convention that the legal or statutory concept of substantial completion must conform to the date of substantial completion as determined by private parties to a contract.

And, finally, explained the Court of Appeal, “we note several several additional difficulties in simply adopting a contractual concept of substantial completion as the statutory standard”:

First, of course, Smart Corner did not agree to the concept of substantial completion in Hensel Phelps’s contract. It would be unfair to hold Smart Corner to a standard it did not agree to in the absence of any indication the Legislature intended to adopt it by statute. Second, it is unclear how courts would apply a contractual concept in practice. Does the statute embody an AIA form contract (and, if so, which version)? Or does the statute embody whatever contract governs the project at issue, regardless of its content? In its narrow focus on the “conclusive” nature of the contractual determination here, Hensel Phelps does not address these issues.

Conclusion

So there you have it. When it comes to third parties, contractually definitions of “substantial completion” cannot bind such third parties with respect to the statute of limitations set forth under Civil Code Section 941, and presumably under Code of Civil Procedure Section 337.15.

#CivilCodesection941 #Statuteoflimitations #SmartCorner #CodeofCivilProceduresection33715 #HenselPhelps

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