State Supreme Court Majority Sides With Developer: Tort Liability For Construction Defects Rejected

The question at hand: May plaintiffs recover in negligence from the entities that built their homes a money judgment representing the cost to repair, or the diminished value attributable to, construction defects that have not caused property damage? Plaintiffs define construction defects as deviations from the applicable building codes or industry standards. Strict liability is not here at issue.

This procedural posture makes the question we address fairly narrow. The question, however, is not simple, because it arises from the nebulous and troublesome margin between tort and contract law. Speaking very generally, tort law provides a remedy for construction defects that cause property damage or personal injury. Focusing on the conduct of persons involved in the construction process, courts in this state have found such a remedy in the law of negligence. Viewing the home as a product, courts have also found a tort remedy in strict products liability, even when the property damage consists of harm to a sound part of the home caused by another, defective part. For defective products and negligent services that have caused neither property damage nor personal injury, however, tort remedies have been uncertain. Any construction defect can diminish the value of a house. But the 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 actions for negligence, a manufacturer's liability is limited to damages for physical injuries; no recovery is allowed for economic loss alone. (Seely v. White Motor Co., supra, 63 Cal.2d 9, 18.) This general principle, the so-called economic loss rule, is the primary obstacle to plaintiffs' claim.

In Biakanja, we held that a defendant's negligent performance of a contractual obligation resulting in damage to the property or economic interests of a person not in privity could support recovery if the defendant was under a duty to protect those interests. The court articulated a case-by-case test for identifying such a duty. "The determination whether in a specific case the defendant will be held liable to a third person not in privity," we wrote, "is a matter of policy and involves the balancing of various factors ." (Biakanja, at p. 650.) The six factors were: "[1] the extent to which the transaction was intended to affect the plaintiff, [2] the foreseeability of harm to him, [3] the degree of certainty that the plaintiff suffered injury, [4] the closeness of the connection between the defendant's conduct and the injury suffered, [5] the moral blame attached to the defendant's conduct, and [6] the policy of preventing future harm." (Ibid.)

Twenty-one years later, the court in J'Aire, supra, 24 Cal.3d 799, applied the Biakanja (supra, 49 Cal.2d 647, 650) factors to conclude that the tenant of a building could state a cause of action for negligence against a renovation contractor hired by the building's owner for business income lost when the contractor "fail[ed] to complete the project with due diligence." (J'Aire, at pp. 802, 804-805.) Applying the Biakanja factors, the court held that a "special relationship" (J'Aire, at p. 804) permitting recovery of economic losses (i.e., the relationship defined by the Biakanja test) existed between the contractor and the tenant. The court dismissed concerns that such a theory of recovery would threaten liability, out of proportion to fault, for remote consequences and speculative damages. (J'Aire, at pp. 807-808.) In the court's view, the Biakanja factors, in combination with "the ordinary principles of tort law such as proximate cause," were "fully adequate to limit recovery" of purely economic damages "without the drastic consequence of an absolute rule which bars recovery in all such cases." (J'Aire, at p. 808.)

The lower courts have expanded upon J'Aire, supra, 24 Cal.3d 799 [to include] cases in which privity did exist. These courts have concluded that "the reasoning of J'Aire is wholly incompatible with a limitation of the cause of action to those instances in which the plaintiff and defendant are not in privity ." (Ott v. Alfa-Laval Agri, Inc., supra, 31 Cal.App.4th 1439, 1448; see also North American Chemical Co. v. Superior Court, supra, 59 Cal.App.4th 764, 783; Pisano v. American Leasing (1983) 146 Cal.App.3d 194, 197 [both applying J'Aire in cases apparently involving privity].)

Plaintiffs contend that J'Aire, supra, 24 Cal.3d 799, when it applies, displaces the general rule (Seely, supra, 63 Cal.2d 9, 18) that damages are not recoverable for product defects that have not caused property damage. Plaintiffs base the contention on the following statement in J'Aire: "Where the risk of harm is foreseeable, . . . an injury to the plaintiff's economic interests should not go uncompensated merely because it was unaccompanied by any injury to his person or property." (J'Aire, at p. 805.) The validity of the orders on review depends largely on the significance of that statement. Paraphrasing it, one might ask the dispositive question this way: Does the law of negligence protect plaintiffs' economic interests in having houses that fully comply with the building codes, measured by the cost of repairs or diminished value associated with noncompliance, even though the asserted harm to those interests is unaccompanied by any injury to person or property?

To apply the multifactored balancing test set out in J'Aire, supra, 24 Cal.3d 799, 804, tends to involve a court in making fairly subjective judgments. In this case, however, a relatively objective obstacle to plaintiffs' claim appears in factor (3), which looks to "the degree of certainty that the plaintiff suffered injury ." (Ibid.) Construction defects that have not ripened into property damage, or at least into involuntary out-of-pocket losses, do not comfortably fit the definition of " ‘appreciable harm' " -an essential element of a negligence claim. (Davies v. Krasna (1975) 14 Cal.3d 502, 513; see San Francisco Unified School Dist. v. W.R. Grace & Co., supra, 37 Cal.App.4th 1318, 1327-1331 [the presence of asbestos products in buildings did not, prior to the release of friable asbestos, constitute actual and appreciable harm under Davies v. Krasna, supra]; Zamora v. Shell Oil Co., supra, 55 Cal.App.4th 204, 208-211 [finding no cognizable damage in the cost of replacing defective pipes that had not yet leaked].) The breach of a duty causing only speculative harm or the threat of future harm does not normally suffice to create a cause of action. (Davies v. Krasna, at p. 513.) For the same reason-because the physical harm traditionally compensable in tort is lacking-to ask in the words of factor (2) whether the harm to plaintiffs was "foreseeab[le]" (J'Aire, at p. 804) simply begs the question: What harm?

Plaintiffs argue that the cost of repairs is an accepted measure of damage for construction defects and that plaintiffs could make the cost of repairs certain within the meaning of J'Aire, 24 Cal.3d 799, 804, by voluntarily repairing defects and obtaining a receipt . This confuses the measurement of alleged damages with the ability of particular facts to support a tort action. To say that one's house needs repairs costing a certain amount is not necessarily to say that one has suffered the type of harm cognizable in tort, as opposed to contract. Plaintiffs also argue that "the degree of certainty that the plaintiff suffered injury" (ibid.) is merely a factor to be balanced with the other factors set out in J'Aire for determining a person's liability for negligently injuring another's economic interests. We do not believe, however, that the J'Aire court intended to dispense with the rule that appreciable, nonspeculative, present injury is an essential element of a tort cause of action. (Davies v. Krasna, supra, 14 Cal.3d 502, 513; cf. Romano v. Rockwell Internat., Inc. (1996) 14 Cal.4th 479, 500-503 [plaintiff suffered appreciable harm sufficient to support a tort claim for wrongful discharge upon actual termination rather than upon prospective notification].) Lacking that fundamental prerequisite to a tort claim, it is difficult to imagine what other factors, singly or in combination, might justify the court in finding liability.

Whether viewed as part of the test set out in J'Aire, supra, 24 Cal.3d 799, 804, or as an independent argument for extending tort liability, the "policy of preventing future harm" (ibid. [factor (6)]) is probably plaintiffs' strongest argument. In some sense, that policy might be served by a rule of tort liability making builders, in effect, the insurers of building code compliance, even as to defects that have not caused property damage or personal injury. Moreover, as plaintiffs argue, to require builders to pay to correct defects as soon as they are detected rather than after property damage or personal injury has occurred might be less expensive. On the other hand, such a rule would likely increase the cost of housing by an unforeseeable amount as builders raised prices to cover the increased risk of liability. Such a rule should also be unnecessary to the extent buyers timely enforce their contract, warranty and inspection rights, and to the extent building authorities vigorously enforce the applicable codes for new construction.

In our view, the many considerations of social policy this case implicates, rather than justifying the imposition of liability for construction defects that have not caused harm of the sort traditionally compensable in tort (Seely, supra, 63 Cal.2d 9, 18), serve instead to emphasize that certain choices are better left to the Legislature. That body has at its disposal a wider range of options and superior access to information about the social costs and benefits of each. "Legislatures, in making such policy decisions, have the ability to gather empirical evidence, solicit the advice of experts, and hold hearings at which all interested parties may present evidence and express their views ." (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 694, fn. 31; see also Moore v. Regents of University of California (1990) 51 Cal.3d 120, 147.)

Home buyers in California already enjoy protection under contract and warranty law for enforcement of builders' and sellers' obligations; under the law of negligence and strict liability for acts and omissions that cause property damage or personal injury; under the law of fraud for misrepresentations about the property's condition; and an exceptionally long 10-year statute of limitations for latent construction defects (Civ. Code, § 337.15). While the Legislature may add whatever additional protections it deems appropriate, the facts of this case do not present a sufficiently compelling reason to preempt the legislative process with a judicially created rule of tort liability.