Do Due Diligence: Property Purchaser Inadvertently Releases Negligence and Breach of Contract Claims

Fortin Law Group

Published: September 17, 2019

Failure to exercise due diligence often leads to liability. Surprisingly, in SI 59 LLC v. Variel Warner Ventures, LLC (2018) 29 Cal.App.5th 146, carelessness released a party from liability.

There, Variel Warner employed subcontractors to construct part of a property. The subcontractors’ work was defective, because it violated sections of the California Building Code. After construction, a developer entered into a purchase agreement to acquire the property. (Id. at 790). The agreement had a general release of claims “arising out of the condition of the Property, including construction errors, omissions or defects.” (Id. at 790-791). Before the close of escrow, Variel Warner represented that the Property complied with all plans and specifications. (Id. at 790). All interests in the Property were subsequently assigned to SI 59, LLC. (Id. at 791).

Upon discovery of defects in the Property, SI 59 sued Variel Warner and its affiliates, alleging negligence, negligent misrepresentation, and breach of contract. SI 59 argued the general release was unenforceable, because Civil Code §1668 prohibits contracts that release liability for fraud and statutory violations. Specifically, SI 59 argued the release exempts Variel Warner from liability for misrepresenting the condition of the Property and violating the Building Code. (Id.). The trial court granted Variel Warner’s demurrer, because the general release barred SI 59’s causes of action. (Id. at 792). The general release was enforceable, because Section 1668 does not prohibit a release of responsibility for past misrepresentation. Variel Warner misrepresented the condition of the property before the purchase agreement was signed. (Id.).

On appeal, SI 59 argued the release was unenforceable, and it had sufficiently pled negligence and breach of contract. (Id. at 793-794). The appellate court rejected these contentions. Variel Warner’s alleged negligence was failing to detect its subcontractors’ violation of the Building Code, not Variel Warner’s own statutory violations. Thus, Section 1668 does not prohibit release, because Variel Warner did not violate a statute. (Id. at 794). The trial court erred in finding that Section 1668 nullified the negligent misrepresentation allegations. However, SI 59 did not plead those allegations with sufficient particularity. SI 59 argued it could add allegations of fraud if given the opportunity to amend its complaint. However, its suggested amendments were insufficient. (Id. at 795-796). Finally, the breach of contract was correctly released, because it did not involve a negligent misrepresentation, only Variel Warner’s failure to deliver the Property in compliance with all plans and specifications. Thus, Section 1668 was not even triggered. (Id. at 795).

Are you facing issues surrounding the construction law in California? It's best to work with an experienced construction law attorney on your case so it is handled properly and your rights are protected. Call the attorneys at Fortin Law Group today.

This article was provided by Fortin Law Group, Costa Mesa, California. This article is intended to provide the reader with general information regarding current legal issues. It is not construed as specific legal advice or as a substitute for the need to seek competent legal advice on specific legal matters.

Tags: 2019, Construction, Contracts

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