California Litigation Update
December 13, 2000
Alan J. Watson- Los Angeles
In Erlich v. Menezes, the California Supreme Court reversed a jury award to
homeowners for emotional distress damages caused by negligent construction of
their “dream house.” Because the house leaked and was structurally unsound,
the lower court found the contractor had exposed the homeowners to intolerable
living conditions and constant, justifiable fear about their safety. The
California Supreme Court held that, while the couple’s distress was
undoubtedly real and serious, they could have avoided the threatened injury by
moving out of the house until repairs were completed. If they had, relocation
expenses would have been part of their damages. The Court concluded: “the
balance of policy considerations - counsel against expanding contract damages to
include mental claims in negligent construction cases.” In California damages
for defective construction are limited to the cost of repairing the home,
including lost use or relocation expenses, or the diminution in value.
Insurer in Subrogation Claim May Not Compel Arbitration Under Construction
Agreement Between General Contractor and Subcontractor.
In a case of first impression in California, the Court of Appeal held an
insurance company, pursuing a subrogation claim, could not enforce a mandatory
arbitration agreement between its insured, the general contractor, and a
subcontractor. Valley Casework, Inc. v. Comfort Const., Inc.
The insured general contractor subcontracted work for the manufacture and
installation of kitchen cabinets. The contract called for binding arbitration of
disputes. The cabinets were defective and the general contractor’s insurer
paid to have them repaired. The insurer then sought repayment from the
subcontractor and attempted to arbitrate its claim. The cabinet subcontractor
objected, claiming the insurer had no right to do so.
The Court of Appeal held the insurer had a right to pursue the subrogation
claim but concluded that the insurer could not enforce the arbitration provision
because the equities weighed against allowing a non-party to enforce an
arbitration provision.