Publications
Does Greystone Signal the End of the Economic Loss Rule in New Residential Home Construction in California?
Construction Practices Newsletter
In Greystone Homes, Inc. v. Midtec, Inc., 168 Cal.App.4th 1194 (2008), a homebuilder's equitable indemnity claim trumped the "economic loss rule" and paved the way for the builder to recover repair costs against the supplier of a defective product that had not caused property damage.
Greystone represents a departure from traditional construction defect recovery. The "economic loss rule" typically precludes a person or company from recovering money to repair construction defects arising out of another's negligence, unless the person or company can show that it suffered personal injury or property damage as a result of the negligence. It was applied against a group of homeowners in a well-known case titled Aas v. Superior Court, 24 Cal.4th 627 (2000). In Aas, the California Supreme Court denied the homeowners recovery of the cost to repair construction defects that had not caused property damage or personal injury based on a negligence claim. The Aas Court acknowledged that any construction defect can diminish the value of a house, but explained that the "economic loss rule" precludes recovery for such damages based on negligence. "[T]he difference between price paid and value received, and deviations from standards of quality that have not resulted in property damage or personal injury are primarily the domain of contract and warranty law or the law of fraud, rather than of negligence."
In response to Aas, the Legislature enacted the "Right to Repair" Act (California Civil Code section 895 and following), which allows homeowners to recover "economic losses" from builders and others who violate the Act's building standards without having to show that the violation caused property damage or personal injury. Greystone clarifies that builders who make an indemnity claim also may recover "economic losses" even if there is no personal injury or property damage. Accordingly, Greystone may have eliminated the "economic loss rule" in home construction disputes brought under the Act.
Factual Background
Greystone Homes, Inc. built condominiums in Chula Vista. Greystone's plumbing subcontractor, Production Plus Plumbing, installed a "RTI Plum-Pex" system in some units, which contained Midtec, Inc. plumbing fittings. Owners of some of the units that contained the Midtec fittings complained to Greystone about water leaks. The Midtec fittings failed primarily due to fatigue arising from a manufacturing problem. Greystone determined that it needed to replace all the Midtec fittings and did so at a cost of about $1.5 million. The cost for repairs related to the fittings that had actually failed was approximately $106,000.
Greystone sued RTI and Midtec. RTI settled by paying Greystone an amount in excess of the cost to repair the failed fittings. Greystone's action for negligence, indemnity and contribution proceeded against Midtec. Midtec filed a summary judgment motion based on the economic loss rule, arguing that Greystone could not recover additional damages from Midtec for the cost of replacing the fittings that had not failed or caused property damage.
Greystone argued that the Right to Repair Act had entirely abrogated the economic loss rule in residential construction defect litigation. The trial court disagreed and granted Midtec's motion for summary judgment, reasoning that the Right to Repair Act only created an exception to the economic loss rule for homeowners, not builders, such as Greystone.
In response to Greystone's appeal, the court of appeal reversed. It agreed with the trial court's conclusion that the Act only permits a direct action for negligence by a homeowner. However, it held that Greystone could bring an equitable indemnity action against Midtec, since the homeowners would have been able to bring a claim against Midtec for its negligent violation of the Act's standards. Where more than one party causes injury, each is "jointly and severally liable" and any one may be held individually responsible for the entire loss—in this case, Greystone.
The responsible parties are then left to work out among themselves any apportionment of the loss. Equitable indemnity is one manner of apportioning the loss in proportion to their relative culpability. Once Greystone paid the homeowners' entire loss, including economic losses, arising out of Midtec's violation of the Right to Repair Act's building standards, it was entitled to recover that loss from Midtec.
Conclusion
The Greystone decision is important because it allows a builder to avoid the economic loss rule – albeit indirectly, by an equitable indemnity claim that is based on the homeowner's right to recover under the "Right to Repair" Act. A builder who intends to file an equitable indemnity claim should comply with the Act's prefiling notice requirements.
Maria J. Giardina concentrates her practice on the prosecution and defense of construction-related disputes. She provides claims analysis and litigation services on a wide variety of matters involving contract claims, payment disputes, mechanic's liens, unfair bidding, unfair competition and antitrust violations, false claims, and design and construction defects.
|