Part II: Construction defects case hinges on purchase agreement

In a previous blog post, we wrote about an interesting case involving a developer, contractor and a general release in a purchase agreement.

A quick recap: a company referred to as Verdugo agreed to make improvements to an 85-unit apartment complex, but its work included construction defects in flashing and counterflashing that resulted in water leaks – and it allegedly knew of the defects.

The developer was apparently also aware of the defects, but signed off on the construction work and later sold the property. The buyer sold the property again about a year later to a company called SI 59 LLC, which noticed the water leak and filed a lawsuit.

At trial Verdugo and Variel argued that the general release in the purchase agreement made SI 59 LLC’s complaints about negligence and breach of contract moot. As stated in our previous post, in response SI 59 LLC cited a section of Civil Code that stated that “all contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of law.”

SI 59 LLC argued that because the developer and general contractor had been aware of the defects, the general release was void. The court disagreed. SI 59 LLC appealed, and the California Court of Appeal for the Second Appellate District held that the cited section of law “applies only to concurrent or future torts.”

The decision was straightforward and undoubtedly a relief to the contractor and developer. The decision relied heavily on language in the purchase agreement. In that agreement, Variel had not made representations as to the property’s condition, and therefore had made no misrepresentation.

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