Latent Defects Not In Settlement Agreement

Law Talk

The case of Willdan v. Sialic Contractors Corporation dealt with a street renovation project in West Hollywood. The City of West Hollywood ("City") hired Willdan to design the roadway, prepare the construction documents, and provide construction management services, as well as other things. The City also contracted with others, including Shawnan as the general contractor.

There were several serious construction problems that came up during the construction process, which resulted in astronomical increases to the construction costs. The City and Shawnan agreed to mediate their dispute. Willdan had participated in only the first mediation session on behalf of the City, but was told not to return to any of the further sessions.

The parties agreed to a Settlement Agreement wherein Shawnan would be paid 2.8 million dollars and would release the City and Willdan from any liability with respect to the project, except for "...claims arising out of the enforcement of this agreement, breach of warranties and latent defects..." Latent defects are hidden flaws or imperfections that are not easily seen. The City and Willdan released Shawnan from the same claims. There was nothing in the agreement that would constitute a release of claims between the City and Willdan.

The City filed a Complaint against Willdan for breach of contract, negligence, express contractual indemnity and implied contractual indemnity. Willdan filed a Cross-Complaint against the City as well as other contractors including Shawnan. During this period of time, Willdan had done some testing on the project which made Willdan believe that some of the construction problems were due to "material failure or deficiency" in the materials put in place by Shawnan – latent defects.

Shawnan made a Motion for Determination of Good Faith Settlement stating that the Settlement Agreement it had entered into insulated it from this Cross-Complaint. The trial court granted Shawnan's Motion and awarded Shawnan its attorney's fees and costs. Willdan appealed this decision stating that the trial court erred in dismissing its Cross-Complaint for indemnity and declaratory relief against Shawnan because the Settlement Agreement excluded latent defect claims and because Shawnan did not establish that the settlement had been entered into in good faith. Shawnan argued that its dismissal was proper because the City's complaint did not allege that the construction problems were caused by latent defects, but negligent design. The City's claim did not stop Willdan from proving that the mistakes were partially due to latent defects.

The Court of Appeal found that the trial court had made a mistake in dismissing Willdan's claims against Shawnan because they were based on a theory of latent defects expressly excluded from the Settlement Agreement. The Court of Appeal also felt that Willdan's liability to the City was not solely based on breach of contract. The court stated that "...although Shawnan, like Willdan, had a contractual relationship with the City, it also had a duty of care to perform in a competent manner." Therefore the Court of Appeal reversed the decision along with reversing the award of attorney fees and costs.