California Litigation Update

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.