Chinese manufacturers of construction materials given competitive edge by SB800 decision

In an increasingly globalized economy, we as a nation strive to provide, at the least, a level playing field for our domestic manufacturers. However a recent decision of the 4th District Court of Appeal has the potential to have just the opposite effect for manufacturers of construction materials.

Last week’s opinion in Acqua Vista Homeowners Association v. MWI Inc., 2017 DJAR 819, held that in order for homeowners to establish a claim against a supplier of construction materials under California’s residential construction defect law (SB800), the homeowner must establish not only that the product is deficient, but that the supplier was somehow at fault for the product deficiency. Because suppliers often act as a mere conduit in the supply chain, without a basis for a finding of fault, homeowners must now look to the manufacturers themselves to be made whole. As a result, construction materials from foreign manufacturers, such as Chinese manufacturers who are practically beyond the reach of our courts, can be distributed with virtual impunity under California’s construction defect law. This would provide a substantial competitive advantage to Chinese manufacturers, and to the domestic suppliers who import such products.

California’s construction defect law for newly constructed residential housing, Civil Code Section 895 et seq., is often referred to as the Right to Repair Act, or more often by its original Assembly Bill designation, SB800. Senate Bill 800 provides a uniform set of guidelines for residential construction, and for the functionality of the components of construction. (Civ. Code Section 896.) Senate Bill 800 provides builders with a right to notice of any construction defect claim, and the opportunity to inspect and attempt to repair any claimed defect within a prescribed time. (Civ. Code Section 910 et seq.) The consumer is then provided a right of action against the “builder” for the costs to repair defects, without the need to prove fault, causation or resulting physical harm to property. (Civ. Code Section 942.) The court in Acqua Vista Homeowner’s Association v. MWI, Inc. held, for the first time, that a consumer must also prove fault in claims against a supplier under SB800, even for a product defect claim that would be subject to strict liability outside of SB800.

The Acqua Vista case involved faulty cast iron pipe manufactured in China, for which a jury awarded a homeowners association in excess of $26 million in damages against the supplier of the pipe, based upon findings that the pipe failed to meet the performance standards in SB800. In reversing the judgment, the Court of Appeal ruled that homeowners claiming defective construction products must also prove fault, by the supplier, under SB800. At common law, such claims would be actionable under strict product liability, without any proof of fault, under Jimenez v. Superior Court, 29 Cal. 4th 473 (2002). However, under the court’s new interpretation of SB800, a higher standard of proof, “negligence or breach of contract,” is imposed upon such claims when brought under SB800.

The trouble with the court’s decision is that it can be virtually impossible to prove “negligence or breach of contract” against suppliers that are merely a “pass-through” link in the supply chain, leaving consumers with no remedy against the supplier under SB800. For now, a plaintiff may still pursue a supplier under common law, outside of SB800; but that may be about to change. The question of SB800’s exclusivity is before the California Supreme Court in McMillin Albany LLC v. Superior Court, 239 Cal.App.4th 1132 (2015).

4th 1132 (2015), in which the 5th District Court of Appeal held that SB800 precludes common law remedies, such as strict product liability, for clams of defective new residential construction covered by SB800. The 3rd Appellate District recently weighed in on the issue through its decision in Elliot Homes, Inc. v. Superior Court (Hicks), 6 Cal.App.5th 333 (2016), holding, consistent with McMillin Albany, that the standards of SB800 apply to all claims in its purview.

If the California Supreme Court decides, consistent with the majority of appellate districts that have considered the issue, that SB800 provides an exclusive remedy, that would preclude common law claims such as strict product liability. Then, the 4th District’s decision in the Acqua Vista case, imposing a fault requirement, would have the unwanted effect of eliminating any possible no-fault claim against a manufacturer or supplier of components of new residential construction covered by SB800. The result would be that these suppliers, who act merely as a pass-through, will in many cases face no liability at all for defective products.

Suppliers of Chinese construction materials, if so insulated from liability, will be free to import and distribute low-cost products without regard for quality control, flooding the market with low-cost, low-quality supplies. This would have a harmful impact on domestic manufacturers, as well as California consumers. Domestic manufacturers, and suppliers of their products, will need to maintain costly high standards of quality control or be subject to liability for product defects, and will have to pay increasing premiums to insure that risk of liability. Meanwhile, Chinese manufacturers, and the suppliers of their products, will gain the competitive advantage of distributing product with much less concern for liability.

The net result from all this is that California law may place domestic manufacturers at a sharp disadvantage by providing an easy path to liability for defects in domestic products, while providing no feasible remedy for the defective Chinese products. Cheap imports will likely inundate the market through suppliers anxious to take advantage of inexpensive products with no liability. This ultimately leaves California consumers who purchase homes incorporating defective Chinese-manufactured construction components without any recourse.