Virginia Public Procurement Act; statute of limitations on actions on construction contracts -
Contractors were informed in 2016 by the Virginia Supreme State Court they are liable for public construction work for eternity. This bill adds a statute of limitations of five years for a public body to make a claim against a construction contract. Currently, the Commonwealth of Virginia is considered a sovereign in the code and therefore not subject to the statute of limitations. Currently contractors are liable on construction work for eternity.
This bill provides that unless otherwise specified in the contract, no action may be brought by a public body on any construction contract unless such action is brought within five years after completion of the contract, including the expiration of all warranties and guarantees. The bill also limits the time frame during which a public body, other than the Department of Transportation, may bring an action against a surety on a performance bond to within five years after completion of the contract, including the expiration of all warranties and guarantees. Current law allows a public body, other than the Department of Transportation, to bring such an action within one year after (i) completion of the contract, including the expiration of all warranties and guarantees, or (ii) discovery of the defect or breach of warranty that gave rise to the action.
Under the common law doctrine of no time runs against the king, states may bring actions for damages that would otherwise be barred by the applicable statute of limitations. Under the doctrine, a state (Virginia) is not bound by a statute of limitation unless the statute expressly mentions the state by name. Virginia in among the minority of states with no limitations.
39 states believe a warranty for eternity on public projects is just too long. The doctrine remains in force with few or no limitations in only 11 states: Arizona, Mississippi, New Hampshire, North Carolina, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia, and Wyoming.
In 20 states, the doctrine applies subject to substantial limitations. The most common limitation, which applies in Alabama, Delaware, Idaho, Indiana, Iowa, Maine, New Mexico, and Ohio, generally applies to the state, but not its political subdivisions.
The following 15 states have substantially or entirely abolished the doctrine by legislation or court decision: Colorado, Florida, Georgia, Kentucky, Massachusetts, Minnesota, Missouri, Montana, Nebraska, New York, North Dakota, South Carolina, South Dakota, West Virginia, and Wisconsin.
What you and your employees need to do:
- Contact both your State Senator and State Delegate and tell them to support SB1369 (Norment) & HB 1667 (Kilgore).Type your information on the right to find your legislators contact information.
- GCs are at risk of going under if a public agency determined their work was defective -15 , 20 or 25years after completion of the work.
- Now that Contractors are aware of this issue, fewer GCs and Subs will take the risk on public projects, thus causing less competition on all projects.
- GC's that can afford the risk, will add the risk into all public procurement projects bids and cost the state more money up front.
If this has been the case all along, why are we hearing about it now?
Recent Supreme Court Decision Highlights the Problem:
In November (2016), the Virginia Supreme Court issued an impactful case decision regarding subcontractors' liability. That decision, Hensel Phelps Construction Co. v. Thompson Masonry Contractor, Inc., in particular addressed the effect of general subcontract flow down provisions and reaffirmed prior law on the enforceability of indemnity provisions in construction contracts.
The dispute in Hensel Phelps arose out of a construction project at Virginia Tech. As the prime contractor, Hensel Phelps hired subcontractors to complete portions of the work. Twelve years after final completion, Virginia Tech sued Hensel Phelps to recover costs of repairing defective work on the project. Ordinarily, Virginia's five-year statute of limitations on contract claims would have barred the claim. However, the statute of limitations does not apply to Virginia Tech because it is an agency of the Commonwealth, so the claim could be brought at any time.
Hensel Phelps settled the claim and then sued various subcontractors (and their performance bond sureties) for breach of contract and indemnity. The subcontractors and their sureties moved the trial court to dismiss Hansel Phelps' claims on the basis that Virginia's five-year statute of limitations applied and had expired. The trial court agreed and Hansel Phelps appealed.
Hensel Phelps' appeal argument was that the statute of limitations did not apply because of flow down provisions in the subcontracts, via which it argued the subcontractors assumed toward Hensel Phelps the same obligations Hensel Phelps assumed toward the owner. The Virginia Supreme Court disagreed, finding that the general flow down provisions in the subcontracts were insufficient to impose on the subcontractors the open-ended statute of limitations governing Virginia Tech's claim against Hensel Phelps.
But, of note, as part of its analysis the court recognized that limitations periods could be waived if the contractual language was specific enough to show specific, knowing waiver. Therefore, if the subcontracts had contained provisions specifically waiving the statute of limitations or incorporating by reference the statute of limitations wavier in the prime contract-rather than generically flowing down the prime contract terms-Hensel Phelps' claim would not have been barred by the statute of limitations.
PART TWO: Enforceability of Indemnity Clauses in Virginia Construction Contracts
This is the second part of a two-part overview of Virginia Supreme Court decision in Hensel Phelps Construction Co. v. Thompson Masonry Contractor, Inc. addressing subcontractor liability and an analysis of the subcontracts' contractual indemnity provisions.
This Part Two addresses Hensel Phelps' secondary argument that since its claims against the subcontractors did not arise until it settled Virginia Tech's indemnification claim (in 2014), the five year limitations period did not begin to run until Hensel Phelps' payment to the college; and that therefore its law suit was timely filed.
The Virginia Supreme Court disagreed. Relying on its prior decision in Uniwest v. Amtech Elevator Services, Inc., the court found that the indemnity clause in the subcontracts was unenforceable because, as drafted, the clause violated Virginia law since it required the subcontractors to indemnify Hensel Phelps for its own negligence; which in Virginia is prohibited in construction contracts by statute. As a result, the court struck the entire indemnification provision from the subcontracts and, without that provision, the subcontractors had no obligation to indemnify Hensel Phelps for Virginia Tech's claim.
Similar to the discussion in Part One regarding what could have been an effective limitations period waiver, the court noted that properly-drafted indemnity clauses (i.e., clauses compliant with Uniwest) would have been effective and so would have saved Hensel Phelps' claim against the subcontractors. But under existing law, Hansel Phelps' subcontracts' indemnity clauses were too broad, were not enforceable, and could not be rewritten by the court to be enforceable.
Hensel Phelps is a reminder that while Virginia Courts generally hold parties to their contracts, the words used in the contracts are critical.