This Can't Go on Forever: A Surprise Limitation for Breach of Contract

As part of my law practice­­, I regularly review recent decisions from state and federal courts around the country on construction law issues. For the most part, these court rulings do not contain surprises, except for the many and varied ways in which contractors can get into trouble.

Occasionally, a decision catches my attention, either because of an odd way established law is applied to the facts or because a judge created some new “standard” or test for breach of contract. The following ruling emphasizes that there is always a chance a court will come up with imaginative reasoning when it does not fully understand the realities of construction contracting.

As you read this article, consider how this case would affect your company if you bid on defective drawings prepared by a general contractor or an owner. Do you know how long the statute of limitations for breach of contract is in your state? What should you do if the project lasts longer than the statute of limitations period? When would you be considered to know when the drawings were defective?

When a breach becomes a breach

Every state has a law that will act as a bar to old claims—referred to as a statute of limitation. The time frames vary and can be from one to five years or more after a breach of contract occurs. Right or wrong, the rationale for these laws is that documents and witnesses may not be available after a certain period of time, and memories fade, making testimony suspicious. There is another social explanation—that a person should be able to believe that, after a long time, past misdeeds can be forgotten. None of these explanations for the law may be justified, but the law is there in any case.

One key question is when does the limitation period start ticking away. When did the breach occur? A recent decision on hotel construction creates uncertainty about these basic questions.

The misdesigned hotel

Marriott hired an architect to design a major hotel in Washington, D.C. The idea was to have a classic contractual arrangement: owner, owner’s architect and contractor. When the design was nearly complete, Marriott changed its mind about the scope of the GC’s responsibilities. Marriott wanted the GC to accept liability for design as well as construction. To this end, Marriott gave the architect’s drawings to the GC, had the contractor bid the job on a lump-sum basis using those drawings, and assigned the architect’s contract to the contractor. Under this formulation, any modifications to the drawings to correct errors or fill in omissions would be at the contractor’s risk.

The GC did not see any obvious defects in the drawings, so it signed the contract with Marriott and took the assignment of Marriott’s contract with the architect.

The contractor obtained demolition and excavation permits for the site prior to a construction permit. That preliminary work began while the majority of the design was still under D.C. regulatory agency (DCRA) review. After a few months, the DCRA rejected the electrical and mechanical designs for being in violation of code. For the next four months, the architect redesigned the work. The DCRA accepted this revised design, but it cost the contractor millions in added work plus the costs of disruption and delay. The architect remained on the job through completion. At the project’s conclusion, the contractor sued the architect. This $350 million hotel took more than three years to complete; Washington, D.C. has a three-year statute of limitation for breach of contract.

When to sue

Breaches of contract can occur at any time during construction. Strictly speaking, if a contractor installs something that does not meet specifications, misses a promised milestone date, or in some other way violates a provision of the contract, there is a breach. For good, practical reasons, most courts allow these breaches to be cured, so that the contractor is not in default and a claim for damages can be filed later. In this way, a contracting party does not have to think about filing a lawsuit each time the contract is breached. As a general rule, the courts allow damages from these breaches to be accumulated during construction. A lawsuit can be filed for all of the breaches, and the statute of limitations will begin to run at substantial completion.

A new, not-improved concept

So, what happened with the Marriott hotel? The GC for Marriott, Hensel Phelps, appeared to have a few options for whom to sue and when. Obviously, the built-in code errors in the architect’s drawings existed when Hensel Phelps submitted its bid. Because those drawings were generated while the architect was under contract with Marriott, Hensel Phelps had a basis for suing Marriott.

There are numerous cases of this type with the contractor suing the owner for defective plans. Most of these suits are brought after substantial completion when all related impact costs can be known. Instead, Hensel Phelps sued the architect, which was now its own subcontractor.

At the trial court level, the case was dismissed as being filed too late. The judge reasoned that the architect’s breach occurred when Hensel Phelps relied on the architect’s drawings and submitted its bid. But the architect was not under contract with Hensel Phelps at that point, so there was really no contract with the architect to breach.

The court of appeals took a different, novel approach. It reasoned that Hensel Phelps did not know of the defects in the drawings until the DCRA discovered them. It was only at that point, according to the court of appeals, that a breach occurred. This ruling is odd. It means a party’s breach of contract does not really become a breach until the other contracting party learns of it.

The court of appeals started the three-year statute of limitations clock at this early stage of construction. By the time the hotel was built, the three-year period had elapsed. The lawsuit was held to be time-barred.

Under this reasoning, had there been any other errors in the drawings not discovered until later, those other breaches would each have its own start date for the three-year clock. This ruling does not seem to be reasonable, and it is unworkable. In whatever way this case is applied in the future, there is now uncertainty about the statute of limitations for breach of contract.

The Marriott decision concerns only one type of limitation: breach of contract claims. Separate statutes of limitations exist for negligence and liens. By contract, there are other time limitations, including those for asserting a claim, demanding arbitration and for warranties.

If you are not aware of these limitations, or wait until the eleventh hour to do something about them, the result can be disastrous.

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