March 25, 2004

New laws have yet to stem tide of condo suits

  • The Legislature’s goal was to curb litigation, lower insurance costs and promote multifamily housing projects.
    Williams, Kastner & Gibbs

    Condominium construction defect litigation has increased dramatically in the Northwest in recent years. While some homeowners have received benefits from settlements and some judgments, these lawsuits may be a significant factor in the dramatic decrease in the number of affordable multifamily projects.

    Additionally, the litigation has resulted in a significant increase in the cost of insurance for everyone involved in buying, selling or building condominiums. Because of the impact on multifamily housing and the construction industry, the Washington Legislature has passed two new laws in an attempt to help the construction industry.

    First, the Legislature enacted RCW 64.50, which gives a contractor an opportunity to examine and correct alleged defects and mandates a notice period. Second, it passed RCW 4.16.326, which tries to remove the application of the tort discovery rule in construction cases, clarifies the time period for filing lawsuits, and arranges six other legal defenses.

    The discovery rule stays the accrual of a cause of action until all of the elements of the cause are known or should have been known. It thereby extends the amount of time in which a plaintiff has to file suit.

    The result of the legislation has been an increase in the obstacles to homeowners interested in pursing builders for defects, as well as a similar increase in requirements for contractors prosecuting claims against subcontractors and defending claims. Both construction professionals and homeowners must be aware of the particular requirements and limits imposed by the legislation.

    Given the purpose of the legislation, it is no surprise that each of the new statutes has faced, and likely will continue to face, legal challenges. The first contested issue for each is whether these statutes apply to buildings built or causes of actions that accrued before the effective date of the statute.

    For RCW 64.50, the issue is whether it applies to buildings built before the decree date of June 13, 2002. Contractors contend that applying the law to all construction, not just construction completed after June 13, 2002, protects both construction professionals and homeowners by creating incentives for the construction professional to inspect and correct alleged defects identified by homeowners. Homeowners associations disagree and argue that it is unfair to impose laws retroactively.

    The issue is the subject of an appeal currently pending in the Lakemont Ridge L.P. v. Lakemont Ridge Homeowners Association case. The appeal addresses several legal nuances about RCW 64.50. The Court of Appeals in Seattle heard oral arguments on March 2, 2004. A ruling is not expected for several months.

    RCW 4.16.326 is the other statute passed by the Legislature to stem the flood of construction-related litigation and increasing insurance costs. The law tries to eliminate the application of the discovery rule in lawsuits arising from alleged defects in the work of a construction professional, as well as arranging six other legal defenses.

    Before 2002, the discovery rule was considered unsuited to construction contract actions. In 2002, the Court of Appeals published two decisions — Architechtronics v. Khorram and Urban Development v. Evergreen Building Products — that applied the discovery rule and changed the landscape of construction defect litigation.

    According to the summary for Substitute House Bill 2039, which lead to RCW 4.16.326, the purpose of the bill was to identify seven affirmative legal defenses that builders and contractors may use in lawsuits involving activities related to improvements to real property.

    Three of these defenses (unreasonable failure to lessen or prevent damages, failure to follow written maintenance recommendations, and homeowner's alteration, use, misuse, or abuse of the building or improvement) are limited to actions brought by homeowners.

    The other four defenses (unforeseen acts of nature, violations for which a release has been obtained, violations that have been repaired, and the statute of limitations) apply to any claims for construction defects whether or not the action is brought by a homeowner.

    Whether RCW 4.16.326 is retroactive is also unclear. From the contractor's perspective, the statute is curative of ambiguous language and therefore retroactive. For homeowners, the statue is neither curative nor remedial and simply limits the period in which a homeowner or homeowners association may file suit.

    Although attorneys for both homeowners and contractors have many legal grounds on which to base their arguments, the issue will remain a legal battlefield until decided by appeal or amendment to the statue by the Legislature. On the other hand, some believe that since these defenses have always existed at common law, the codification does little, if anything, to change the law, and whether this statute is retroactive or not is immaterial.

    Regardless of the Legislature's intent to curb litigation, lower insurance costs and promote multifamily housing projects, the flood of litigation has slowed little. Currently, both the State Senate (Substitute Senate Bill 5536) and House of Representatives (House Bill 3131) are considering amendments to RCW 64.34, the Condominium Act. It is unclear now whether there is enough support for either bill to pass.

    Doug Hofmann and John Evans are members and Jay Terry is an associate at Williams, Kastner & Gibbs PLLC. They are part of the firm's Construction Practice Group.

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