E-Alert Case Updates
In Phased Construction Project, Statute of Limitations Runs from Time of Breach, Not Time of Substantial Completion
Hensel Phelps Construction Co. v. Cooper Carry, Inc.
In a recent opinion, the United States District Court for the District of Columbia held that the statute of limitations on a construction contractor’s claims against its fellow contractor related to a phased construction project ran from the time that Defendant delivered allegedly defective designs to Plaintiff.
Plaintiff entered into a contact with Marriott to build a hotel in Washington, DC for a guaranteed maximum price (“GMP”) of approximately $350 million. Separately, Defendant entered into a design services contract with Marriott to create the design of the hotel. Under the design services contract, Defendant’s work was split into five (5) phases, three (3) of which were preliminary design phases. Plaintiff contended that it was entitled to rely on documents created by Defendant in these three (3) phases, and did so in calculating its GMP for Marriot. Defendant, however, was still in the process of completing its obligations under the two (2) non-preliminary phases of its contract when it delivered the GMP documents to Plaintiff. Pertinently, the design services contract contained an indemnity clause under which Defendant agreed to indemnify Plaintiff “from and against any claim judgment, lawsuit, damage, liability, and costs and expenses, including reasonable attorneys’ fees, as a result of” Defendant’s performance under the contract.
Shortly after Plaintiff began construction, it found the first of what eventually turned out to be 18 problems with Defendant’s design. Each of these problems had to be remedied during construction in order for the project to comply with District of Columbia law and/or Plaintiff’s obligations to Marriott. The problems caused the project to go over-budget. Plaintiff subsequently sued Defendant, alleging: (1) that Defendant breached its design services obligation by making errors in its design; and (2) that Defendant breached its obligation to indemnify Plaintiff. Defendant moved for summary judgment, arguing that Plaintiff’s claims were barred by the statute of limitations and that the indemnity provisions at issue did not apply to these circumstances.
Judge Richard J. Leon, writing for the Court, granted Defendant’s motion. As to Defendant’s statute of limitations argument, the Court noted that crux of this issue was whether the statute of limitations ran from the time at which Plaintiff received the GMP documents from Defendant or from the time at which Defendant’s design services were substantially complete. Here, it was undisputed that Plaintiff knew of the deficiencies in Defendant’s design documents early in the building phase. Although Defendant still had other duties to perform under its contract, i.e. during the two (2) non-preliminary phases of its contract with Marriott, Defendant’s contractual duties with regard to the design documents were complete at the time Plaintiff received the GMP documents. According to the Court, “[o]nce the time for compliant performance had passed and [Plaintiff] had accepted the initial design documents on which its claim for damages is based, the clock began to run against [Plaintiff].”
The Court rejected Plaintiff’s substantial completion argument. The Court concluded that, although in some construction cases the project must be substantially complete before a breach can occur, that rule only applies where there is a “unitary construction contract,” i.e. a contract where the only obligation is to deliver the completed construction. In a unitary construction contract, there can be no breach without substantial completion because the time for delivery and acceptance does not arrive until the project is substantially complete. By contrast, the construction contract in this case was done in phases. As a result, the statute of limitations for Defendant’s alleged breach of contract ran from the time the preliminary design phases were complete. Because it was undisputed that the GMP documents were delivered more than three (3) years prior to the institution of this lawsuit, the Court concluded that Plaintiff’s claim was time-barred.
The Court also denied Plaintiff’s claims based on the indemnity clause. The Court was persuaded that the language of the indemnity clause clearly anticipated the potential of third-party litigation, and was not intended to apply in a suit between Plaintiff and Defendant. Moreover, any action based upon a purported breach of the indemnity agreement would be redundant, as such a breach could only occur if Defendant otherwise breached the contract in the first place. Consequently, the Court granted Defendants’ motion for summary judgment.
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