By Ross Bromberger, Hedrick Gardner Kincheloe & Garofalo, LLP
What happens when an owner brings a lawsuit against its former general contractor six years to the day from substantial completion? Or if the owner brings a suit one month before the claim is barred by North Carolina’s statute of repose but the complaint is not served until more than six years after substantial completion? In either scenario, can a general contractor bring suit against its subcontractors or are those derivative claims, either in contract, indemnity, or contribution, barred by North Carolina’s statute of repose? Unfortunately, the answer appears to be that the general contractor is barred from asserting those valuable derivative claims against the subcontractors, even though the subcontractors are often the ones that performed the work at issue.
In ESA, Inc. v. Walton Constr. Co., Inc., the Eastern District Court was faced with this exact scenario. No. 7:04-CV-75-F(3), 2007 WL 9718764, 2007 U.S. Dist. LEXIS 113115, (E.D.N.C. Mar. 16, 2007) (applying North Carolina law). Plaintiff, Extended Stay America (ESA), filed suit against its general contractor, Walton, six years to the day after substantial completion. Walton filed a third-party complaint against its subcontractor, Power Plus, which actually performed the work in dispute. Walton’s Third-Party Complaint, however, was filed six years and two months after substantial completion. At summary judgment, Power Plus sought dismissal of Walton’s Third-Party Complaint, arguing the claim was barred by North Carolina’s six-year statute of repose. In response, Walton argued that such an application of the statute of repose would be inequitable. Ruling in favor of Power Plus and dismissing Walton’s Third-Party Complaint, the ESA Court noted:
Although the court appreciates the seeming inequity of the result, [N.C.G.S.] § 1-50(a)(5)(a), (b)(6) plainly dictates it. Therefore, where, as here, an owner files an action against a general contractor for defective or unsafe conditions arising from improvement to real property on the very last day allowed by law, that same statute of repose operates to preclude that contractor from seeking contribution or indemnity from his subcontractors. The Court of Appeals of North Carolina expressly has rejected the argument that the statute of repose does not bar an action for contribution or indemnification under similar circumstances, pursuant to an earlier version of the statute. New Bern Assoc. v. The Celotex Corp., 359 S.E.2d 481, 483 (N.C. Ct. App.), cert. denied, 362 S.E.2d 782 (N.C. 1987). The court also has pointed out that “[w]hether a statue of repose has expired is strictly a legal issue . . .,” Cellu Products Co. v. G.T.E. Products Corp., 344 S.E.2d 566, 568 (N.C. Ct. App. 1986), and that where “the pleadings and proof show without contradiction that the statute has expired, then summary judgment may be granted.” Id.
ESA, at *3.
What can a general contractor do to avoid, as the ESA court noted, such an inequitable ruling? Such a question requires a closer look at North Carolina’s construction statute of repose. For construction disputes, North Carolina’s statute of repose can be found in N.C.G.S. § 1-50(a)(5), stating, “[n]o action to recover damages based upon or arising out of the defective or unsafe condition of an improvement to real property shall be brought more than six years from the later of the specific last act or omission of the defendant giving rise to the cause of action or substantial completion of the improvement.” (emphasis added).
In reviewing N.C.G.S. § 1-50(a)(5), the North Carolina Supreme Court, in Christie v. Hartley Const., Inc., undertook an inquiry as to the legislative basis and intent behind a statute of repose. 367 N.C. 534, 766 S.E.2d 283 (2014). The Christie Court noted that “[b]ecause an applicable repose period begins to run automatically, statutes of repose give potential defendants a degree of certainty and control over their legal exposure that is not possible when such exposure hinges upon the possibility of an injury to a plaintiff that may never manifest.” Id. at 539, 766 S.E.2d at 287. Therefore, as a statute of repose acts to provide a bulwark against open-ended exposure, where a business contractual modifies and extends the statute of repose, North Carolina courts will allow such modification. Id. at 539-41, 766 S.E.2d at 287-88. Such a modification is allowable as parties generally are “free to contract as they deem appropriate.” Id.
In adopting and applying Christie, Judge Bledsoe of the Business Court found that contracting parties can seek to toll the applicable statute of repose. Window World of Baton Rouge, LLC v. Window World, Inc., 2019 NCBC 10,, 2019 WL 540755, 2019 NCBC LEXIS 11 (N.C. Super. Feb. 11, 2019). In support of this position, Judge Bledsoe stated, “North Carolina courts have explicitly recognized that a statute of repose may be tolled by agreement.” Id. at 6.
Not only can a party contractually modify to extend or toll the applicable statute of repose, but contracting parties can also agree to shorten the applicable statute of repose. Tsonev for Est. of Shearer v. McAir, Inc., 272 N.C. App. 689, 847 S.E.2d 788 (2020). In Tsonev, the plaintiff-homeowners hired McAir to remediate flood damage at their personal residence. Plaintiff and McAir entered into a contract, which, in part, specifically stated, “[McAir is] not liable for any consequential incidental, indirect, punitive, treble, speculative, or special damages of any kind whatsoever, and you may not bring any action against us more than two (2) years after the Completion Date.” Id. at 694, 847 S.E.2d at 792. Five years after completion date, plaintiff-homeowners discovered defective workmanship by McAir and brought suit. Upon review of the contract, the Tsonev Court dismissed plaintiff-homeowners’ claim, stating that the contractually shortened statute of repose was allowable “[b]ecause the express provision of the contract is clear” and therefore “the contract must be enforced as written.” Id. Based upon the Tsnoev decision, it appears a party may contractually modify the statute of repose to match the three-year statute of limitations for construction claims.
Back to the question at hand: what can a general contractor do to avoid the inequity of being sued within an owner’s statute of repose but outside a subcontractor’s statute of repose? At least one of the potential answers is the contractual formation on the front end. A general contractor can contractually modify and limit the statute of repose with the owner as in Tsonev. To that end, one suggestion would be to limit the statute of repose to match the applicable statute of limitations at three years. Alternatively, a general contractor could modify their subcontract agreements to include a tolling provision pursuant to Christie and Window World. In so doing, a subcontractor’s statute of repose would be contractually tolled from the date the owner brings suit against the general contractor. While there’s no silver bullet, at least there do appear to be contractual options available to protect a general contractor against the implicit risk of the statute of repose.
Finally, what can be done if the contracts are silent on the issue of modifying or tolling the statute of repose? Under such a scenario, the options for a general contractor are limited. If, however, the owner of the project has provided notice of potential issues, it might be advisable for a general contractor to file suit against any subcontractors that performed the work in dispute to preserve any available claims. The lawsuit against the subcontractors could later be consolidated with any lawsuit that was filed by the owner but served after the statute of repose has run.