Construction Defects – Settlement Agreement Bars a Later Suit for Latent Defects
Joseph M. Fenech | Low, Ball & Lynch
May 5, 2015
Court of Appeal, Second Appellate District (February 17, 2015)
In 2004, David Belasco (“Belasco”) bought a home from general contractor/builder Gary Wells (“Wells”). After closing escrow, he immediately filed a Contractors State License Board (“CSLB”) complaint against Wells alleging roughly 150 construction defects, but no roofing defects. The dispute was submitted to binding arbitration. Before the arbitration concluded, the parties entered into a settlement agreement requiring a payment of $25,000 to Belasco in exchange for a release of all known and unknown claims and a waiver of all rights under Civil Code § 1542. Six years later, Belasco sued Wells, alleging latent roofing defects which were not known at the time of the CSLB complaint. Wells moved for summary judgment on the grounds that the prior settlement agreement released all present and future claims. Summary judgment was granted and Belasco appealed.
The settlement agreement stated that it was a release of “any and all claims” which included past, present, and/or future claims. It also included a waiver of C.C.P. § 1542 that states that a general release does not apply to unknown claims.
On appeal, Belasco argued that: (1) the 2006 release was for patent defects only and would not be a “reasonable release” under Civil Code §929 if it included latent defects; (2) that a §1542 waiver for latent defects is against public policy; and (3) that Belasco’s fraud and negligence claims raised triable issues of fact that, if found in his favor, would have voided the settlement.
The Court of Appeal held that “none of Belasco’s arguments had any merit.” The Court focused on Belasco’s arguments that the release was not “reasonable” under §929 and that Wells committed fraud by not telling Belasco that he installed the roof rather than the roofer who had originally bid the project. The court rejected both claims.
The Court also rejected Belasco’s argument that the money paid in settlement was for performing repairs, not a cash settlement, and the release was therefore barred by Civil Code §926, which prohibits a release or waiver in exchange for repair work. The court stated that § 926 did not apply here because it was undisputed that the 2006 dispute was resolved by a cash settlement without repair. According to the Court, § 926 simply did not apply.
The Court also rejected Belasco’s argument that the release was barred by § 929 because the release was not “reasonable” even in exchange for a cash payment. The Court noted that Belasco was an attorney who was himself represented by counsel, that he had signed an agreement expressly providing that he had read and understood its terms, and he admitted this during his deposition.
The Court found that Belasco’s argument of fraud was meritless. According to the Court, Belasco presented no evidence that any misrepresentations were made to him by Wells. Specifically, Wells never represented the names of subcontractors to Belasco. The Court agreed with the trial court that the name of the roofing contractor was not a material issue, because Belasco did not suggest he purchased the residence in reliance on the information in the permit. The Court also found that Belasco could not establish the element of intent. The record contained no evidence that Wells knew at the time of sale or in 2006 that the roof was defective.
Finally, Belasco failed to present any evidence that he bought the house in reliance on a false representation that a roofing contractor had installed the roof. Belasco admitted that his decision to enter into the 2006 settlement was a product of his own judgment and not influenced by any statement by Wells.
This decision emphasizes the importance of requiring a settlement agreement that releases “any and all” claims “known and unknown,” with a waiver of rights under C.C.P. § 1542. You must also ensure that the release includes language that each party has “read and understood” the agreement, that the agreement is a product of both parties, and that each party has had the opportunity to have it reviewed by counsel. Since this was a pre-litigation settlement agreement, it would also be prudent to include a provision that the settlement is deemed by the parties to be “reasonable” pursuant to §§ 926, 929, and 945.5(f).
For a copy of the complete decision, see: Belasco v Loren Wells – CD case
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