Construction Project Participants Face Differing Time Limits for Claims as NC Court of Appeals Interprets Definition of "Substantial Completion"
The North Carolina Court of Appeals recently issued a decision in Gaston County Board of Education v. Shelco, LLC, et al[1] that has the potential to significantly impact the time limits for claims on construction projects. Historically, North Carolina’s six-year statute of repose has provided owners, architects, contractors, and others in the construction industry with some degree of certainty as to when exposure to potential liability ends. Generally, claims related to construction must be brought within three years from discovery of the claim with an outside limit—a statute of repose—that runs six years from the later of substantial completion or the last act giving rise to a claim. Substantial completion was generally understood as being when the project, or a portion thereof, is fit for use by the owner for its intended purpose. Substantial completion is often set by contract by certificates of substantial completion, either for the entire project or portions thereof, and often corresponds with issuance of final or temporary certificates of occupancy. A claim filed more than six years following substantial completion is generally barred and would be dismissed by a court.
In Gaston County, the Court interpreted the definition of "substantial completion" in a manner that brings uncertainty as to whether the statute of repose begins to run from different dates depending upon the party involved and when a party’s particular scope of work was completed, rather than from overall project completion or partial/phased completion (often evidenced by issuance of a substantial completion certificate). The Gaston County Board of Education filed suit against four parties—a contractor, an engineer, an architect and the architect’s subcontractor—who had worked on a project to develop a new public high school. The suit was filed after the Board became aware that portions of the construction of reinforced soil slopes and retaining walls around the proposed high school’s athletic complex (collectively, the "Retaining Walls") had cracked. That Retaining Walls at issue in the case was completed around 2011. The Board became aware of the cracks in 2012, and the Board, the contractor and the architect signed a certificate of substantial completion for the entire project in 2013. The Board and all four would-be defendants executed a tolling agreement in 2018 with an effective date from March 2019 until September 2020, and the Board filed suit in November 2020 alleging that the Retaining Walls were defective. In that lower court, all four defendants sought to dismiss the plaintiff’s claims, in part based on the six-year statute of repose. The lower court dismissed the claims against the engineer and the architect’s subcontractor regarding the portion of the construction completed around 2011, finding that they were outside the six-year statute of repose, since those two defendants did not sign the 2013 certificate of substantial completion at issue in the case.
On appeal, the Court found that the Rule 12(b)(6) dismissals were inappropriate based on the statute of repose because the owner’s complaint did not allege any date when "substantial completion" occurred (the complaint did not allege both the dates (a) when any defendant performed its "specific last act" and (b) the "substantial completion of the improvement"). The Court explained that, while a plaintiff must prove compliance with the statue of repose, a plaintiff is not required to plead facts in its complaint to show that its claim was filed within the statute of repose and a Rule 12(b)(6) dismissal for failure to state a claim that is based on the statute of repose is only appropriate when a complaint alleges facts that conclusively show that the complaint was not filed within the applicable statute of repose.
The defendants argued that the act constituting "substantial completion" for purposes of the statute of repose was the completion of the Retaining Walls (the cracks within which portion of the construction form the subject of the dispute), i.e., when the "specified area or portion thereof" was substantially completed. The Court, quoting the statute, found that the statute’s plain language indicates that, as to a particular contractor, a substantial completion date occurs when the part of the improvement for which that contractor was hired to provide services reaches "a degree of completion" where "the owner can use the same for the purpose for which it was intended."
For example, the Court reasoned that, when an owner hires a company to build a house foundation, the statute of repose runs when the foundation is completed "such that the owner can contract with someone else to build the frame, etc." In other words, that owner’s entire house does not need to be complete for the statute of repose to run against that contractor. And for further example by comparison, the Court reasoned that, when an owner hires a contractor to build "an entire house," although the suit may be for laying a bad foundation, the statute of repose runs from completion of the entire house.
In the Gaston County complaint, there was no allegation that the engineer was hired only to perform services for the Retaining Walls; no allegation when the entire project was substantially completed; no allegation that the date was established by written agreement between the engineer and the plaintiff; and no allegation that the architect’s subcontractor was hired to work on the Retaining Walls portion of the project alone. Also, the architect’s subcontractor was not a party to the certificate of substantial completion for the project, and the Board had entered into an agreement with the architect for services for the project.
The Court’s decision leaves multiple unanswered questions. The statute of repose does not only apply to claims between an owner and a contractor; it applies to claims between other construction project participants as well. The Court does not directly address when "substantial completion" would be achieved for subcontractors or suppliers contracted only to perform a specific scope of work. In addition, the Court appears to take the position that industry-standard substantial completion certificates, at least for purposes of a Rule 12(b)(6) motion to dismiss, can only bind the parties executing them. Accordingly, rather than providing a date-certain for potential liability to end, the Gaston County decision leaves open the possibility for fact-intensive determinations regarding when the statute of repose runs, the possibility of differing statutes of repose dates for various scopes of work—or even for the same scope of work—depending upon which party is the subject of the complaint (i.e., the general contractor versus a subcontractor). The decision also appears to allow plaintiffs to avoid the statute of repose at the motion to dismiss stage by simply not pleading facts that could implicate the statute of repose.
Mindful of the importance of these issues to the construction industry, we are certainly monitoring the possibility that the parties to the Gaston County appeal may further appeal the decision to the North Carolina Supreme Court. Despite the uncertainty and increased risk for general contractors, owners, and their insurers following this decision—all of which is likely to result in additional insurance premium and litigation costs—this opinion underscores the significance of careful drafting, both of construction contracts and court pleadings.
Upfront risk management is especially crucial in light of this new opinion. All project participants are well reminded to carefully review their construction and design contracts and to track pertinent (and potentially multiple) claim deadlines. The Court of Appeals in this new decision interprets "substantial completion" in a manner that may allow the statute of repose to expire and bar claims earlier than project participants might have expected and at different times for different parties. While it allows parties to agree in writing to the date of substantial completion, this is not common practice among all project participants and could create a legal trap for the unwary.
[1] Gaston County Board of Education, Plaintiff-Appellant/Appellee v. Shelco, LLC, and Boomerang Design, P.A. (f/k/a MBAJ Architecture, Inc.), Defendants-Appellants, CAMPCO ENGINEERING, INC., S&ME, Inc., Defendants-Appellees, v. HOOPAUGH GRADING COMPANY, LLC, Worldwide Engineering, Inc., Hart Wall and Paver Systems, Inc. and Lincoln Harris, LLC, Third-Party Defendants., No. COA21-618, 2022-NCCOA-550 (N.C. Ct. App. Aug. 16, 2022).
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