Did You Unknowingly Sign Away Your Ability To Sue? Double Check Your Construction Agreement!

by Ervin Cohen & Jessup LLP

ConstrBlog-4.23.2014-Contract-MagnifyingGlass-iStock-PAID-RESIZEDBy statute, the time to bring a lawsuit against a contractor for hidden construction deficiencies can be as long as 10 years. That means that, say, a property owner could sue his or her architect or general contractor for defective work up to 10 years after substantial completion of that work, so long as the deficiency was (a) latent, i.e., the deficiency was not apparent by reasonable inspection, and (b) recently discovered, i.e., within four years. As to deficiencies which are apparent by reasonable inspection, so called “patent deficiencies,” the time to bring a lawsuit is four years from substantial completion. These bright line statutes of limitation have developed as a compromise on traditional approaches to statutes of limitation and their exceptions, such as the delayed discovery rule, which provides that the statutes of limitation begin to run when the plaintiff actually discovered, or should have discovered, his or her injury. In other words, in balancing the rights of owners and construction professionals, the legislature determined that a 10 year statute of limitations will be the outside limit for latent deficiencies.

An interesting scenario arises when the parties to a construction agreement purport to shorten the time in which a lawsuit for construction defects may be brought. What is the result then? As a matter of first impression, a California court recently held that such clauses can be enforceable. See Brisbane Lodging, L.P. v. Webcor Builders, Inc., 216 Cal. App. 4th 1249 (2013). In Brisbane, an owner and a contractor entered into an American Institute of Architects (“AIA”) Standard Form contract for the construction of a hotel. In their contract, the parties agreed that any applicable statute of limitations shall commence to run, and any alleged causes of action shall be deemed to have accrued, on the date of substantial completion. Notably, there was no express limitation on the right to sue for latent defects, much less a specific waiver. Five years after the hotel was substantially completed, the owner discovered plumbing problems. When those problems were not resolved to the owner’s satisfaction, the owner filed a lawsuit against the general contractor for breach of contract, negligence and breach of implied and express warranties. Based on what the court characterized as “clear” language, the court granted summary judgment in favor of the general contractor, holding that the owner’s claim was barred because it was untimely.

The court acknowledged that parties (particularly, sophisticated parties) have the right to negotiate for the security of knowing the date beyond which they would no longer be exposed to potential liability—a concept generally referred to as the “freedom to contract.” The court rejected the owner’s argument that the provision was unfair and against public policy. First, any party attempting to invalidate a contractual provision on account of public policy must carry an extremely heavy burden. Secondly, the court characterized statutes of limitation as personal rights for the benefit of the individual, which therefore may be waived.

Interestingly, the AIA dropped the limitation provision in a subsequent version of its form General Conditions—presumably as a result of owner complaints. Further, in Brisbane, the court was clear to limit its holding to sophisticated parties negotiating an arms-length transaction, and emphasized that any contractual restraints on the statute of limitations must be reasonable. However, because such provisions can be enforceable (or at a minimum, require the challenging party to overcome a heavy burden), it should come to no one’s surprise that savvy construction attorneys insert similar provisions in contracts to their clients’ advantage to shorten or lengthen statutes of limitation as appropriate. Accordingly, owners and construction professionals alike should carefully review their construction agreements, even form agreements, and should consider consulting trusted counsel when questions arise.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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