Written by Stephanie Gacek Cook, Esq.
There have been a number of suits filed by Virginia Polytechnic Institute & State University (“Virginia Tech”) against several general contractors who constructed various buildings on campus. In turn, these general contractors have filed suit or at least initiated claims against many of its subcontractors who performed work on these projects.
The statute of limitations for claims filed by a state agency or public institution, such as Virginia Tech, is unlimited. According to Va. Code Ann. 8.01-231, “[n]o statute of limitations which shall not in express terms apply to the Commonwealth shall be deemed a bar to any proceeding by or on behalf of the same.” In other words, no statute of limitations applies to the state of Virginia or its governmental bodies and agencies.
Recently, however, the Supreme Court of Virginia issued an opinion that makes it clear that this unlimited statute of limitations does not also apply to claims made by general contractors against its subcontractors on projects involving state agencies. See Hensel Phelps Construction Company v. Thompson Masonry Contractor, Inc., et. al., 2016 Va. LEXIS 166, 791 S.E.2d 734.
In Hensel Phelps, Virginia Tech awarded Hensel Phelps a contract to construct the Student Health & Fitness Center in 1997. The work was substantially completed in 1998. Virginia Tech issued final payment to Hensel Phelps in 1999, and Hensel Phelps issued final payment to its subcontractors also in 1999. One subcontractor was asked to fix a problem covered by their warranty, and it concluded all work by June of 2000. Virginia Tech subsequently discovered other, defective work and elected to repair it. It was not until April of 2012 that Virginia Tech asserted a claim against Hensel Phelps, seeking costs for curing the defective work. In October of 2013, Hensel Phelps demanded that its subcontractors pay the claim. The subcontractors refused to do so. Hensel Phelps then settled the claim with Virginia Tech in 2014 and filed suit also in 2014 in Montgomery County Circuit Court for breach of contract and common law indemnity claims against its subcontractors, as well as breach of contract claims against the sureties. The subcontractors and sureties filed pleas in bar asserting that the statute of limitations barred the claims.
They also filed demurrers to the common law indemnity claims. The Montgomery County Circuit Court granted the pleas in bar, sustained the demurrers and dismissed the case in its entirety.
In affirming the lower court’s decision, the Supreme Court of Virginia made three significant holdings. First, it held that the action filed by Hensel Phelps against its subcontractors was time barred under Va. Code Ann. 8.01-246(2), which provides a five year statute of limitations period for suits based upon contract. In making this holding, the Court specifically looked to a flow down provision which Hensel Phelps relied upon in arguing that the subcontractors waived the five year statute of limitations period. The flow down provision provided that its subcontractors assumed any and all warranty obligations owed by Hensel Phelps to Virginia Tech which arose out of the subcontractors’ performance. The Court found that this provision did not “demonstrate sufficient intent” to incorporate a waiver of the five year statute of limitations. Id. at 8. It pointed out that a waiver is “the intentional relinquishment of a known right, with both knowledge of its existence and an intention to relinquish it.” Id. at 7 (quoting May v. Martin, 205 Va. 397, 404 (1964)).
In addition, while the subcontracts definitely incorporated the prime contract by reference, the Court found that “a general incorporation provision is insufficient to expressly waive a limitations period, as it does not expressly acknowledge the right to a limitations period or intent to waive that right.” Id. at 6-7. The Court also examined a provision in the subcontract that stated, “[t]he Subcontractor is bound to the Contractor by the same terms and conditions by which Contractor is bound to [Virginia Tech] under the Contract.” It further addressed a provision which stated that the subcontractors’ warranty period covered any time “prior to Contractor’s release from responsibility to [Virginia Tech] therefore as required by the Contract Documents.” The Court found that these provisions also failed to expressly constitute a waiver of the statute of limitations period. Id. at 8.
The second holding by the Court was that even if the terms of the prime contract between Virginia Tech and Hensel Phelps were imposed upon the subcontractors, the subcontractors would not be bound by a statutory waiver of the five year statute of limitations. Importantly, the Court pointed out that it is not the prime contract itself that actually waives the statute of limitations period. In fact, nowhere in the prime contract between Virginia Tech and Hensel Phelps did it state that Hensel Phelps agreed to an unlimited period. Rather, that unlimited period was created by statute under Code § 8.01-231 and not by contract. Therefore, the subcontracts between Hensel Phelps and the subcontractors could not incorporate by reference a statutory waiver of the limitations period.
Third, the Court held that “the subcontracts did not state an intent to create an obligation on the part of the subcontractor to indemnify the contractor, and thus, the right of action accrued upon breach of the performance provisions of the contract.” There was a specific indemnification provision in the subcontracts between Hensel Phelps and its subcontractors. However, Hensel Phelps conceded that the indemnification provisions would not be enforceable because they provided that the subcontractors would indemnify Hensel Phelps for Hensel Phelps’s own negligence. Such provisions are void against public policy pursuant to Va. Code Ann. 11-4.1. Instead, Hensel Phelps tried to point to various, other contract provisions that would create a duty on the part of the subcontractors to indemnify Hensel Phelps. The Court did not agree and found that these provisions were performance provisions rather than provisions for indemnification.
In conclusion, the holdings made in Hensel Phelps could provide substantial defenses in public construction cases for subcontractors. However, each case will be contract specific, and the contracts should be examined closely. The attorneys at KPM are happy to help navigate through the provisions and to consult on any potential defenses.