November  15, 2002



Bulletin #62, Time Heals All Wounds? (November 15, 2002)

It was a standing joke in the offices of ZZZ Sheet Metal that the lawyers should be given assigned parking spaces in the company lot. The HVAC subcontractor had battled its way though construction slumps, developer bankruptcies, economic recessions, and hyper-inflation. It had survived the asbestos litigation nightmares of the 1980s and 1990s. The company had negotiated, mediated, arbitrated, and litigated with innumerable general contractors, construction managers, architects, and other subcontractors. Somehow the company survived, but ZZZ management had been constantly reminded of the risks and challenges inherent in the construction industry. While most projects proceeded from bidding to completion without formal legal proceedings, the company had become intensely focused on avoiding and minimizing legal risks and on protection of its right to payment.

Given the experiences of the subcontractor, there was always a feeling of relief at ZZZ when the final payment on a project was delivered, along with the retainage. This was particularly so if the final payment did not reflect any set-off, claim or backcharge amounts. While the subcontractor realized that it still faced some risk on its warranties, completion and acceptance of the work (and final payment) were the most important milestones.

If warranty claims arose, the subcontractor had found that being responsive and addressing the claims (even if they were somewhat marginal) was the best course of action. This approach had earned the company good will with construction managers and general contractors in the region. These positive relationships had significantly fueled the growth of the company and its regional expansion. There was a second sigh of relief when the warranty period expired with minimal, if any, repair requirements. At that point, the plans and specifications, contracts, bidding materials and construction records were boxed up and placed in storage, hopefully never to reappear again. The books were closed on another project. Or so the company thought...

The trouble began one day in July 2002. ZZZ received a call inquiring as to whether any officers were available at the offices of the company. In fact, all of the officers were there for the monthly management meeting, and an affirmative response was provided. Less than an hour later, a process server arrived, and the company was formally served with pleadings in a lawsuit. The pleadings related to a hospital project the company had completed in 1989. The work had involved the installation of an upgraded HVAC system in an existing hospital, and a new system in a wing of the hospital being constructed at that time. In October 1989, the renovation and new construction had been completed, and a certificate of occupancy had been issued by the local building authorities. ZZZ’s work had been completed several months earlier, and had been accepted by the general contractor and the architect. The close-out of the project had proceeded with unusual smoothness, the subcontractor had been paid in full, and all of the retainage had been released. There were no set-offs, backcharges or warranty claims. When the books were closed on the hospital project, there seemed almost no chance that it would ever pose an issue for the subcontractor. The pleadings told a different story.

According to the legal complaint, a mold problem had developed in the air-handling system of the hospital. In fact, large quantities of mold had been found at various locations in the duct work. The air-handling system was allegedly spreading spores from the mold throughout the hospital, and it was feared that significant contamination had resulted. The owner of the hospital had sued the architect, the mechanical engineer, the general contractor, and ZZZ. The general contractor was also claiming against ZZZ. The general contractor’s claim alleged breach of contract based upon errors with installation of the system and negligence. The owner’s claims against ZZZ alleged negligence in failing to properly install the system, and in failing to identify and address design defects likely to lead to the build-up of mold in the system. The pleadings alleged damages in the millions of dollars based upon the assertion that the problems could be resolved only by replacement of large quantities of the duct work. This would require tearing out multiple sections of ceiling, floor, and walls. As a result, it was alleged that large portions of the hospital would be rendered unusable throughout the repair process. Claims for lost revenue, damage to reputation, and the potential for employee and patient health impacts were all included as part of the lawsuit. The pleadings ran to over 60 pages. As each page was turned, the mood at the ZZZ management meeting darkened further. It was obvious that these claims, if sustained, could wipe out the company. At the very least, defending the claims would cost hundreds of thousands of dollars, and consume years of management time.

ZZZ reluctantly called its legal counsel, and a meeting was convened the next day. The boxes were recovered from storage, and the attorneys began to investigate. After considerable investigation, the lead attorney described the situation as a “classic statute of repose case.” The attorney explained that state law contained a statute of limitations on most claims related to construction. In that particular state, the statute of repose set a limit of ten years after the date the improvements became available for their intended use. ZZZ’s attorney recommended immediately bringing a motion in the court proceeding to seek dismissal of the subcontractor from the case based upon the statute of repose.

Upon ZZZ’s filing of its motion, the general contractor filed its own motion seeking similar protection against the owner’s claims. The owner responded by asserting that the statute of repose applied only to actions based on negligence and not to a potential breach of contract claim. The owner also argued that the defects were latent, and that any time period under the contract or the statute of repose should run from the date of discovery. The owner analogized its situation to that of the purchaser of an inherently defective product that does not become aware of the defect until long after purchase of the product. The owner’s attorneys argued that courts were increasingly holding manufacturers of such defective products to a higher standard in order to protect the public. The argument concluded that the patients of a hospital were among the most vulnerable members of society, and should certainly receive the highest level of legal protection, where the negligent or reckless actions of a general contractor and subcontractor have exposed such individuals to a serious and potentially fatal risk. It was a compelling argument and was well-presented. The management of ZZZ faced many sleepless nights while the court considered the matter.

The court’s order arrived three months after the hearing. The judge found:

  • That the facts of the case were clearly within the scope of the statute of repose.
  • That the statute applied a ten year timeframe for claims arising out of allegedly defective work or design.
  • That the statute should be interpreted broadly.
  • That the statute of repose clearly applies to latent, as well as, obvious defects.
  • That the statute must apply to claims based upon breach of contract, as well as, negligence for the law to provide the anticipated protections to parties involved with construction projects.
  • Therefore, all claims against ZZZ, and the general contractor were dismissed.

    Statutes of repose vary from state-to-state, as do the court interpretations of those statutes. However, if there is a significant time lag between the completion of a project and the assertion of a claim, the subcontractor should always consider whether a statute of repose defense might exist. Such a defense, if successfully pursued, can resolve applicable claims early in the legal process before large sums are expended on attorney’s fees and costs.

    Author’s Note: For the past six years, I have had the privilege of authoring the Contracts Bulletin series for SMACNA. My purpose throughout was to address legal and contract issues through various scenarios involving ZZZ Sheet Metal, a fictional subcontractor. Hopefully, the result was informative and also somewhat interesting to read. My thanks to Tom Soles for providing a number of good suggestions on topics, and to SMACNA for allowing me to participate in this project.

    David M. Cremons Minneapolis, Minnesota

 

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