California Appellate Court Clarifies When Construction Professionals’ Knowledge Will Be Imputed to Real Property Seller

Emergent LLP partner and real estate litigator Johnny J. Yeh closely follows developments in the California appellate courts.  Below, he discusses a recent decision analyzing when an architect, engineer, or general contractor’s knowledge of property defects will be imputed to the seller in litigation brought by the buyer.  To stay up to date with this and other Emergent news, contact us.

Recently, the Court of Appeals issued its opinion in RSB Vineyards, LLC v. Orsi, 2017 WL 4325299 (Cal. Ct. App. Sept. 29, 2017), which was certified for partial publication.  The setup of the case is straight-forward.  Defendants purchased a vineyard and engaged in remodeling work to convert a residence on the property into a wine tasting room.  Throughout the process, defendants, who were not construction professionals, relied on their architect, structural engineer, and general contractor to ensure that the work conformed to applicable building codes and standards.  Subsequently, plaintiff purchased the vineyard from the defendants, including the wine tasting room.  Shortly thereafter, plaintiff discovered that the wine tasting room was structurally unsound and had to demolish it.  Plaintiff then sued defendants, claiming misrepresentation and omissions with respect to the sale.  Defendants, in turn, successfully moved for summary judgment, arguing that they had no actual knowledge of the defects at issue.

On appeal, plaintiff argued: (1) that it had provided evidence creating a triable issue of fact as to defendants' actual knowledge; and (2) that it had no obligation to demonstrate defendants' actual knowledge because the knowledge of their construction professionals could be imputed to them, and the evidence showed the deficiencies were so severe that those professionals must have known of these defects.

The court quickly disposed of the first point, noting that many of the alleged defects "were discovered only during the process of demolition."  Id. at *4.  The court further observed there was a lack of evidence showing that the defects "would have been apparent to a non-professional."  Id.  The court likewise rejected plaintiff's appeal to the sheer number and severity of the defects, noting that they were "technical matters" that would not be "apparent to a person unskilled in construction or structural engineering."  Id. at *5.

The court's discussion of plaintiff's second point was more interesting.  The court accepted the rule (fairly well-established in the law) that a principal could be charged with the knowledge of his agent "while the agent was acting in that role and within the scope of his or her authority as an agent."  Id.

However, the court did not accept plaintiff's suggestion that defendants’ contractual professionals were necessarily "agents."  Specifically, the court pointed to Civil Code section 2295, which defines an agent as "one who represents another . . . in dealings with third persons."  Id. at *6.  Based on this language, the court noted that "if a service provider simply furnishes advice and does not interact with third parties as the representative of the recipient of the advice, the service provider is not acting as an agent."  Id.  The court then concluded that there was "no evidence to suggest [defendants'] professionals were acting in the role of agent when they acquired . . . knowledge" about the defects.  Id.  Indeed, such knowledge "would have been gained while the professionals were planning or carrying out the work of renovating the residence," and not while acting in their role as agents.  Id.

In addition, the court dismissed plaintiff's affirmative misrepresentation claims on the basis that the representations were, in fact, true.  Finally, the court dismissed plaintiff's breach of contract claim, which was also premised on defendants' failure to disclose.

Ultimately, RSB reminds litigants of an important wrinkle in the process of proving the actual knowledge requirement for a fraud-based claim against a seller of property.  Specifically, if a litigant is going to impute a contractor’s or other professional's knowledge of a defect to the seller, the litigant should prepare to demonstrate that the contractor or professional acquired knowledge of the defect while acting as an agent (as opposed to acting as a mere service provider).  Careful and thoughtful use of discovery is a must in this respect, and creating a solid record of the conduct and actions of the construction professionals is critical.