The Problem: Under the common law doctrine of nullum tempus occurrit regi (no time runs against the king), a state may bring actions for damages that would otherwise be barred by the applicable statute of limitations. Under the doctrine, a state is not bound by a statute of limitation unless the statute expressly mentions the state by name. Virginia is among the minority of states with no limitations. A November 2016 Supreme Court decision, acknowledged the eternal liability and further opinioned on how a General Contractor can pass the never ending liability on to their subcontractors,
The Solution: HB1667 and SB 1369 will establish a five year statute of limitations by which the state could bring a claim against a contractor for defects on state construction projects.
• Statutes of limitations exist for good reasons. They have been a fundamental part of jurisprudence for thousands of years.
• It is impractical, and in some cases, fundamentally impossible, to bring a claim against a construction firm 15, 20, 30, or even 50 years after the completion of a construction project. With the passage of time, it would be challenging, not to mention costly and/or impossible, to obtain documentation and records, and to locate key stakeholders.
• State owners could, years after the completion of a project, assert claims that are more likely to arise from maintenance, life span or other factors not caused by the original construction team. The threat of litigation costs or damaging their relationship with the state may compel many to compromise claims with limited merit.
• In response to the 2016 Supreme Court decision, general contractors are changing their contracts with their subcontractors, leaving these small businesses with eternal liability. At a time when the Commonwealth is trying to increase SWaM certified businesses and luring their participation through set aside projects or mandates for inclusion, they are trapping certified businesses with a liability that could crush the very companies they are seeking to help.
• As general contractors and subcontractors learn about the financial risk they take every time they win a state contract, companies are building into their budgets financial protections against possible future lawsuits. This only serves to drive up the cost of projects and limit the pool of applicants.
• Some insurance carriers say that as a result of the Hensel Phelps decision, some contractors may have trouble purchasing general liability insurance because the insurance companies either won't write or the premiums will make them too costly to purchase.
• Bonding carriers and agents have asserted that the decision will have a chilling effect on the ability of some bonding companies to provide surety coverage on state projects. Some contractors may not be able to bid projects because of the increased premium costs. This will be exceptionally harmful to smaller subcontractors trying to work on state bids.
Associated General Contractors (AGC)
National Association of Women in Construction (NAWIC)
Black Business Alliance of Virginia
Virginia Assoc of Roofing Professionals
Alliance for Construction Excellence (ACE)
Alliance for Procurement Reform
Virginia Chamber of Commerce
Hispanic Chamber of Commerce
NOVA Chamber of Commerce
Hampton Roads Chamber of Commerce
Lynchburg Regional Business Alliance
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.