AB 1700: The Legislature Revamps the Calderon Process
by Paul P. Terry, Jr.
The Calderon Process is the commonly used name for the pre-litigation procedure through which a community association must go before it may bring a construction defect lawsuit against the builder. It is codified in Civil Code § 1375, and is part of the Davis-Stirling Common Interest Development Act.
The Calderon Process, so named because Senator Calderon drafted the legislation giving rise to the process, was intended to offer builders and associations an alternative to the expense and delay of litigation by providing them with an avenue to resolve construction defect disputes short of litigation. Unfortunately, the Calderon Process was rarely successful because it contained several inherent flaws, and, in practice, served only to delay resolution of construction defect claims.
AB 1700 resulted from extensive negotiations between the Consumer Attorneys of California and the Building Industry Association. AB 1700 substantially revamps the Calderon Process in an effort to address several of the shortcomings in the process. Only time will tell if these changes will help.
Obstacles to Settlement under the Old Calderon Process
There were three primary shortcomings that derailed the old Calderon Process. The most serious flaw was the failure to include the subcontractors in the process. The old Calderon Process was initiated by the association sending a "Notice to Builder." The notice identified the association and included a preliminary list of defects, a summary of any questionnaire distributed to the homeowners and the results of any testing. Significantly, the Notice to Builder, once served by the builder on its insurance carriers, obligated those carriers to act as if the builder had been sued. In practical terms, that meant the insurance carriers for the builder had to hire attorneys and experts and investigate the claim.
The old Calderon Process placed no similar obligations on the insurance carriers for the subcontractors. Frequently, the insurance carriers for the builders would be willing to work toward resolution of the construction defects, but participation by the subcontractors and their insurance carriers was strictly voluntary and, as a result, spotty at best.
Without the legal compulsion to participate, the subcontractors would offer only a small portion of their exposure in settlement. The builder had no method to compel further participation. This flaw was amplified by the fact that the contracts between the builder and the subcontractors often contained an indemnity clause, requiring the subcontractor to defend the builder and pay to settle the association's claims against the builder. Thus, where a builder might expect a contribution toward settlement from the subcontractors in the 70% range once a lawsuit was filed, in the Calderon Process the subcontractors might offer only a 25% contribution, if they offered any contribution at all. The only way the builder could enforce the indemnity clause was to force the association to file a lawsuit and then the builder could file a cross-complaint against the subcontractors.
A second flaw in the old Calderon Process was the time frame. Only 90 days were allotted for settlement of the claim. Ninety days was simply inadequate to resolve the dispute (although the time could be extended by agreement of the parties). The third flaw was the absence of documentation. The association frequently did not have access to the plans for the project and rarely had access to the construction documents during the old Calderon Process. This made the inspections less precise and the costs of repair more expensive.
The New Calderon Process
The new Calderon Process is started by sending the builder a "Notice of Commencement of Legal Proceedings" (the "Notice") Like the old Notice to Builder, the Notice must identify the project, set forth an initial list of defects and the results of those defects, if known, a summary of any questionnaires and any test results. Service of the Notice commences a period of 180 days, rather than the old 90 days, during which the parties must try to resolve the dispute. During this 180 day period, all statutes are limitation are tolled (that means they stop running). The 180 day period may be extended for one additional period, not to exceed 180 days, but only by agreement of the association, the builder and all significant subcontractors.
Two important, and new, requirements must be satisfied within 60 days of the date the association serves the Notice. First, the builder must provide the association with access to, and allow the association to copy, all plans and specifications, subcontracts and other construction files. The association must provide the builder with access to reserve studies, maintenance records and other similar documents. In the past, these documents were not available until well after a lawsuit had been filed. Subcontractors must also provide their documents within 60 days of being served with the Notice.
Also within 60 days of the date the association serves the Notice, the builder must provide written notice to all subcontractors, design professionals, and its insurers. The written notice must specify the date and manner by which the parties shall meet to select a "Dispute Resolution Facilitator." Each subcontractor or design professional who has been served with this written notice must, within 10 days, serve on the association and the builder a "Statement of Insurance." The Statement of Insurance must include the names, addresses, policy numbers and contact persons of all insurance carriers whose policies were in effect from the commencement of construction to the present.
Within 20 days of the builder sending the written notice to the subcontractors, design professionals and insurers, the parties must meet to select a "Dispute Resolution Facilitator." The Dispute Resolution Facilitator is similar to the Special Master that is frequently appointed in construction defect litigation. The big difference here is that the Dispute Resolution Facilitator is appointed before a lawsuit is filed.
The Dispute Resolution Facilitator is empowered to enforce the provisions of the revamped Calderon Process. Chief among these is the organizing of a Case Management Meeting at which at Case Management Statement is developed. The Case Management Meeting must take place within 100 days of when the association serves the Notice.
The Case Management Statement sets forth the details regarding establishment of a document depository, provision of a more detailed list of defects by the association, schedules for visual and intrusive testing and facilitated dispute resolution of the claim (ie., mediation). In addition, the Case Management Statement may address exchange of expert reports, expert presentations, and expert meetings.
During the new Calderon Process, any party may petition the Superior Court for an order allowing depositions or subpoenas, to compel compliance with the obligation to provide a Statement of Insurance, or to resolve any other disagreement. This is a new tool to force the subcontractors to participate in the process.
If the dispute does not settle in the new Calderon Process, the association may then file a lawsuit in Superior Court. Under most circumstances, neither the builder, the subcontractors nor design professionals may conduct any further inspection or testing of the project without the association's permission. Moreover, any subcontractor or design professional who failed to attend the facilitated dispute resolution, or who attended without settlement authority, is bound by any settlement that may have been reached in the facilitated dispute resolution. Finally, the Superior Court must give the lawsuit trial priority and treat the lawsuit as if it had been filed on the date the Notice was served by the association on the builder.
The new Calderon Process only applies if a Notice to Builder under the old Calderon Process has not been sent before July 1, 2002.
Observations about the New Changes
Many of the provisions in the new Calderon Process are not really new. What has changed is that these provisions--like the participation of the subcontractors, testing by the builder and subcontractors, establishment of a document depository and exchange of insurance information--have been moved to the pre-litigation dispute resolution stage.
Also significant is the establishment of a 180 day time frame. The activities that must be accomplished during the first 180 days will allow associations and their attorneys to determine if the builder and the subcontractors are participating in good faith. If not, the association can refuse to extend the 180 period and prevent the builder and the subcontractors from conducting any further inspections or testing. This would leave the builder and subcontractors at a substantial disadvantage in the ensuing litigation. As a result, we anticipate both builders and subcontractors will be much more motivated to take inspection and testing seriously during the pre-litigation stage.
Similarly, if a subcontractor is not cooperating, the association and the builder can reach a settlement through the new Calderon Process and, when the builder seeks to enforce an indemnity clause in its contract with the subcontractor, the subcontractor will be bound by the settlement. Given the strength and enforceability of the indemnity clauses in most subcontracts today, this provision should provide a significant financial incentive for subcontractors and their insurance carriers to participate meaningfully in the pre-litigation settlement process.
Finally, because the Superior Court must give the lawsuit priority on the trial calendar and treat the lawsuit as if it had been filed on the date the Notice was served on the builder, the Calderon Process will no longer impose a delay on resolution of the association's claim, even if a settlement is not reached through the process.
Conclusion
Only time will tell if this new, revamped Calderon Process will expedite the settlement of construction defect claims. However, it appears we now have a workable plan that addresses many of the shortcomings in the old process, and we look forward to utilizing the new Calderon Process in the coming months.
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