01/31/2017 by Gretchen M. Ostroff
PART ONE: Flowing-Down the Statute of Limitations to Subcontractors
Last month 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. This Part One article addresses liability flow-down and limitations periods. Our next Part Two article will address the case’s reaffirmations regarding construction related indemnity provisions.
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 waiver 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 will address the court’s consideration of Hensel Phelps arguments that the subcontractors and their sureties were regardless liable pursuant to the subcontracts’ contractual indemnity provisions.