No Flow-Down of a Waiver of the Statute of Limitations to Subcontractor

In the matter Hensel Phelps Construction Company v. Thompson Masonry Contractor, Inc. et al. the Supreme Court of Virginia considered whether a subcontract waived the applicable statute of limitations--meaning there was no time restriction to filing a lawsuit--by incorporating by reference the prime contract between the general contractor and the Commonwealth. The Court held that there was no waiver and therefore the general contractor's lawsuit against the subcontractors was time barred by the applicable statute of limitation.

The underlying project was for the construction of a health and fitness center at the Virginia Tech campus in Blacksburg, Virginia. The general contractor entered into the $15 million contract with Virginia Tech, a Commonwealth agency. By law, no statute of limitations period can run against Virginia Tech. Va. Code section 8.01-231. By contract, the prime contract stated that: Except

as otherwise specified, all work shall be guaranteed by the [general contractor] against defects resulting from the use of inferior materials, equipment or workmanship for one (1) year from the date of final acceptance of the entire project by [Virginia Tech] in writing[.]

Nothing in this section shall be construed to establish a period of limitation with respect to any other obligation which the [general contractor] might have under the Contract Documents, including liability for defective work under [the Warranty provisions].

In sum, besides the 1-year warranty, there was no statute of limitations applicable to claims or disputes under the prime contract.
The project undisputedly was finished in 2000. Twelve years later in April 2012, Virginia Tech found variety of construction defects, repaired them, and then brought a claim against the general contractor to recover over $7 million. The general contractor looked to its subcontractors for these repair costs. When they refused, the general contractor settled with Virginia Tech for $3 million, and then sued all its implicated subcontractors. The subcontractors invoked the statute of limitations, which in Virginia, is five years for an action on a written contract. Va. Code § 8.01-246(2).

In turn, the general contractor pointed to its subcontracts' flow-down provision, which stated that "[t]he subcontractor is bound to the [general contractor] by the same terms and conditions by which [the general contractor] is bound to [Virginia Tech] under the [prime] contract," and that the subcontractor's warranty period covers any time "prior to [the general contractor's] release from responsibility to [Virginia Tech] therefor as required by the Contract Documents." The general contractor argued that because the general contractor was obligated to Virginia Tech on its claims brought 12 years after the project concluded, the subcontractors too were subject to claims from the general contractor.

Virginia's highest court sided with the subcontractors holding that any waiver of a known right must be "express" in that it reflects both knowledge of the right and the clear intent to relinquish the right. It need not be in writing. Here, the Court continued, the subcontract incorporation by reference neither acknowledged the 5-year statute of limitation nor the clear intent to waive the benefit of the statute. Moreover, just because the prime contract was silent on the statute of limitations, the subcontract could not be held to incorporate a statute that existed outside the prime contract. As a result, the Court held that the statutory waiver of the statute of limitations was not incorporated into the subcontracts, the 5-year period had run, and therefore the general contractor had no claim against the subcontractors.

As an alternate argument, the general contractor focused on the accrual date for the claim. It argued that its claims against the subcontractors, which sounded in indemnification, did not accrue until it settled with Virginia Tech. But because Va. Code § 8.01-246(2) states that the accrual is "when the breach of contract occurs in actions ex contractu and not when the resulting damage is discovered," this too was a dead end for the general contractor. Another statute Va. Code § 8.01-249(5) for "actions for contribution or indemnification," established accrual when "the contributee or the indemnitee has paid or discharged the obligation." But, here, the indemnification provision in the subcontract was rendered void because it could be read as requiring indemnification for the general contractor's own negligence. The Court disagreed that other parts of the subcontract, cobbled together, could give rise to independent cause of action for indemnification. So again, the general contractor could not proceed with its lawsuit.

The lesson learned is that explicitness in a follow-down provision is necessary if a waiver of rights is involved.
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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Texas Supreme Court Reinforces that Subcontractors May be Liable to Property Owners

by Kat Statman and Eddy De Los Santos

On August 22, 2014, the Texas Supreme Court ruled that both the trial court and the court of appeals improperly dismissed a property owner's claim for negligence against a subcontractor for improper plumbing installation in Chapman Custom Homes, Inc. v. Dallas Plumbing Company. The Court reiterated that a subcontractor has an implied duty to perform with both care and skill and that breach of this duty may result in liability to property owners. The Court's ruling in this case makes it clear that a subcontractor may be directly liable to a property owner even when the property owner and subcontractor do not have a contractual relationship.

In Chapman, Chapman Custom Homes was hired as a general contractor to build a home in Frisco, Texas. Chapman hired Dallas Plumbing Company to install the plumbing in the new house. The plumbing was allegedly installed improperly, and leaks from the plumbing significantly damaged the structure. The property owner sued Dallas Plumbing alleging breach of contract, breach of warranty, and negligence.

The trial court granted summary judgment for Dallas Plumbing because the property owner did not have a contract with Dallas Plumbing. Additionally, the trial court found the property owner did not allege a violation of a duty owed to it by Dallas Plumbing, independent of the contract.

 

Looking to a case from 1947, the Texas Supreme Court reversed the decision of the court of appeals. The Court found that, even though Dallas Plumbing and the property owner did not have a contractual relationship, Dallas Plumbing still had a duty to perform the contract with both care and skill. Therefore, the property owner's suit alleging that Dallas Plumbing had performed work negligently was sufficient to raise an implied duty by Dallas Plumbing to perform its work with care and skill.

The Court further rejected Dallas Plumbing's argument that the property owner was barred from recovery under the economic loss rule. The economic loss rule states that a party may not recover damages for failure to perform under a contract when the only damages are losing what the party expected to receive under the terms of the contract. The Court specifically noted that, when the tort duty is independent of the contract itself, the economic loss rule will not preclude recovery. In this case, the Court found that Dallas Plumbing had an independent duty to perform with care and skill. Because this duty was independent of the contract between Dallas Plumbing and Chapman Custom Homes, the economic loss rule did not preclude recovery.

There are a number of cases that state a subcontractor cannot be sued by a property owner for defective work because the property owner does not have a contract with the subcontractor, only with the general contractor. This case makes it clear that, while a property owner may not have a contract suit against a subcontractor with whom they do not have a contract, they may have a negligence claim. Importantly, this potential liability is independent of any contract with the subcontractor.

This case also reinforces an independent legal duty that subcontractors have to property owners when they are conducting work. At all times, they must perform the work with both care and skill. Failing to perform a contract with both care and skill may result in liability to the property owner in addition to potential contract liability to the general contractor.

Finally, because this duty and potential liability is independent of the contract between the subcontractor and general contractor, a subcontractor will not be able to escape liability under the economic loss rule. If a subcontractor breaches its duty to perform with care and skill, it will be liable for all damages caused by the breach. 

For your reference, the opinion is linked here.