Virginia Supreme Court Holds That Subcontractors Did Not Waive Statute of Limitations, With The Result That The General Contractor Was Liable To Owner For Defective Work But With No Recourse Against Subcontractors Who Performed The Work

Hensel Phelps Constr. Co. v. Thompson Masonry Contractor, Inc., et. al., No. 151780, 2016 Va. LEXIS 166 (Va. Nov. 3, 2016)

The dispute arose from the construction of a student health and fitness center at Virginia Tech. The prime contractor, Hensel Phelps, and its subcontractors substantially completed their work in 1998, and Virginia Tech made final payment in 1999. In April 2012, Virginia Tech discovered defects in the work, elected to repair them, and then sought to recover the costs from Hensel Phelps. Despite the significant passage of time between completion of the work and Virginia Tech’s assertion of its claims, Hensel Phelps could not invoke the statute of limitations because under Virginia Code § 8.01-231, statutes of limitation do not apply to claims asserted by Commonwealth agencies such as Virginia Tech.  Ultimately, Hensel Phelps paid $3,000,000 to Virginia Tech to settle the defective work claims.

Hensel Phelps, in turn, sought to recover from the subcontractors that performed the defective work. When the subcontractors refused to pay, Hensel Phelps commenced an action alleging, among other things, breach of contract against the subcontractors and their sureties. All of the defendants argued that Hensel Phelps’ claims were barred by the applicable statute of limitations. The lower courts agreed. On appeal, the Virginia Supreme Court affirmed.

In arriving at its decision, the Supreme Court reviewed the language of the subcontracts to determine whether there had been a waiver by the subcontractors. In Virginia, a “waiver” is the “intentional relinquishment of a known right, with both knowledge of its existence and an intention to relinquish it.” Waivers may be either express of implied. In this case, Hensel Phelps argued that the waiver was expressed in the subcontracts. Specifically, Hensel Phelps relied upon two provisions in each of the respective subcontracts. The first provision was a standard “flow down” provision which provided that “each Subcontractor is bound to the Contractor by the same terms and conditions by which Contractor is bound to [Virginia Tech] under the Contract.” The second provision provided that the subcontractor’s warranty period covered any time “prior to Contractor’s release from responsibility to [Virginia Tech] therefor as required by the Contract Documents.” The Court held that the provisions failed to incorporate a waiver of the statute of limitations because they did not “expressly acknowledge the right to a limitations period or intent to waive that right.”

The Court also noted that the prime contract between Hensel Phelps and Virginia Tech did not itself contain a waiver of the statutes of limitations. Rather, it was the operation of Virginia Code § 8.01-231 and Virginia Tech’s status as a Commonwealth agency that made the statutes of limitations inapplicable to the claims asserted by Virginia Tech. Therefore, the Court concluded that even if the terms of the prime contract were contractually imposed upon the subcontractors, there was still no contractual waiver of the statute of limitations to be imposed upon the subcontractors.

Hensel Phelps argued, in the alternative, that its claims, while explicitly brought as claims for breach of contract, were actually claims for indemnification, and as such did not accrue until the subcontractors breached the subcontracts’ indemnification provisions by refusing to pay. Consequently, Hensel Phelps argued, its claims were timely.  The Virginia Supreme Court disagreed. Citing Uniwest v. Amiech Elevator Services, Inc., a case decided after execution of the subcontracts, the Court held that the indemnification provisions in the subcontract were void because they required the subcontractors to indemnify Hensel Phelps from and against damages arising from its own negligence. The Court also rejected Hensel Phelps attempts to repurpose other provisions in the subcontracts as indemnification provisions.

As a result, the prime contractor found itself in a situation where it was liable to a public owner for damages stemming from defective work, but with no recourse against the subcontractors that performed the work. The Court commented on this seemingly onerous result for contractors entering into agreements with the public owners by directing such contractors to “draft or amend their subcontracts to comply with Uniwest.”

To view the full text of the court’s decision, courtesy of Lexis®, click here.

James M. Kwartnik, Jr.

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