Construction Law - Arbitration Agreement
Does Your Arbitration Agreement Inadvertently Expose you to Liability for an Unlimited Time?
John D. Burns
The great Scots poet Robert Burns married the daughter of a brickmason, so it is no surprise he seems to have understood one of the essential truths of construction law: Nothing is certain in construction except uncertainty. There are no sure things.
But if there is one thing that should be a sure thing in construction law, it is the statute of repose. While the time period1 and type of claim to which it applies2 differ from state to state, every state has some version of a statute enforcing the idea that once a certain amount of time has passed after work has been completed, a contractor or architect should be able to move on without being concerned about whether old errors or liabilities will pop up and result in a lawsuit. In North Carolina, that time period is six years. North Carolina General Statute §1-50(a)(5)a. states, “no action to recover damages based upon or arising out of the defective or unsafe conditions of an improvement to real property shall be brought more than six years from the later of th specific last act or omission of the defendant giving rise to the cause of action or substantial completion of the improvement.”3
The public policy behind such a statute is clear. Building professionals should not have to face what a North Carolina court called “potential open-ended liability for an indefinite period of time.”4 If any flaw or injury related to an improvement to real property could give rise to a cause of action that lasts forever, contractors would face the difficulty of defending cases based on facts and conditions that occurred several years prior.
So, it must be a sure thing then: if you build anything in North Carolina, you won’t face a claim more than six years after completion. Right? Wrong. The ubiquity of arbitration agreements in modern contracts has imperiled this sure thing in some states, including North Carolina. One recent case shows how. A second-tier sitework subcontractor on a shopping mall project completed its work in early 2005, and the shopping mall opened in the fall of that year.
However, in the spring of 2012, Seven years later, the subcontractor found itself facing a motion to compel its participation in an arbitration arising from an alleged flaw in its work. Despite case law that held the statute of repose to be “an unyielding and absolute barrier” that gave a defendant a “vested right not to be sued” on old claims,5 the trial court compelled the client to arbitration.
The basis for this ruling is that the statute of repose in North Carolina states that “no action to recover damages” could be brought more than six years after substantial completion. The claimant contended, and the court and arbitrator ultimately agreed, that under prior North Carolina decisions "an arbitration is neither an 'action' nor a 'judicial proceeding unnecessary."6 Since it was not an action, the arbitration claim could not be barred by the language of the statute. The result? The subcontractor ended up facing a large liability that, in the absence of an arbitration agreement, would likely have been defeated on the first day of court.7
Because arbitration provisions are found in nearly every contract, particularly on substantial construction jobs, such rulings should sound a strong note of caution for building professionals, particularly those who are involved in projects as subcontractors. If, as in North Carolina, such timing rulings are left up to the arbitrator, significant expense can be incurred before any ruling is had on the issue, and the arbitrator may, under the logic in cases like Cameron or Broom, rule that the statute does not apply.
Short of lobbying for every state to change its laws, there is only one way to ensure the statute of repose protects against stale claims in arbitration: build it into the contract, ideally in the arbitration provision itself. For the protection of the contractor, the arbitration provision of any construction contract should state that, in any arbitration proceeding conducted thereunder, any statutes of limitation or repose of the forum state should be deemed to apply to claims brought in arbitration as if the case were brought in a court of law.
Alternatively, the contract could be drafted with its own repose or limitations provision, setting forth the date before which any claim must be brought. Like an arbitration clause, such a provision should be enforceable against both parties, provided it could not be deemed to be an unconscionable abuse of one party’s bargaining power over the other.
What any building professional should not do is assume it is a sure thing that a statute of repose will automatically bar stale arbitration claims. Keeping in mind what Robert Burns said about the best laid schemes of mice and men, careful wording before the contract is executed can help resolve that uncertainty.
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1 The American Institute of Architects (AIA) provides a handy guide to the Statutes of Repose in each state as of 2011, which can be found at: http://www.aia.org/aiaucmp/groups/aia/documents/pdf/aias078872.pdf. That listing shows that 23 states have a Statute of Repose of 10 years. The longest is Iowa, at 15. The shortest is Tennessee, at 4.
2 Some states apply a statute of repose only to claims arising from contract; others apply it to tort claims as well. For this reason, careful review of any claim is strongly advised before decisions are made based on the application of the statutes of repose or limitation.
3 Virginia’s Statute of Repose, which is five years, has similar wording. Code of Virginia §8.01-250.
4 Monson v. Paramount Homes, Inc., 133 N.C. App. 235, 240, 515 S.E.2d 445, 449 (1999).
5 Black v. Littlejohn, 312 N.C. 626, 633, 325 S.E.2d 469, 475 (1985).
6 Cameron v. Griffith, 91 N.C. App. 164, 165, 370 S.E.2d 704, 704-05 (1988). The Cameron court was discussing the application of a statute of limitations to a securities claim. The distinction between statutes of repose and statutes of limitation did not persuade the court or the arbitrator.
7 While the issue might have been revisited in an hearing on a motion confirming an ultimate arbitration award after the arbitration was concluded, the matter settled on confidential terms.
8 See, for example, Scott v. Delaware Tech &Comm’ty. Coll., 1985 Del. Ch. LEXIS 400 (Mar 5, 1985) (finding arbitration barred by statute of repose referring only to “actions”).
9 Broom v. Morgan Stanley DW, 169 Wash. 2d 231, 236 P. 3d 182 (2010).
10R.C.W. § 7.04A.090
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