Contractors often understandably assume that the end of a contractual warranty period marks the end of their potential liability on a project. Unfortunately, while a warranty can effectively limit obligations to make certain repairs, liability for defective construction does not end with the warranty. Instead, the duration of risk is primarily determined by two types of laws: statutes of limitations, and statutes of repose.
The Statute of Limitations
Statutes of limitations are laws that determine how long a party has to file a lawsuit. They provide certainty regarding potential liability for a particular act or event (in other words, a party knows they can’t be sued for something that happened after a specific period of time). The law prescribes different limitations periods for different types of claims. These periods can run anywhere from two months to twenty years. Lawsuits brought after an applicable statute of limitations has expired are subject to a dismissal in court.
Most claims arising out of construction projects in the Carolinas carry a three-year statue of limitations. This applies to claims involving payment disputes, breaches of contract/warranty, or construction defects. The three-year clock does not necessarily begin to run upon the completion of a project. Instead, the limitations period starts once the claimant knows or should know they have a claim (a concept known as the “discovery rule”).
In the construction context, the discovery rule usually comes into play when latent or hidden defects arise after project completion. For example, improper soil compaction may not affect a building’s foundation for months or even years after warranty expiration. In the meantime, the owner has no way of knowing about a potential problem until foundation cracks appear.
Because of this, the law allows an owner to bring a defect claim for contractor negligence even if the warranty period has ended. But, the owner must assert its claim within three years after it knows or should know about the problem. The owner does not need to know the cause of the problem for the clock to start — only the fact that a problem exists.
The Statute of Repose
Note that the discovery rule won’t allow potential claims to exist into perpetuity. Both North and South Carolina have what are known as a statutes of repose, which close the door on all potential claims on a project after a certain period of time. Statutes of repose can bar claims regardless of when a potential defect is discovered. The South Carolina statute of repose sets this period at eight years (S.C. Code Ann. 15-3-640). In North Carolina, the period is six years (N.C. Gen. Stat. 1-50(a)(5)). Unlike statutes of limitations, these time periods begin upon a project’s substantial completion.
Since the discovery rule keeps contractors exposed to liability until the statute of repose has expired, contractors should be mindful of those projects for which they still have risk. Adequate CGL coverage for completed operations is critical so long as there is potential liability. Owners must also be mindful of the cutoff imposed by applicable limitations statutes, and should act quickly if a possible defect is discovered.
Bryan P. Kelley is an attorney with Elmore Goldsmith, a nationally recognized law firm in the construction industry. The firm represents clients throughout the Carolinas in all aspects of construction matters. Read more construction law-oriented blog posts by the attorneys at their Hard Hat Blog.