Court Determines That A Builder May Seek Equitable Indemnity Against A Manufacturer Under California’s Right to Repair Act

Greystone Homes, Inc. v. Midtec, Inc. 168 Cal.App.4th 1194 (Cal. Ct. App. 2008)

California’s Right to Repair Act (Civil Code section 895 et. seq. or the “Act”) establishes a set of standards for residential construction and provides tort liability for failing to meet those standards. The Act was enacted in response to the California Supreme Court’s decision in Aas v. Superior Court, 24 Cal.4th 627, 636 (2000), which held that “[i]n actions for negligence, a manufacturer’s liability is limited to damages for physical injuries; no recovery is allowed for economic loss alone.” In other words, under Aas, the “economic loss rule” precluded recovery for damages such as “the difference between price paid and value received, and deviations from standards of quality that have not resulted in property damage or personal injury.” The Act, however, abrogated the Aas decision by permitting a homeowner that established a violation of the Act to recover economic losses from a builder, among others, without having to show that violation caused property damage or personal injury.

In the recent case of Greystone Homes, Inc. v. Midtec, Inc., the California Court of Appeal ruled on the following two issues that had not been previously addressed under the Act: (1) whether a builder may recover for economic loss caused by a product manufacturer’s violation of the Act through a claim for equitable indemnity against that manufacturer; and (2) whether that builder may bring a direct action for negligence against the manufacturer to recover its economic losses. As discussed below, the court concluded that a builder may bring an action for equitable indemnity to recover economic loss as a result of a manufacturer’s violation of the Act, but a direct claim for negligence is not permitted.

Greystone Homes, Inc. (“Greystone”) was a homebuilder that developed and built a new home community in Chula Vista, California. Greystone entered into a plumbing subcontract with Production Plus Plumbing, which then purchased a plumbing system from Radiant Technologies, Inc. (“RTI”). RTI purchased plastic fittings for its plumbing system from the manufacturer, Midtec, Inc. (“Midtec”).

After construction, several unit owners experienced leaks in their plumbing system and complained to Greystone. After investigating the matter, Greystone determined that the fitting failures were caused by a molding defect in Midtec’s manufacturing process. Greystone determined it was highly likely that there would be additional failures in units that had not yet actually experienced a failure and replaced all of the Midtec fittings. The total cost to replace all the fittings was $1,494,904, although the repair cost for fittings that had actually failed was $106,000.

Greystone brought an action against RTI and Midtec, but reached a settlement with RTI. Under the settlement, Greystone was paid $460,000, an amount that exceeded its costs to repair water damage caused by fittings that actually failed. Having settled with RTI, Greystone proceeded with its case against Midtec under causes of action for equitable indemnity and negligence per se. Midtec filed a motion for summary judgment generally arguing that the Act only permits a homeowner (and not a builder) to bring an action pursuant to the Act and, since the Act does not apply, under Aas, the economic loss rule precluded Greystone from recovering additional damages for the cost to replace fittings that had not failed or caused property damage. For its part, Greystone argued that it was entitled to bring its action against Midtec and that the Act imposed liability for economic loss on product manufactures that violate the Act. The trial court granted Midtec’s motion on the grounds that Greystone, as a builder, could not bring an action for violation of the Act and, because the Act did not apply, the traditional economic loss rule prohibited Greystone from recovering for damage where the fittings had not actually failed and caused property damage.

On appeal, the court was not persuaded by Midtec’s argument that the Act did not apply. The court explained that in an action for equitable indemnity under California law, both the builder and the manufacturer may be liable for construction defects that cause physical damage or property damage, so long as there is some basis for tort liability against the proposed indemnitor. The court held that the Act imposes such liability and specifically provides that product manufacturers shall be liable to homeowners “to the extent that the manufacturer caused, in whole or in part, a violation of the Act’s standards as the result of negligence or a breach of contract.”

Thus, the appellate court concluded that a homeowner may recover economic losses from a manufacturer for a violation of the Act’s standards that is caused by the manufacturer’s negligence or breach of contract. In light of that basis for liability against Midtec, Greystone’s derivative equitable indemnity claim was permissible because it was based on Midtec’s joint legal obligation with Greystone to the homeowners (and not Greystone’s direct liability to Midtec). Accordingly, the court reversed the trial court and held that Greystone was entitled to pursue its equitable indemnity action against Midtec.

The court further ruled that Greystone could not pursue an action directly against Midtec for negligence per se based on the alleged violation of the Act. The court noted that the Act contains no language authorizing or even referring to a direct action brought by a builder against an entity of any kind. Because the Act does not suggest that Greystone is a member of the class of persons that the Act was intended to protect, and because Greystone and Midtec did not share a “special relationship” to place them within a narrow exception to the economic loss rule, the court concluded that Greystone may not recover its economic losses from Midtec in a claim of negligence per se, but may continue to pursue its equitable indemnity claim against Midtec.