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Construction Law - July 2009

Now, Achieving Quicker Peace of Mind for Claims Alleging Defective’ Work Can Be Found Under the Accrual Provision

When does a cause of action for a claim alleging defective construction or defective design arise? It varies from state to state. Some statutes of limitations contain an express or implicit “discovery rule.” Can contracting parties legally establish by their contract the date when the statute of limitations must start regardless of when the alleged defect ultimately is discovered? Now, an Illinois court has directly addressed the validity of a contract’s “accrual provision” in the context of an American Institute of Architects standard form contract.

By John S. Mrowiec

Lawsuits claiming defective construction or design sometimes are filed many years after project completion. Construction contractors, design professionals and, if the property has been transferred, developers, depend on the relevant statute of limitations for protection.

John S. Mrowiec
John S. Mrowiec is a partner with Chicago-based Conway & Mrowiec, a construction and public contracts law and litigation practice. He may be reached at (312) 658-1100. For information, go to the firm’s Web site at www.cmcontractors.com.

The problem is that statutes of limitation often are triggered by the date the suing party’s “cause of action arose.” When does a cause of action for a claim alleging defective construction or defective design arise? It varies from state to state.

Some statutes of limitations contain an express or implicit “discovery rule.” Under the discovery rule, a suing party’s cause of action does not arise until the party discovers the defect or, more precisely, when the party should have known to investigate that the party’s damages were “ascertainable” or “wrongfully caused.” For example, in Missouri, recovery was allowed against an architect regarding a project completed twenty-three years before a lawsuit where the owner’s “damages were not ascertainable” until twenty-two years after completion of the project and the owner sued within Missouri’s five year statute of limitations thereafter. See Business Men’s Assurance Co. of America v. Graham, 984 S.W.2d 501, 508 (Mo. 1999).

Some states combine a statute of limitations with a discovery rule and a statute of repose. Wisconsin combines a ten year “exposure period” after substantial completion of a construction project, with a statute of limitations and expressly gives a plaintiff who “sustains damages” between the eighth and tenth year, three years after the damages are sustained. See Wis. Stat. §893.89 (2008).

In Illinois, the statute of limitations on such claims is four years, while the statute of repose is 10 years. With the “discovery rule” in Illinois, if the cause of action arises in year nine after completion, the suing party then has four years to sue, unless a written warranty provides a longer period.

Under the right circumstances, then a late discovered cause of action might mean the suit is not initiated for nearly fourteen years (in Illinois) after completion of construction.

All this brings to mind an important question: Can contracting parties legally establish by their contract the date when the statute of limitations must start regardless of when the alleged defect ultimately is discovered?

In Missouri, there is a statute expressly declaring that contract provisions “which either directly or indirectly limit or tend to limit the time in which any suit or action may be instituted, shall be null and void.” See §431.030 R.S. Mo. (2009).

In Indiana and Wisconsin, courts have held the parties are free to contract to set a trigger different from the “discovery” of the injury and a shorter duration for the time to sue. See, e.g., New Welton Homes v. Eckman, 830 N.E.2d 32, 35 (Ind.) (enforcing contractual limitation period triggered by “occurrence of that breach”), reh. denied, 2005 Ind. LEXIS 576 (2005); Keiting v. Skauge, 543 N.W.2d 565 (Wisc. Ct. App. 1995) (tort claim for property damage by purchaser against home inspector for failure to discover defects time-barred because parties could contract for an accrual date of “date of Agreement” to trigger a contract’s provision of two years to sue), rev. denied, 546 N.W.2d 472 (Wisc. 1996).

So, the law defining this point in time varies from state to state. But now, an Illinois court has directly addressed the validity of a contract’s “accrual provision” in the context of an American Institute of Architects standard form contract in Federal Insurance Co. v. Konstant Architecture Planning, Inc., 2009 Ill. App. LEXIS 50 (1st Dist. Feb. 11, 2009).

Konstant Architects designed a residence. The house was built and substantially completed in 1997. The homeowners discovered water and mold damage in the house on November 7, 2002.

The homeowners were insured by Federal Insurance Co. The insurer paid more than $300,000 to repair damage caused by water intrusion and mold infestation. Insurerthereby became subrogated to the rights of the homeowners-insureds.

The insurer sued the architect, the general contractor and the roofing contractor on September 9, 2005. The contractors settled.

The insurer alleged that the architect failed to properly design the house including failing to provide proper ventilation in a roof design to prevent ice damming, leaking and water intrusion and failing properly to supervise the roof installation.

The contract between the architect and the homeowners was an American Institute of Architects contract. Article 9.3 of the contract provided the following:

“Causes of action between the parties to this Agreement pertaining to acts or failures to act shall be deemed to have accrued and the applicable statutes of limitations shall commence to run not later than either the date of Substantial Completion, or the date of issuance of the final Certificate for Payment for acts or failures to act occurring after Substantial Completion.”

Take a look at Konstant Architecture, 2009 Ill. App. LEXIS 50, *2. That Section 9.3 appears in the AIA B151 Owner-Architect Agreement (1997 ed.). Similar language appears in the 1997 editions of the AIA B141 Owner-Architect Agreement and the AIA A201 General Conditions to the Contract for Construction.

Accordingly, the architect cited the Illinois four-year statute of limitations for actions alleging defects in design or construction. See 735 ILCS 5/13-214(a). The architect argued that, under the contract, homeowners and their subrogated insurer had only until four years after substantial completion to sue because the cause of action accrued at substantial completion according to the contract.

The trial court agreed with architect and dismissed the insurer’s suit. The insurer appealed.

On appeal, the insurer relied on another part of the Illinois design and construction statute of limitations, Section 13-214(b). That section provides in relevant part the following:

“Any person who discovers such act or omission prior to expiration of 10 years from the time of such act or omission shall in no event have less than 4 years to bring an action as provided in subsection (a) of this Section.”

Take a look at 735 ILCS 5/13-214(b). The insurer argued that Section 13-214(b) prevented the statute of limitations from beginning to run until discovery of the act or omission by architect.

Because the homeowners had not discovered the act or omission until November, 2002 and insurer sued less than four years thereafter, insurer contended its suit was timely.

The appellate court disagreed with insurer. Citing cases from throughout the United States, Konstant Architecture found “that Article 9.3 of the AIA contract in this case controlled the accrual date of the applicable statute of limitations and precluded application of the discovery rule.” See Konstant Architecture, 2009 Ill. App. LEXIS 50, *11.

The appellate court held that the contract clearly provided that the statute of limitations began to run on the date of substantial completion or final payment.

Therefore, under these facts, the homeowners already were barred from suit when they discovered their damages five years after substantial completion or final payment. See Konstant Architecture, 2009 Ill. App. LEXIS 50, *12.

The provision enforced in Konstant Architecture appears not only at Section 9.3 of the American Institute of Architects, B151 Abbreviated Standard Form of Agreement Between Owner and Architect (1997 ed.) but also in the B141 Standard Form of Agreement Between Owner and Architect (with Standard Form of Architect’s Services), Clause 1.3.7.3 (1997 ed.) and the A201 General Conditions of the Contract for Construction, Section 13.7 (1997 ed.).

In the AIA 2007 edition design and construction documents, the “accrual provision” was changed. The AIA forms now establish that actions must be commenced “within the time period specified by applicable law, but in any case not more than ten years after the date of Substantial Completion of the Work.” See American Institute of Architects, B101 Standard Form of Agreement Between Owner and Architect, §8.1.1 (2007 ed.); A201 General Conditions of the Contract for Construction, §13.7 (2007 ed.).

With this new provision, the reasoning of decisions like Konstant Architecture still should apply, at a minimum, to suits brought more than ten years after Substantial Completion.

 

 

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