Part I: Construction defects case hinges on purchase agreement

We read recently of a construction law dispute that involves a developer, contractor and a general release. The case began back in 2005 when Variel Warner Ventures, LLC agreed to a construction contract with Verdugo Management & Investment, Inc. for improvements in an apartment complex.

As part of the contract, Verdugo agreed to make good, workmanlike improvements to the 85-unit complex. However, according to a recent article on the case, the company’s work included construction defects. The article states that the contractor knew “the work was defectively flashed, counterflashed, and waterproofed.” Read on, because the contractor and developer prevailed in this case.

When the apartment complex was sold, a general release in the purchase agreement stipulated that the buyer released both Variel and Verdugo from all claims, including construction defect claims.

A year later, the apartment complex was sold to a firm called SI 59 LLC, which noticed a water leak into the property’s parking garage. SI 59 LLC sued, alleging that Verdugo’s construction had been negligent and that Variel had “negligently managed, inspected and developed the property.” The lawsuit also argued that Variel breached the purchase agreement because it had delivered a property that had not been in accordance with the plans and specifications of the original construction contract.

At trial, the defendants argued that the general release in the purchase agreement made SI 59 LLC’s claims for negligence and breach of contract moot. However, 59 LLC countered with Civil Code section 1668, which states that contracts which exempt someone from their own fraud, “willful injury to the person or property of another” or “violation of law, whether willful or negligent” are “against the policy of law.”

Please be sure to reach part II of this blog post as we discuss how the contractor and developer prevailed on this issue.

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