Have you ever signed a contract that was “under seal”? You probably have, and you probably have done so without really understanding what it means. In North Carolina, a contract “under seal” means that the contract can be enforced for ten (10) years instead of the usual three. In other jurisdictions, the contract can be enforced for even longer periods of time. [For example, in Delaware, a contract under seal extends the time for brining a claim to twenty (20) years!] Since a sealed contract extends your liability significantly, it is not something you should do lightly.
The phrase “under seal” comes from the old tradition of using a unique wax symbol (such as an engraved signet ring) to identify the owner signing the contract. Today, however, you sign under seal when the words “under seal” or even just “[Seal]” is printed next to your signature, like this:______________ [SEAL] Melissa Dewey Brumback
While it is good to know about seals in general, construction professionals should be more concerned than ever about sealed contracts following a recent North Carolina Court of Appeals decision, Davis v. Woodlake Partners. The Court in Davis held that in a contract to purchase improved property, signed “under seal,” extended the statute of limitations to the ten year statute as authorized by N.C. Gen. Stat. 1-47(2). This is despite the fact that there is a six year statute of repose in North Carolina. In the case, the lawsuit was brought within the 6 years, but outside of the 3 year statute of limitations for ordinary contracts. The Court found the action was timely because of the “sealed” nature of the contract.
What does this mean for construction contracts? You could find yourself liable on a construction contract longer than you intended. Does this case apply in a situation where the 6 year statute of repose was violated? The Court was not faced with that issue, so it’s too soon to tell. The case was a divided opinion, so the state Supreme Court may be weighing in on the issue. Stay tuned.
In the meantime, consider striking through any “seals” on your construction contracts.
Your turn. Take a look at the last contract you were asked to sign. Was it “under seal”? Did you know what that meant when you signed it? Share below.
Photo (c) Losinpun.
As we’ve previously discussed, the statute of limitations for construction claims in North Carolina is generally three years. That is, once 3 years have passed, you are generally protected from any lawsuit filed after that time.
Does that mean that no lawsuit can be filed against you subsequent to that time? No. First, the statute of limitations is an affirmative defense, meaning that you must timely assert the defense as part of your response to the lawsuit.
Secondly, it is sometimes not apparent when the three year period begins to run. Substantial completion or final completion? What if your work is finished, but the project is not– does the three year period not start until project completion? The issue of whether the statute of limitations has run is complex, and a mixture of law and fact questions. See, Lord et al v. Customized Consulting Specialty, Inc. et al, 182 N.C. App. 635, 643 S.E.2d 28 (2007).
Finally, be aware of the hidden danger of hidden dangers.
The three years does not start to run until it becomes obvious that there is damage stemming from your professional negligence. The applicable statute states that the three years “shall not accrue until bodily harm to the claimant or physical damage to his property becomes apparent or ought reasonably to have become apparent to the claimant, whichever event first occurs.” N.C. Gen.Stat. § 1-52 (2005).
In other words, if there is a defect that is not readily observable and visual, the three years may not start to run until it becomes observable (e.g., through destructive testing, repair work, or renovation work). This is what is known as a “latent defect”, and it can impose liability far beyond the initial 3 years.
Does the latent defect rule extend liability indefinitely? No, it does not. The statute of repose (6 years in NC; other states vary) will impose an absolute final date on real property improvements, after which no further liability can successfully be claimed.
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A blog reader recently raised the question of to how to handle construction defect claims while repair attempts are being made on a defective building. In part, the answer to this question will depend on how close you are to the statute of limitations or the statue of repose from running. The closer you are, the more you need to be concerned about this issue. Just because all parties are working together to solve construction issues does not mean that the statutes are not running. They can. [There are, as usual, exceptions for equitable reasons.] And once statues run, there’s no getting them back.
One prudent approach to dealing with the statutes is to have all parties involved enter into a “Tolling Agreement.” What a properly drafted tolling agreement can do is to stop the running of the statue of limitations and/or repose while the parties attempt to fix the defects or otherwise settle their issues with one another. Note that the tolling agreement does not give a party any greater rights than they would have at the time it is signed– that is, if the statute has *already* run, then it would be of no use. But the tolling agreement can act as a “time out” on the running of the clock.
A good example of a tolling agreements is found in the Court of Appeals opinion in Charlotte Motor Speedway, Inc. v. Tindall Corporation, 195 N.C. App. 296, 672 S.E.2d 691 (2009). The Speedway case involved the infamous collapse of a pedestrian walkway during the NASCAR Winston Cup. The walkway which collapsed had been substantially completed by October 1995, and the collapse occurred in May 2000. Speedway (the project owner) and Tindall (which constructed the walkway) entered into a tolling agreement:
“to toll and suspend any applicable statute of limitations, repose or time, whether created by statute, contract, laches or otherwise, within which any cause, claim action, cause of action, or suit must be made, or commenced by the parties against any one of them concerning the [pedestrian] claims, including any and all claims for indemnification and contribution.” Id. at 298, 672 S.E.2d at 693.
Tindall attempted to argue that the statute of limitations barred Speedway’s claim for indemnification of monies paid prior to three years before it filed its complaint, but the Court found that the Tolling Agreement, which remained effective “through and including January 1, 2006″ tolled the action, and Speedway brought suit on July 17, 2007, less than two years after the Tolling Agreement expired. Likewise, the Court held that the statute of repose did not bar the action, because the Tolling Agreement was entered into less than six years after substantial completion, and the lawsuit was brought during the pendency of a second funding [tolling] agreement between the parties.
If you are considering a tolling agreement (or think you don’t need one because you “have time”), it is always smart to get a professional opinion on the matter.
Comments? Let me know. I welcome the opportunity to discuss how the statute of limitations and repose may be tolled in your specific situation.
Photo “Trucks” by JMLeedy (Justin Leedy) via Flickr via Creative Commons License.
Hold the phone– didn’t I just say last week that the statute of repose was basically an absolute bar to any action after 6 years? Why, yes, yes I did.
BUT it too has exceptions! (If you’ve learned anything from my rantings, I hope it is that there is always an exception to the rule). In a recent Court of Appeals case, the application of the statute of repose was called into question.
In Dawson v. N.C. Dept of Environment and Natural Resources (June 15, 2010), a couple bought land only after inquiring of the Person County health department to determine that the lots perked. Based on a 1989 letter issued by the health department stating that the lots perked, the couple bought the land. In 2000 (that is, 11 years later!), the couple applied for building permits only to learn from DENR that the land was not suitable for building.
The couple sued DENR under a negligence theory, and DENR argued the time bar of the 6 year statute of repose. In its decision, the court held that because the 1989 letter was not based on an improvement to real property, the statute of repose was not applicable. The Court indicated that, had the county inspector been inspecting an existing septic system, their decision may have been different.
Moral of the story? Just because you think you have a good defense, don’t forget that there is always an exception to the rule or, rather, there are many times when the shoe looks like it fits, but it really doesn’t. Be careful– blisters are painful!
Photo “Dakota Composite Dual Toe” by Bottinex via Flickr via Creative Commons Attribution-Noncommercial-Sharealike license
Last week, I discussed the statute of limitations and how it is generally applied to North Carolina construction projects. Today, I want to introduce you to another important concept: the statute of repose.
What is the Statute of Repose?
The Statute of Repose is another time-barring statute within which your claim must fit. Like the statute of limitations, it depends on what state’s law will apply to your case, which is usually, but not always, the state where the project is located.
The Statute of Repose, under N.C. Gen. Stat. §1-50(a)(5)(a) provides:
“No action to recover damages based upon or arising out of the defective or unsafe conditions of an improvement to real property shall be brought more than six years from the later of the specific last act or omission of the defendant giving rise to the cause of action or substantial completion of the improvement.”
When does it run for North Carolina construction projects?
The Statute of Repose in North Carolina for improvements to real property is currently six (6) years from substantial completion or the last specific act or omission of the defendant, whichever is later. N.C. Gen. Stat. §1-50(a)(5)(a); Nolan v. Paramount Homes, Inc., 135 N.C. App 73, 518 S.E.2d 789 (1999). Once you have been off of a job for 6 years, you cannot (successfully) be sued for any construction defect, regardless of when the defect was or is discovered. It is an extreme, bright line bar to any claim after that time; that is, it puts your risk to bed.
How is it different from the Statute of Limitations?
Unlike the Statute of Limitations, the Statute of Repose starts running whether or not you are aware of any defect. Bryant v. Don Galloway Homes, Inc.,, 147 N.C. App. 655, 556 S.E.2d 597 (2001). This is a double-edged sword—if you are the one whose work is being questioned, you can rest easy that after you have been off of a project for 6 years, no claim can thereafter be (successfully) brought against you.
On the other hand, you are also bound by the repose statute, regardless of any equitable considerations. For example, in Monson v. Paramount Homes, Inc., homeowners sued a general contractor for defective construction, and the contractor brought a third-party action against his subcontractor. The claims against the subcontractor were deemed time-barred under the statute of repose. 133 N.C. App. 235,515 S.E.2d 445 (1999). In Monson, the contractor had to defend the action but had no ability to recover from the subcontractor who actually performed the poor construction.
Does punch list or warranty work extend the Statute of Repose?
In most cases, no. Once the statute of repose starts to run, it generally cannot be tolled by any subsequent action. For example, in one case, even when the contractor had performed some punch list work after substantial completion, and even though the architect failed to issue a certificate of substantial completion, the court held that the statute began to run at the date of substantial completion of the contractor’s work. Mitchell v. Mitchell’s Formal Wear, Inc, 168 N.C. App, 212, 606 S.E.2d 704 (2005).
This is also true if you return to the job for minor warranty type issues during the 6 year period. The statute of limitations is tolled during the repair time, but in general, the statute of repose is not tolled once it begins running. The policy behind this interpretation is that the Statute of Repose is a substantive right designed to limit the potential liability for a set period of time.
Photo “Cama nova do furas / Ferret’s new hammock” by Isa Costa via Flickr via Attribution-NoDerivs 2.0 Generic Creative Commons license.