Buyer's Remorse in a Down Economy

By Jan Gruen

It's no secret that the building industry has been hard hit by a declining real estate market. With markedly slow sales, there is an abundance of available product, and the value of California homes has decreased. Inarguably, those who bought homes before the downturn now own homes worth considerably less. The result? Home builder attorneys are seeing an increase in defect claims coupled with demands that builders "buy back" their homes. Are these the symptoms of buyer's remorse and a desire to offset economy driven losses?

In times when home values are consistently increasing, buyers with defect claims typically seek monetary compensation to fix their homes. In the absence of serious conditions, owners do not tend to consider selling their increasingly valuable asset back to the builder. In a strong real estate market, the voluntary buy-back concept emerges only where there are severe defects, when a defective home can be repaired and resold without much delay or loss, or in other extreme situations. Under such circumstances, a buy-back may sometimes be preferable to the outcome of litigation. Voluntary buy-backs are accomplished by repurchasing a home at the current market value or at some other fixed point in time, plus any additional reimbursement of reasonable out-of-pocket expenses incurred.

In today's economy, buy-backs are even less attractive to builders who are loath to add more product to their inventory in a very slow moving market. Faced with strong resistance to the voluntary buy-back concept, especially for weak or garden-variety defect claims, some owner-claimants are filing suits and demanding the rescission of their purchase contracts in lieu of more traditional monetary compensation. Armed with laundry lists of claimed defects, some real and some not, the goal is to force builders into a buy-back. These claims are often made years after purchase of the home.

Under the law of rescission, a party to a purchase and sale contract can rescind the contract and return the property where there is proof of fraud or mistake. Given the onerous nature of the remedy, proving the elements necessary to successfully rescind a contract are challenging. Rescission requires the complaining party to prove the intentional withholding of material information that, if known, would have affected their decision to purchase the home (fraud) or the existence of severe defects sufficient to establish that the home was, unbeknownst to the buyer, materially different than that bargained for (mistake).

Strong defenses to rescission exist and make the likelihood of victory even more questionable. Rescission is improper where a buyer: (1) fails to file a timely suit: an aggrieved party has three years from the time they discover, or reasonably should have discovered, the facts constituting the fraud or mistake; (2) waives the right to rescind, having accepted benefits under the agreement with full knowledge of facts warranting rescission; e.g., disclosure; (3) fails to perform obligation(s) under the contract; (4) unreasonably delays in asserting a claim to the prejudice of the seller, e.g., the long-term owner; or (5) seeks unreasonable or non-compensable damages. Other defenses may also apply.

While an aggrieved and victorious party is entitled to recover bona fide non-duplicative losses incurred, not all claimed losses are recoverable. The rescission of a housing contract allows the purchaser to collect only "reasonable" out-of- pocket expenses incurred in the course of the transaction. Such expenses include costs of repairs and improvements, taxes, interest paid to the seller, escrow and closing costs, operating losses during the buyer's maintenance of the property and payments made to reduce existing encumbrances on the property. A credit is then given for the reasonable rental value of the property during occupancy. If the elements of fraud or mistake are met, the battle will necessarily focus on recoverable damages.

Until the real estate market strengthens, I am certain we will continue to see questionable rescission claims brought against builders, as attorneys employ creative remedies to address adverse market conditions. Less certain is the relative success of rescission as a method offsetting decreased property values.

June 2008 Builder Architect Edition Issue

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It's A Wrap......Or Is It?

By Jan A. Gruen

The roof leaks. The windows leak. The stucco is cracking. The house is not performing well. As between the builder and the subcontractor, who should bear responsibility for the cost of defending these claims and repairing the defects and damage? Historically, contracts for work on residential projects have required the subcontractor to assume responsibility if his/her workmanship is involved. The subcontractor was to defend the builder and hold him/her harmless from all claims arising out of, related to or deriving from the subcontractor's work, including labor and materials. Critics of these "indemnity provisions" claimed they unfairly imposed liability on subcontractors, regardless of whether their work was only partially to blame.

Builder/subcontractor contracts also required subcontractors to obtain insurance coverage during the course of construction and after, with the builder to be named as an additional insured under the subcontractor's insurance policy. Thus, builders who hired others to perform work on a project were protected from defect claims by way of indemnity provisions and subcontractor insurance. Not actually having performed the work, this seemed only fair, since the builder was exposed to potential liability for the negligence of the subcontractors who actually performed the work.

Over the course of time, two seemingly unrelated issues arose that would forever alter the builder/subcontractor relationship. First, subcontractors began to resist the imposition of broad-based indemnity clauses, claiming such clauses were costly and unfair. The result?

Civil Code section 2782 was amended to limit the permissible scope of indemnity by making it against public policy to contractually impose liability on a subcontractor for (1) damage or expenses arising out of the sole negligence or willful misconduct of the builder (not new), and (2) claims that arise out of, pertain to or relate to the negligence of individuals other than the subcontractor and to the extent the claims do not pertain to the scope of work in the written agreement between the developer and the subcontractor.

In roughly this same time frame, insurance companies stopped offering coverage after the past completion of work at a project, and the cost of insurance skyrocketed, making it impossible for subcontractors to buy coverage. The goal of making adequate coverage available for all while presenting a united defense to construction defect claims seemed laudable and appropriate. The result?

The concept of builder-purchased insurance policies that "wrapped" builders and their subcontractors together into one single policy of insurance for residential construction projects was born.

Although the builder pays for the majority or all of the costs of wrap insurance, the number of developer-versus-subcontractor lawsuits has been reduced where wrap insurance applies, and one policy providing coverage for all has reduced finger-pointing and made for prompter resolution at significantly less legal expense. It appears that certain subcontractors object to paying any share of the wrap deductible and have, in certain instances, become unhappy with the scope of wrap insurance coverage. They claim that holes, or exclusions, in coverage are triggering individual subcontractor liability and that the scope of contractual indemnity obligations has done little to lessen their responsibility for defects and deficiencies unrelated to their work. The result?

A new proposed piece of legislation, AB 2738, introduced by Assemblyman Dave Jones, has made its debut and again highlights the divergent positions of builders and subcontractors on indemnity and insurance issues. AB 2738 seeks to further narrow the scope of indemnity owed by subcontractors to builders, further reduces defense obligations and contributions owed by subcontractors contractually and pursuant to wrap insurance, and shifts the risks of liability to the developer instead of the subcontractors who perform the work, while providing subcontractors with the exclusive ability to control the defense of the claim against them. The result?

One thing is for sure, a sequel will follow.

May 2008 Builder Architect Edition Issue

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To Sue or Not to Sue- That Is the Question

By Jan A. Gruen

Home builders typically retain the services of architects, geotechnical engineers and structural engineers to design residences for proper layout, structural safety and geotechnical conditions. Visualize a luxury home located in a canyon with views aplenty. The home is adorned with the nicest interior finishes imaginable. It is perfectly nestled into a hillside. The living room, dining room and family room include vast picture windows that capture the beauty of open space on all sides. It is the nicest home in the subdivision. Priced at a mere $5 million, the would-be home buyer loses all control and must buy. A year later, the home continues its steady movement downslope. Repair is no longer a solution. The dream home is no longer.

When evaluating the claims of homeowners or homeowners' associations, builder counsel must consider whether there are valid claims against the architect, structural engineer or geotechnical engineer who designed the project on behalf of the builder. The assessment can be complicated. Using the example above, the analysis goes something like this: Was the foundation improperly designed? Was it properly designed and improperly constructed? Were geotechnical conditions, including bad soils or water in the slope, to blame? Were corrective measures mandated by the geotechnical engineer and overlooked in the field?

The potential liability of design professionals must also be considered alongside California Code of Civil Procedure section
411.35, which requires that a Certificate of Merit be filed in any action or cross-action against a design professional for indemnity or negligence. This provision is unique to design professionals and is not required when filing suit against subcontractors or materials providers. The Certificate of Merit requires confirmation that the attorney has (1) reviewed the facts of the case, (2) consulted with at least one consultant practicing in the same field as the defendant or cross-defendant, and (3) concluded, based on the review and consultation, that "there is reasonable and meritorious cause for the filing of this action."

Simple enough, but by filing a Certificate of Merit, is the builder admitting that the home has design defects? The contents of a pleading, possibly including a Certificate of Merit, may constitute an admission by the party filing that pleading. (Evid. Code §1220; Brooks v. Brooks (1944) 63 Cal. App.2d 671; Dolinar v. Pedone (1944) 63 Cal. App.2d 169; see also 9 Wigmore Evidence (Chadbourne rev. 1981) §§2588, p. 821; 2590, pp. 822-23; 4 Witkin, Cal. Procedure (4th ed. 1997) Pleading, §413, pp. 510-
511.) While there is no court of appeal case directly on point, it seems fundamentally unfair to require a builder to comply with the Certificate of Merit requirement and thereby "fall on its sword" just to preserve its rights against a potentially liable design professional. Moreover, the statute makes the consultation with the independent design professional completely privileged, suggesting that the legislature intended no effect of admission.

Builders have several good arguments against the contention that filing a Certificate of Merit constitutes an admission of liability. However, caution should still be exercised before asserting that there is reasonable and meritorious cause for filing the action against the named design professional. This is particularly true where the design professional is no longer in business or has no available insurance. Typically, the builder will remain strictly liable for defects and design deficiencies in construction regardless of whether its design professional has the assets or insurance to cover the claim.

At times, filing suit against a design professional is not only appropriate, it is advisable. For more complicated or questionable situations, alternatives exist. It may simply make more sense for a builder to delay filing suit where it has strong contractual indemnity language in its favor along with a contractual attorneys' fees provision. In addition, where liability is uncertain, it may be advisable to enter into an agreement to delay filing liti- gation against the design professional while preserving all rights to do so later. As I always say, let competent counsel guide you.

October 2007 Builder Architect Edition Issue

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The Manufactured Lawsuit

Methods for Combating the Latest Litigation Trend

By Jan A. Gruen

Over the years, claims have consistently been asserted against builders and architects for the defective design and construction of residential building projects. In the "old days," these claims alleged water intrusion through the building envelope or skin and sought compensation for the resulting damage associated with these conditions.

Armed with visible evidence to back them up, homeowners of the past would assert poor design and construction practices falling below industry standards of care. Were the claims legitimate? While overblown at times, many claims had at least some merit. Most importantly, these claims were made after homeowner complaints made to builders went unanswered or repairs failed. Frustrated, homeowners would then contact an attorney.

Fast forward to recent times. A cottage industry has emerged. Plaintiff attorneys are trolling for business in subdivisions where contented homeowners remain &mdash until they walk to their mailbox and find a solicitation letter from a lawyer claiming that their house is all but falling down. The solicitation states that others in their community are experiencing problems and that the problems seem consistent and widespread throughout the project. These letters, sent by a select group of firms specializing in the creation of construction-defect actions, whether or not defects exist, encourage an "evaluation" of the home to see if the owner is one of the unlucky ones. Over the course of time, homeowners may receive one, two or even three letters from competitor firms.

Ultimately, a suit is filed. At first, these lawyers brought suit on behalf of owners in a single subdivision. Over time, plaintiff lawyers developed a new strategy targeting a single builder and every community built by them in a particular county. At present, suits include multiple developments built over time by different subcontractors using varying building techniques and materials, and pursuant to different building codes. The only common thread: the builder and the geographical location. The innuendo at the time of trial: Every project built by the builder is defective.

One need not think too hard to figure out who benefits and who is hurt by this latest litigation craze. The plaintiff lawyers and their experts clearly profit by receiving handsome attorneys' fees and expert fees as they test a handful of homes and brand them as permanently defective. The unwitting homeowner who has the testing done to "prove" the existence of defects will forever need to disclose to future purchasers reports that are dramatic and often inaccurate. These reports impact property values regardless of whether the defects exist or not.

Damage estimates created by so-called experts will often range from $80,000 to $200,000 or more per home (you can raze and build a new home for these higher figures). These same claims typically settle for pennies on the dollar, leaving insufficient funds to make even legitimate repairs. Using legislative avenues, there have been attempts to force plaintiff lawyers to disclose these possibilities to their homeowner clients, much like drug companies must disclose potential side effects of the products they sell. Shockingly, plaintiff lawyers have mightily resisted.

These claims also hurt builders and subcontractors who spend countless dollars and countless hours defending these lawsuits. Facing difficulties securing insurance that actually provides coverage, we are seeing higher deductibles or self-insured retentions, wrap policies and other insurance trends growing out of these claims.

There are simple and effective solutions to counter this trend:
- Make sure that new buildings are designed and built to SB 800 standards, which are set forth in Civil Code section 896, et seq.
- Provide responsive customer service that addresses homeowner complaints promptly and professionally.
- Live up to the warranty you provide.
- Offer a comprehensive and easy-to-use homeowner maintenance manual and reference guide and explain it to customers whenever possible.
- Document customer service and conditions before, during and after repairs.
- Upon discovery of solicitation efforts in a community, offer to meet with homeowners, review their concerns and address complaints that appear appropriate or reasonable.

While these lawsuits will keep coming, the above techniques will reduce the value of claims, the number of claims and make overall exposure more manageable. Oh, and when all else fails, call your attorney.

September 2007 Builder Architect Edition Issue

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Don't Take the Fall for Inadequate Job Site Protection

By Jan A. Gruen, Esq.

On a weekend in spring, the employee of a stucco subcontractor builds makeshift scaffolding to assist in applying a three-coat stucco system to a two-story single-family residence. He has been on the job for three days. He is asked by his employer to work on a Saturday so the project stays on track. Neither the builder nor the architect know anything about the fact that he is working on a weekend, or that he has built this makeshift scaffolding. His foreman turns the corner, sees the scaffolding and insists that the worker immediately remove it because it is unsafe. The worker falls during the removal process and sustains head trauma and permanent head injuries. He remains in a coma. Will you be liable for the injuries he sustained?

Builders and architects, acting as owner/ builder representatives, typically contract with subcontractor trades to perform specific scopes of work in a good and workmanship like manner. These contracts often include provisions designed to shift responsibility for the method of job performance and jobsite safety from the builder/ architect to the subcontractor hired as an independent contractor.

An example of such contract language is as follows:

Contractor hereby accepts full responsibility and liability for the training of its employees as to all precautionary measures necessary to protect such employees during both routine and emergency situations on the job site. Contractor shall take precautions to provide a safe workplace and comply with all applicable rules and regulations of the Occupational Safety and Health Administration (OSHA), and all applicable local, state and/or federal laws, rules or regulations pertaining to the work, including all required safety equipment and supplies.

Absent exceptional circumstances, when a worker injury occurs on the job site in California, an employee's sole remedy against his or her employer is that which is recoverable through the workers' compensation system. This is known as the Workers' Compensation Exclusivity Rule. Labor Code section 3600.

Given his inability to recover more than workers' compensation benefits, employees often try to obtain additional monetary damages by suing the builder/architect for unsafe job site conditions. Those of you who think the contract language quoted above will unquestionably shield them from liability should probably read on.

California law holds that the employee of a subcontractor injured on the job due to his employer's own negligence cannot also recover damages from the hiring builder or architect. Privette v. Superior Court (1993) 5 Cal. 4th 689; Toland v. Sunland Housing Group, Inc. (1998) 18 Cal.4th 254. In contrast, regardless of ironclad contracts, California cases have imposed liability on a hiring builder or architect if they take affirmative action or engage in affirmative conduct that causes injury to the subcontractor's employee. See Hooker v. Department of Transportation (2002) 27 Cal.4th 198; McKown v. Wal-Mart Stores, Inc. (2002) 27 Cal.4th 219. Merely retaining control over safety conditions at a worksite is not enough to impose liability against a builder or architect. However, liability will be imposed if a builder/architect's retention of control affirmatively causes the employee's injuries. (Id.) Situations where liability has been imposed include: (1) concealing a known hidden danger from the independent contractor; (2) insisting on performance of the work using unsafe methods; (3) interfering with the established means and methods of performing the work in such a way as to affirmatively cause injury or accident; and (4) supplying defective equipment to the independent contractor so as to cause the accident.

This discussion translates into simple words of caution: While a builder/architect should not turn a blind eye to unsafe practices or conditions noted in the field, make sure your contracts are adequate to address responsibility for job site safety, and once responsibility is established, steer clear of conduct that interferes with and causes injury.

May 2007 Builder Architect Edition Issue

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Attached Housing: Its Unique Approach

By Jan A. Gruen

By a show of hands, how many of you have designed or built attached housing product in the last 10 years, or plan to do so? How many of you really raised your hand? (Just checking). Due in part to the fact that homeowner associations typically have a board of directors to represent the interests of its unit owners, and the fact that associations and owners "own" different parts of the attached product, claims relating to defects and deficiencies in attached housing product have long been a testing ground for streamlined litigation procedures.

Before the Right To Fix It Bill (SB 800) was introduced in California, a different form of alternative dispute resolution already existed to resolve defect disputes between associations, owners and their builders. This predecessor to SB 800 is known as the Calderon Act and is found in Civil Code section 1375 et seq. The Calderon Act still applies to attached product sold before January 1, 2003 and requires an association, before filing suit, to provide a builder with notice of claimed defects and, to the extent available, proof of the claims. Once a builder receives notice of a claim they must, within certain time frames, provide a response to the notice and notify subcontractors and design professionals of the claim. There are established procedures for site inspections, destructive testing, the free exchange of documents and information and, ultimately, for dispute resolution through a mediation process. If a builder fails to follow the procedures of the Calderon Act, the association can commence formal litigation. The Calderon Act does not provide for an absolute right to repair. Although it will become inoperative July 1, 2010, for now this predecessor to SB 800 remains in effect.

SB 800, the most recent method of resolving defect claims by providing builders, their subcontractors and their design professionals with an opportunity to repair deficient work, also includes attached product such as community apartment projects, condominium projects, planned developments and stock cooperatives. Interestingly, condominium "conversions" are not included in SB 800.

ATTACHED PRODUCT: WHO CAN MAKE A CLAIM AGAINST A BUILDER?

That depends. Under the Calderon Act and SB 800, both the owner and the association have the right to make a defect claim. Normally, the proper claimant will be determined by the CC & R's, which define who owns what, who must repair and maintain which portions of the project and what constitutes common area and separate property. While an individual owner can sue for damage to his or her property, many unit owners own only the paint and airspace within their unit. In contrast, an association can sue for common area deficiencies, individual unit owner damages linked to defects in common area and damages to a unit owner's property if the association is obligated to maintain or repair it.

An example will help. Assume Jayne and Ted buy a condominium. The CC & R's state that they own the puce-colored paint on the walls, their airspace and their roof. The association owns the siding on their unit, which is defined as "common area." Under the CC & R's, the association also has a duty to repair and maintain Jayne and Ted's roof. Who can sue? Let me give you a hint: Jayne and Ted can sue for the damage to their paint caused by water intrusion through the siding. They can also sue for roof leaks and the damage it causes to their unit. On the other the hand, the association can sue for all of these problems because they involve common area, areas the association has a duty to maintain and damage to the owners' property due to common area defects. Based on this example, it is fair to say that under SB 800, you will continue to see claims brought by associations in connection with project conditions.

ATTACHED PRODUCT: ARE THERE ANY EXCEPTIONS TO THE REQUIREMENTS OF SB 800?

No. When you design or build attached housing under SB 800, you have all the same rights to fix defects before a suit can be filed. All of the requirements and obligations of SB 800 also apply. This means that plans and specifications for attached product must meet or exceed the minimum building standards of SB 800. It means that a builder, general contractor, subcontractor, material supplier, individual product manufacturer and design professional will be liable for construction falling below the standards and resulting damage until the defect is properly repaired. It means that maintenance manuals and warranties must be provided to both unit owners and the association and should be written separately to address the unit owner interests and the association's common area interests. It means that when establishing operating budgets and long-term maintenance budgets for an association, adequate reserves, through monthly dues, should be established at the outset by the builder to assist with maintenance and repairs.

SB 800 is here to stay. Historically, attached housing has been a pioneer in tackling defect claims in an expedited fashion without the need for formal litigation. SB 800 continues this trend.

Jan A. Gruen is the managing partner of the Walnut Creek office of Newmeyer & Dillion LLP, a statewide business and real estate law firm. Ms. Gruen possesses more than 19 years of litigation experience representing builders, landowners and businesses in day-to-day risk management, real estate, business and insurance matters, as well as complex large-scale construction defect claims, contractual disputes, subcontractor liability, loss recovery and warranty-related matters. Ms. Gruen can be reached via e-mail at jan. gruen@ndlf.com.

January 2007 Builder Architect Edition Issue

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AIA Contracts with a California Twist

SB 800: The Right to Fix It Legislation

By Jan A. Gruen

This is the second in a series of articles that focus on certain pitfalls associated with the wholesale use of standardized AIA contracts. For those of you having trouble sleeping or those of you who design or build residential housing in California, the time has come to examine your AIA contracts.

START SIMPLY

Identify each provision in your standard contract that addresses SB 800. If you missed them the first time, try reading your contract again. Not there? Not surprising.

AIA contracts are used throughout the country, and the standardized language is not tailored to the laws of any specific state. Whether you are involved in single-family, attached or mixed-use projects, if your work is performed in California, your contracts must now incorporate the provisions of SB 800.

WHAT IS SB 800?

SB 800 is legislation enacted in California to provide a framework for the identification and resolution of construction defect claims short of formal litigation. It is a prelitigation process. Embodied in California Civil Code section 895 et seq., SB 800 provides builders, architects, subcontractors, suppliers and others with the right to repair claimed construction deficiencies before a lawsuit can be brought by an owner. Adherence with the procedural requirements, which are complicated and contain numerous strict deadlines, is a prerequisite to the protections afforded by this legislation.

SB 800 applies to all new residential housing, detached and attached, if the purchase contract was signed by the builder on or after January 1, 2003.

SB 800 sets forth minimum standards for everything including the kitchen sink. The standards, set forth in California Civil Code section 896, address the appropriate construction and performance, for set periods of time, of windows, doors, decks, roofs, balconies, foundations, drainage, stucco, plumbing, shower and bath components, and various other building components so as to avoid water intrusion through the building envelope. There are also minimum standards associated with the structural, electrical, plumbing and mechanical systems of a residence. Compliance with standards of the industry and/or plans and specifications no longer provide a defense to a claim. Instead, the minimum standards set forth in Code of Civil Procedure section 896 govern whether or not a residential building is defective.

TIMING IS EVERYTHING

SB 800 provides specific and non-negotiable procedures and deadlines to, among other things, make a claim, respond to a claim, produce requested documents, inspect deficient conditions, identify those who will perform the repairs, issue a written offer to repair and a response thereto, and make repairs. A failure to comply with any given procedure or deadline takes you out of the protections of SB 800 and enables the owner to file a formal lawsuit.

AIA CONTRACT REVISION IN LIGHT OF SB 800

Does your contract require the parties to comply with the requirements of SB 800 so that you are afforded the opportunity to evaluate and repair conditions before the commencement of formal litigation? Does your contract spell out your rights to be notified of a claim and participate in the inspection and repair process?

Does your contract set forth the requirements and obligations to design and construct in accord with the minimum standards, provide a written warranty, maintain documents for production in the event of a claim, and be bound by and adhere to the very strict time deadlines that impact upon your ability to enjoy the protections afforded by the legislation?

Does your contract spell out what remedies you have if a party breaches contract terms addressing SB 800 so as to expose you to civil litigation?

If your answer to any of the following questions is no, a visit to your attorney of choice is appropriate. Bear in mind that SB 800 reflects the current laws of California governing, in part, the design, construction and performance of residential housing and the dispute resolution process associated with claimed deficiencies or defects in new housing. Detailed familiarity with its provisions and the incorporation of these provisions into your AIA contracts is highly recommended.

September 2006 Builder Architect Edition Issue

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AIA Contracts: The Nuances of Seemingly Clear Provisions

By Jan A. Gruen

Many architects and builders enter into standard AIA contracts for architectural services relating to the design and construction of commercial and residential housing projects. These contracts contain generic terms bearing on all aspects of the architect/builder relationship from the scope of services to be performed to dispute resolution procedures. The form contracts are a good beginning, but they are nothing more than a beginning.

Architects often prepare the contracts for signature by their client, the builder. A careful builder will review it (or have their attorney review it) and raise questions or concerns as they arise. During the course of contract negotiation, beware of a response to the effect that language of concern is "standard in the industry", "neutral" or "fair." AIA contracts should be carefully evaluated and negotiated to ensure necessary protection and consistency with other projects' contracts.

This article is the first in a series that ex- amines the pitfalls of standard AIA contracts. Without modification, they are often a trap for the unwary.

To begin, read this:
"Architect shall defend, indemnify and hold harmless builder of and from any and all claims, demands, obligations, actions, causes of action, suits, judgments, awards, fines, penalties, damages of any type (including, without limitation, bodily injury, property damage and costs to repair), costs, expenses, actual attorneys' fees, consultant fees, expert fees, losses or liability, in law or equity, of every kind and nature whatsoever, whether or not well founded (Claims) directly or indirectly arising out of or in any way connected or related to architect's work. Architect shall not be obligated to indemnify builder to the extent the claims are determined by final judgment to arise out of the sole negligence or willful misconduct of builder."

Read it again.
Does this paragraph give a builder a right to recover attorneys' fees and costs in an affirmative action against an architect for losses or damages suffered by the builder to correct design deficiencies and related defects?

Answer: No.
While the seemingly broad language quoted above appears to obligate the architect to pay both the costs to repair defects related to its work and to pay attorneys' fees and costs if a builder is sued or if it becomes necessary for the builder to file suit to secure reimbursement from the architect, it does not. The latest California cases addressing the recoverability of attorneys' fees and costs pursuant to a typical indemnity provision reject this broader interpretation and state clearly that an indemnitor is only obligated to pay the attorneys' fees and costs incurred by a builder in connection with third-party claims against the builder (Varco-Pruden, Inc. v. Hampshire Construction Co. (1975) 50 Cal.App.3rd 654; Myers Building Industries v. Interface Technology, Inc. (1993) 13 Cal.App.4th 949).

California law further provides that if an indemnity provision is to apply to both third-party claims and affirmative claims brought by the builder against its indemnitor ("intra-party" disputes), the provision must clearly and expressly indicate the broader intent of the parties to include intra-party disputes (Dream Theater, Inc. v. Dream Theater (2004) 124 Cal.App.4th 547).

Addressing indemnity in the standard AIA contract to ensure the recovery of fees and costs:
In addition to including "intra-party" language in an indemnity provision, a separate provision for attorneys' fees and costs can be included in the contract. Regardless of whether attorneys' fee language for "intra-party" disputes appears under an indemnity provision or in a separate attorneys' fees and cost provision, keep in mind that a builder may ultimately have to pay the architect's attorneys' fees and costs if the builder is not the "prevailing" party to the lawsuit (California Civil Code Section 1717). What is good for the goose is good for the gander.

This is only one example of the need to read and understand AIA contract terms. Only then can these contracts be tailored to provide adequate protection for parties before litigation commences.

June 2006 Builder Architect Edition Issue

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