Bradley E. Sands, Associate, Jones Walker LLP.
Statutes of limitations establish the period of time within which a claimant must bring an action after it accrues. An action can be filing a lawsuit and, in some instances, filing a demand for arbitration. But a multi-year construction project could be longer than the applicable statute of limitations. For example, under Delaware or North Carolina law, the statute of limitations for a breach of contract is only three years.1 So a claim for breach of a construction contract that occurred (i.e. accrued) at the beginning of a four-year project under Delaware or North Carolina law may expire before the project is completed.
Generally, a claim accrues at the time of the breach (however, it is important to note that this is not always the case and claim accrual could be the subject of an entirely different article). During the course of a multi-year construction project, proposed change orders or claims for additional compensation can sit, unanswered or unpursued, for months. Or, the parties may informally agree as part of regular project communications to put off dealing with a claim head-on until the end of the project. On certain projects, slow-walking a claim is understandable, as a contractor may be hesitant to sue an owner in the middle of a multi-year project and risk upsetting an otherwise good working relationship. But a delay in formally asserting a put-off claim after it accrues could result in the claim falling subject to a statute of limitations defense.
The best defense to the statute of limitations is a good offense – a claimant should timely assert claims to avoid the statutes of limitations. However, there are viable arguments that could be raised to overcome a statute of limitations defense should a contractor find itself beyond the statutory time period and needing overtime to assert its claim.
This article will provide an overview of three arguments that can be used to potentially avoid a statute of limitations defense specifically for claims arising under construction contracts. First, a contractual requirement to arbitrate claims may remove any contract-based claims from the statute of limitations. Second, the construction contract may contractually delay the accrual of the claim or otherwise extend the time period to bring an action due to the contractual pre-suit dispute resolution process. Third, the applicable statute of limitations may be different and longer than that asserted as a defense.
The three arguments addressed in this article are not an exhaustive list of arguments that could be used to potentially avoid a statute of limitations defense. Additionally, this article will not address statutes of repose, which are different than a statute of limitations. This article will also not address how statutes of limitations apply to non-contract claims, such as statutory penalties.
A Contractual Arbitrate Requirement May Prevent a Statute of Limitations Defense
Statutes of limitations do not always apply to contract claims brought pursuant to a mandatory arbitration provision. Statutes of limitations are what the name implies: statutes passed by state legislatures that establish a time limit for a party to sue on a claim.
Each of the 50 states has a different statute of limitations, and each state statute of limitations has its own particularized time period, wording, intent, and body of law. But only three states—New York, Georgia, and Washington—expressly apply its statute of limitations to arbitration proceedings.2 For example, Washington’s Uniform Arbitration Act expressly applies the statute of limitations to arbitration:
A claim sought to be arbitrated is subject to the same limitations of time for the commencement of actions as if the claim had been asserted in a court.3
On the other hand, many states are silent as to whether the relevant state legislature intended their state of limitations to apply to arbitrations. Instead, a typical statute of limitations may refer to the time to commence a “judicial proceeding” or “civil action.” As a result, numerous courts have concluded that arbitration is not a “judicial proceeding” or “civil action” subject to state statutes of limitations.4
When the applicable statute of limitations does not specifically address claims in arbitration, parties may address this gap in their contract and cause a state statute of limitations to apply to claims brought in arbitration. Both ConsensusDocs and the American Institute of Architects (AIA) do this and have provisions that cause the relevant statute of limitations to apply in arbitration.
For example, in Section 12.5.1.1 from ConsensusDocs 200, the applicable statute of limitations expressly applies to a demand for arbitration:
Neither Party may commence arbitration if the claim or cause of action would be barred by the applicable statute of limitations had the claim or cause of action been filed in a state or federal court. Receipt of a demand for arbitration by the person or entity administering the arbitration shall constitute the commencement of legal proceedings for the purposes of determining whether a claim or cause of action is barred by the applicable statute of limitations.5
And Section 6.3.2 from AIA Document A401 similarly expressly applies the applicable statute of limitation to a demand for arbitration:
A demand for arbitration shall be made no earlier than concurrently with the filing of a request for mediation but in no event shall it be made after the date when the institution of legal or equitable proceedings based on the Claim would be barred by the applicable statute of limitations. For statute of limitations purposes, receipt of a written demand for arbitration by the person or entity administering the arbitration shall constitute the institution of legal or equitable proceedings based on the Claim.6
Many bespoke construction contracts that require arbitration—unlike the form documents provided by ConsensusDocs and AIA—fail to include an express provision applying the applicable statute of limitations to claims to be arbitrated.
A claimant facing a statute of limitations defense in arbitration based on a bespoke construction contract should carefully analyze the contract and confirm whether the asserted statute of limitations defense is applicable to the particular arbitration. Claimants should not assume the asserted statute of limitations affects the claims subject to arbitration.
The Parties’ Contract May Delay the Accrual of the Claim
A statute of limitation typically begins to run when the cause of action accrues. A breach of contract action accrues immediately on a breach, even if actual damages do not occur until afterwards. For example, a breach may occur at the time a contractor performs additional work after identifying a changed condition.
Many construction contracts, however, provide an express dispute resolution procedure as a condition precedent to filing suit. And courts routinely enforce pre-suit dispute resolution procedures. These procedures, so long as they are diligently followed, may delay the accrual of a claim.
A court may find that a breach of contract action does not accrue while the parties act according to the changes or dispute provision concerning a claim for additional compensation. When a contract dispute resolution procedure is a condition precedent to a claimant’s ability to sue, the statute of limitations does not begin to run until the condition precedent is met.7
For example, a construction contract that requires a claimant to seek an equitable adjustment as the contractual remedy for additional costs incurred may be an express condition precedent to litigation. An equitable adjustment procedure can drag on for months as the parties consider the various issues and as the claimant continues to provide requested additional documentation. Under this example, the equitable adjustment process would not be exhausted until the equitable adjustment is rejected. And the statute of limitations would not begin to run until the rejection, even though the breach occurred months before.
It is sound policy that courts permit claimants to rely on the express dispute resolution procedures in their contracts to provide relief for a premature statute of limitations defense.8 Otherwise, potential defendants would be encouraged to draw out the negotiating process until the statute of limitations period elapses. Still, claimants must stay vigilant to the express procedures outlined in their contract, including express time periods within their construction contracts that requires that claims be brought.
The Applicable Statute of Limitations May Be Different Than That Asserted as a Defense
The applicable statute of limitations is often dispositive on whether a claim is viable or not because there are substantially different time frames provided by the various state statutes of limitations. As noted above, the statute of limitations for a breach of contract is only three years in Delaware and North Carolina. While in Tennessee, the statute of limitations for breach of contract is six years.9
The issue of which statute of limitations is applicable to a given dispute becomes convoluted when litigation or arbitration ensues in a state (i.e. forum) different than that selected by the choice-of-law provision. A construction contract may include a choice-of-law provision that applies the law of a state different than the state in which the project or the lawsuit is located. For example, a general contractor located in Florida may include a choice-of-law provision in its standard subcontract form selecting Florida law as the governing law of the subcontract, regardless of the project location.
But if a contract does not also include an exclusive, mandatory forum selection clause, the parties could find themselves litigating a construction contract in a state different from the choice-of-law provision. A court in one state will apply the law of another state if required by a choice-of-law provision to the extent that it deals with the substance of the case. However, even if another state’s substantive law governs the parties’ contract, the general rule is that the forum state’s statute of limitations applies.
A choice-of-law provision in a contract will generally not apply the statute of limitations, unless a provision expressly includes it.10 This is because statutes of limitations are generally deemed procedural law rather than substantive law. A court will rely on the procedural law of the forum state—the state where the lawsuit is located—to deal with procedural aspects of the litigation. So whether the choice-of-law provision includes the selected state’s procedural law, and therefore the statute of limitations, is an issue of contract interpretation.
What’s more, states such as New York, Tennessee, and more than a dozen other states have protective statutory restrictions that void mandatory forum selection clauses and choice-of-law provisions in contracts related the performance of construction work on real property within its state.11 The Tennessee statute, T.C.A. § 66-11-208(a), states in relevant part:
a provision in any contract, subcontract or purchase order for the improvement of real property in this state is void and against public policy if it makes the contract, subcontract or purchase order subject to the substantive laws of another state or mandates that the exclusive forum for any litigation, arbitration or other dispute resolution process is located in another state.12
So, for example, even if the parties agree that their contract is governed by Florida law, and also should be litigated in Florida courts, if the construction project is in Tennessee, the parties could find themselves in Tennessee, subject to the Tennessee statute of limitations, not Florida.
Issues of choice-of-law and the appropriate forum may seem immaterial when entering a contract, however, these issues become important when claims drag-on and potentially fall subject to a statute of limitations defense.
Conclusion
Claims should be asserted well before the statute of limitations becomes an issue. However, do not take the statute of limitations defense at face value. Often there are available arguments that may provide a claimant an overtime shot at asserting an otherwise late claim.
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The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice