Consequences of “Hokie Stone” Case on Public Construction Projects

Because the legal matter in this article was handled by attorneys at Gentry Locke, we are required to inform readers that THE RESULTS OF CLIENT MATTERS DEPEND ON A VARIETY OF FACTORS UNIQUE TO EACH MATTER. PAST SUCCESSES DO NOT PREDICT OR GUARANTEE FUTURE SUCCESSES.

Virginia Tech’s athletes are not the only ones engaged in high-level Hokie contests.

In 1997, Virginia Tech contracted with a construction company to build McComas Hall, a facility to house student health, fitness, and recreational services. Consistent with the campus aesthetic, McComas Hall’s exterior featured Hokie Stone, a unique variety of limestone that is quarried on property owned by Virginia Tech and used exclusively on buildings that are a part of its system. As a part of the construction, which concluded by 2000, the general contractor employed the services of many subcontractors, some of which also posted surety bonds as a condition of their subcontracts.

In 2006, Virginia Tech contacted the general contractor about water intrusion into McComas Hall and resulting damages. At that time, the general contractor did not become involved in addressing the alleged problems, and did not provide any information to any of its subcontractors about the issue. Virginia Tech proceeded with evaluating the problem, and moved forward with a remediation plan to the tune of $6 million.

When the remediation work was about completed in 2012, Virginia Tech approached the design professional and the general contractor seeking reimbursement for the amount expended on the fix. Virginia Tech claimed that the general contractor had deviated from the plans and specifications for the project, leading to the water intrusion and other problems. At that point, the logical question would have been – what about the statute of limitations? Doesn’t that protect the contractor from claims 12 years after the project was completed?

Presumably because Va. Code Section 8.01-231 eliminates any statute of limitations against the Commonwealth of Virginia, the general contractor entered into settlement negotiations with Virginia Tech, and paid the school $3 million to settle the claim in 2014. The subcontractors were not involved in that settlement. The design professional separately settled with Virginia Tech.

After settling with Virginia Tech, the general contractor filed suit in 2014 against several of the subcontractors in the Montgomery County (Va.) Circuit Court, seeking to recover the $3 million apportioned among the defendant subcontractors, and performance bond sureties for several of them. The suit included claims for breach of contract and common law indemnity.

The subcontractors challenged the suit on the grounds that, as between them and the general contractor, the statute of limitations had begun running at the conclusion of the project and had expired five years later (around 2005) – long before the filing of the suit. They also contended that the common law indemnity claim was precluded by an express indemnification provision in the subcontracts. Presumably, the general contractor did not assert an express indemnification claim because the provision violated Virginia’s anti-indemnity statute (Va. Code § 11-4.1) under the Supreme Court of Virginia’s opinion Uniwest v. Amtech Elevator Services, Inc., 280 Va. 428, 442 (2010). The subcontractors’ sureties took the same position, and also made additional arguments about timing and notice requirements within the bonds themselves.

In response, the general contractor pointed to flow-down provisions of the subcontracts, arguing that all rights and limitations between it and Virginia Tech became part of the subcontracts, including the immunity from the statute of limitations. Importantly, the prime contract did not expressly waive the statute of limitations. Rather, it is a Virginia law (Va. Code § 8.01-231) that declares no limitations period runs against the Commonwealth and its agency, Virginia Tech. The general contractor also argued that its claim was essentially for common law indemnity, and that the three-year statute of limitations on such a claim did not start running until it made payment to Virginia Tech in 2014.

The circuit court agreed with the subcontractors and their sureties, and dismissed the lawsuit. In a written opinion, the court ruled that the general contractor had no claims for indemnification, but only for breach of contract against the subcontractors. It found that the statute of limitations began to run at the latest in 2000, when all subcontractors were fully paid and released from their obligations on the job – and that a suit fourteen years later was clearly outside the five-year statute of limitations for any breach of contract action. The general contractor appealed.

The Supreme Court of Virginia granted review of the circuit court’s ruling, except as to the dismissal of the common law indemnity claim. After extensive briefing and oral argument, on November 3, 2016 the Court unanimously affirmed and dismissed all claims against the subcontractors and their sureties.

The Court analyzed (1) whether the subcontracts waived the statute of limitations through the flow-down provisions, and (2) if not waived, whether the limitations period had not begun running until the contractor’s settlement with Virginia Tech.

The Court found no error with the decision below that the action was time-barred. First, it concluded that the subcontractors had not waived the statute of limitations. To be effective, the waiver must be expressly made in writing by the subcontractor (presumably as a provision of the subcontract). The flow-down provisions were not sufficient to constitute a knowing and intentional waiver, as required by Virginia law. This was especially true since, as noted above, the prime contract itself did not expressly waive the statute of limitations.

Second, the Court affirmed that the limitations period expired long before suit was filed in 2014. The Court adhered to a line of cases holding that a contract action accrues – and the limitations period begins running – when the injury or damage is first sustained, no matter how slight. The Court rejected the general contractor’s argument that it had no cause of action upon the subcontractors’ breach of performance, as it sustained no damages until settling with the Virginia Tech in 2014. In this case, the Court concluded that the action accrued upon breach of the performance provisions of the contract “at some point between the commencement of construction in 1997 and completion of the project in 1998, or the repair work in the year 2000.” Accordingly, the statute of limitations had long run before the filing of suit in 2014.

The Court also rejected the general contractor’s indemnification theory as a way to postpone the running of the statute of limitations until the 2014 settlement. It ruled that the express indemnification clause failed under Uniwest (discussed above), and that various other provisions regarding the subcontractors’ financial responsibility did not operate as indemnification provisions.

The Court held that the circuit court reached the correct conclusion. Thus, the general contractor’s effort to recover the $3 million ended.

A full copy of the Court’s opinion is available here: Hensel Phelps Constr. Co. v. Thompson Masonry Contractor, Inc., et al., No. 151780, 2016 Va. LEXIS 166 (Nov. 3, 2016).

With the Commonwealth of Virginia (including its agencies and other public bodies) engaged in so many construction projects, this Supreme Court opinion raises questions – and offers some answers – for design professionals, contractors, construction managers, subcontractors, and the myriad of other businesses who perform work on these public jobs. Following are some of the basic – but not nearly all – issues that are raised by the issues in this dispute, and the outcome of the case.

What should General Contractors working for the Commonwealth consider in light of this statute and the opinion?

• At a basic level, a general contractor, construction manager, or anyone thinking about doing business directly with the Commonwealth must be aware of this risk and decide whether the benefits of doing the work offset this risk. Based on conversations we have had recently, general contractors are weighing this issue carefully.
• If a general contractor or construction manager decides to pursue work with the Commonwealth, then it should enhance its project documentation. While companies normally keep daily logs, photographs, and electronic communications from projects, defending against a claim years down the road can be enhanced by having as much documentation as possible. How much is enough is impossible to know, but basic documentation and beyond – and maintenance of those records – is a must.
• The idea of passing along future liability to subcontractors responsible for the portions of the work should be considered now as well. At the threshold, a concern is whether subcontractors will still be in business ten or more years after the completion of a project. So enhanced subcontracts may – or may not – help if the subcontractor entity is not even around then. Requiring performance bonds of certain subcontractor entities may help with this, but – in the opinion of this author – that is very unlikely given the passage of time and the narrow windows for recovery on performance bonds.
• In terms of passing along liability to subcontractors, a couple of potential modifications to the subcontract are worth considering. The first one tracks a point raised by the Supreme Court of Virginia in the Hensel Phelps opinion. The Court concluded that a normal flow-down provision (making the subcontractor responsible to the general contractor/construction manager to the same extent the general contractor/construction manager is responsible to the owner) is not enough to constitute a knowing and intentional waiver of the statute of limitations. Instead, the subcontract must contain a provision whereby the subcontractor agrees that there is not any statute of limitations applicable. Including a reference to Va. Code § 8.01-231 would help as well.
• Further, the general contractor’s inability to pass along liability to the subcontractors on the Virginia Tech project also resulted from it not having a valid indemnification provision under Virginia law. Its subcontract contained a provision labeled “Indemnification.” But the general contractor did not sue the subcontractors on that provision, apparently because it violated Virginia’s anti-indemnity statute. Had there been a valid indemnification provision that was also broad enough to cover claims for defective work performed by the subcontractors, then a claim for indemnification may have arisen when the general contractor paid Virginia Tech the $3 million, as the statute of limitations for indemnification starts when the underlying payment (for which the party will later seek repayment) occurs.
• Take heed if the Commonwealth-owner raises issues. Help control the process and the cost by being involved and getting subcontractors involved.

What should subcontractors on Commonwealth-owned projects consider?

• Subcontractors, and anyone working on a Commonwealth project for that matter, need to be aware of this issue. The result in the Hensel Phelps case is a positive for subcontractors (and their sureties), but the decision is not an automatic and complete bar to liability being passed along to them.
• For any claims that may arise related to Commonwealth projects that have already been completed, then the Hensel Phelps decision is a roadmap for challenging any claims by general contractors/construction managers.
• For any future projects, subcontractors will need to be vigilant of the language in the subcontracts. For each provision discussed above by which general contractors/construction managers may want to increase the chances of being able to pass along liability, subcontractors are going to want to remove, limit, and/or narrow those provisions. It may be that taking on some of these projects will not be worth the risk. In particular, subcontractors will not want to agree to an unlimited statute of limitations period, and should resist broad form indemnification provisions that cover workmanship issues (as opposed to just personal injury and property damage).

What should design professionals working for the Commonwealth consider?

• It is worth noting that Virginia Tech did assert a claim against the design professional on the McComas Hall project. That claim was settled as well.
• Thus, design professionals need to give the same considerations as discussed for the general contractors, above. While design professionals may have fewer contractual options for passing claims along to others, one thing is for certain: they cannot assume that the Commonwealth’s immunity from the statute of limitations will keep their own related legal actions alive..
• There is likely a greater chance that insurance would cover claims against design professionals, so keeping sufficient professional liability insurance intact, including tail coverage for persons or companies going out of business, is advised.

What should bonding companies for general contractors and/or subcontractors on Commonwealth-owned projects consider?

• The performance bond sureties on Commonwealth-owned projects should be aware that claims are being made against these bonds at the general contractor and subcontractor levels.
• Sureties for general contractors will need to defend based upon language in the bonds and the statutory language that applies to and affects such claims.
• Sureties for subcontractors will want to defend based upon the underlying statute of limitations and internal time limitations in the bonds themselves.

Does Section 8.01-231 apply to agreements with cities or counties?

• A strict reading of the statute does not indicate application to cities or counties, and there are not any cases applying it in those situations. 

Does Section 8.01-231 apply to VDOT projects?

• As an agency of the Commonwealth, this section is likely to apply to VDOT projects.

Are there other points for consideration?

• Keep in mind that Section 8.01-231 pertains to whether there is a statute of limitations applicable to a breach of contract claim. As the Supreme Court mentioned, whether there is a claim for indemnification between the general contractor and subcontractor is a separate issue. As discussed above, the exact language of any indemnification provision will be scrutinized to determine if it comports with Virginia law and is broad enough to cover the claims being made. If it does, then the statute of limitations for filing claims for indemnity are likely to begin running much later than when the work was performed – i.e., when the general contractor makes payment to the owner for the defective work.
• Keep in mind that the Statute of Repose (Va. Code § 8.01-250) is not affected at all by any of the points in this discussion. Section 8.01-231 applies to breach of contract claims. The statute of repose applies only to claims against contractors and design professionals for personal injury or property damage claims caused by alleged defective workmanship and/or design.