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Hammering Out Liability

Daily Journal
By: Stephen N. Roberts

A California appellate court has bucked the majority trend of increasing the liability contractors face for their work. By upholding the "completed and accepted" doctrine, the court signals that project owners may face increasing difficulty in seeking indemnity from contractors for patent construction defects or negligent conditions.

Last September, the 2nd District of the California Court of Appeal decided Jones v. P.S. Development Co. Inc., 166 Cal.App.4th 707 (2008), supporting the "completed and accepted" doctrine (also sometimes called the "completion and acceptance doctrine"), which shields construction contractors from liability for patent defects after a project's completion and acceptance. In so doing, the court extended the controversial 2nd District holding in Sanchez v. Swinerton & Walberg Co., 47 Cal.App.4th 1461 (1996), by applying the doctrine to portions of work accepted by an owner, even when the contractor is continuing to work on other parts of the project. While somewhat limited in scope, the completed and accepted doctrine remains a viable defense for contractors whose negligent construction contributes to injuries sustained by owners or visitors, and a warning to project owners.

Until the early 1960s, the prevailing rule held a contractor liable for any injury resulting from its negligence before work was completed, but not once the project was completed and accepted by the owner. Boswell v. Laird, 8 Cal. 469 (1857). This reflected the lack of privity between the parties in that the owner's acceptance was an intervening cause relieving the contractor of liability. The doctrine evolved to include so many exceptions that, in Stewart v. Cox, 55 Cal.2d 857 (1961), the California Supreme Court took the position that contractors should be placed on the same footing as sellers of goods and likewise should be held to the general standard of reasonable care for the protection of anyone who may foreseeably be endangered by negligence, even after acceptance of the work.

While the court's decision in Stewart seemed to signal the demise of the completed and accepted doctrine, the doctrine proved remarkably resilient. The 1996 Sanchez case - considered an aberration by commentators - involved a contractor that failed to follow plans and caused water to pool and drain onto an office floor. The plaintiff slipped on the puddle and suffered injuries. The trial court entered summary judgment in favor of the defendant general contractor and its concrete subcontractor. The Court of Appeal affirmed, based on evidence that the pool of water that caused the plaintiff's fall was a patent defect discoverable by the owner and obvious to any reasonably observant person. In fact, the owner, had noticed the condition before the accident and failed to call it to the attention of the contractors. The court took the pre-1961 position that the owner had a duty to inspect the work and ascertain its safety before accepting it, and, accordingly, by accepting the work the owner had represented the work was safe and was liable.

The 'Jones' Decision

In last September's Jones decision, the 2nd District followed its earlier holding in Sanchez and applied the completed and accepted doctrine to portions of work that had been accepted, even though other parts of the project remained ongoing. The case involved a Transportation Security Administration employee at the Los Angeles International Airport. LAX hired a contractor to install several explosive detection system machines at the airport. The contractor designed the anchoring system to secure the machines to the ground. The plaintiff tripped over a machine's anchor bolt and was injured. He sued the subcontractor that installed the system and bolted the machines to the ground in accordance with the design.

The testimony showed that security officials had accepted the machine and put it into full operation two months prior to the accident. The trial court applied the completed and accepted doctrine and granted summary judgment in favor of the defendant. The Court of Appeal affirmed the trial court's decision and concluded that the doctrine, as explained in Sanchez, shielded the defendant from liability. The court found the fact that the defendant was still working on other explosive detection system machines in LAX to be immaterial to the application of the completed and accepted doctrine. In the court's view, the defendant had completed the work and retained no control over the machine in question. In explaining its decision, the court stated: "[T]he rationale underlying the "completion and acceptance" doctrine is dispositive of the question before us. As the court explained in Sanchez, liability for the safety of a contractor's work shifts to the owner upon acceptance of the work, that is, when the owner has had an opportunity to examine the work, and thereafter represents that it is safe ... By acceptance and subsequent use, the owners assume to the world the responsibility of its sufficiency, and to third parties, the liability of the contractors has ceased, and their own commenced. Here, there are no triable issues regarding these matters: prior to [the plaintiff's] accident, TSA had put the machine with the installed anchors into full operation, and [the plaintiff], his co-workers, and a "lead" were, in fact, aware of the hazard. As there is no evidence that respondents retained control over the machine, we conclude that they are not liable for plaintiff's injuries."

The court distinguished its holding from Stewart by interpreting Stewart to apply only to latent defects, or defects that are not revealed through reasonable inspection. The court reasoned that injuries from latent defects, as compared to patent defects (that are apparent by reasonable inspection), arise in situations where owners lack an opportunity to cure the defect and thus cannot assume the responsibility of or be liable for the contractor's work.

The 2nd District's position appears not to reflect the majority view, as numerous states leave the contractor open for liability in such circumstances. See, for example, Davis v. Baugh Indus. Contractors Inc., 159 Wash.2d 413 (Wash. 2007); Bond v. Walsh & Kelly Inc., 869 N.E. 2d 1264 (Ind. App. 2007); Dorrell v. South Carolina Department of Transportation, 361 S.C. 312 (S.C. 2004).

Status and Scope

The Jones court expanded the scope of the completed and accepted doctrine by applying it to portions of work accepted by an owner, even when the contractor is continuing to work on other parts of the project. In practice, this may allow contractors to shield themselves from liability by splitting apart larger projects and seeking acceptance from owners after each portion is completed. With Jones, the doctrine has been applied to both private (Sanchez) and public (Jones) construction projects. Design-build contractors and design professionals may attempt to use the doctrine's logic to protect themselves. On the other hand, since both decisions are from the 2nd District of the Court of Appeal, and the leading Supreme Court precedent is arguably contrary, other districts may not necessarily follow the Jones decision.

As the completed and accepted doctrine appears viable in at least the 2nd District, owners should take steps to protect themselves. Although Sanchez and Jones do not decide the issue, because the liability with which the parties are concerned arises from negligence, it may be possible to obtain protection by including a carefully crafted contractual provision in the construction contract, such as an indemnity clause that shifts liability to the contractor. Public policy would not seem to be a barrier, in that such liability-shifting clauses are common in other contracts, including insurance policies. Once construction work has begun, the owner should be mindful of actions that may constitute acceptance, especially with regard to parts of a project that are no longer under the contractor's control.

The concern over acceptance of patent defects should be specifically identified to those whom owners have appointed to inspect construction work. Finally, owners should ensure that their liability insurance covers them for the entire period they are potentially liable under the applicable statute of limitations, possibly the four-year outside limit for patent defects under Code of Civil Procedure Section 337.1.

Stephen N. Roberts is a partner in the San Francisco office of Nossaman who has devoted his practice to general business litigation since 1974. He can be reached at 415-438-7213 or Ashley C. Jacobson is an associate in Nossaman's infrastructure practice group. She can be reached at 213-612-7819.

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