Due to a recent decision of the North Carolina Court of Appeals, there now exists the potential for some uncertainty as to the time limits to assert claims related to a construction project. Specifically, that potential uncertainty relates to when the six-year statute of repose on construction claims begins to run. As for a statute of repose, you may say “what the heck is that?” Generally, the statute of repose is a firm and absolute deadline, after which claims related to improvements to real property, including a construction project, will be time-barred. This period runs from the date of “substantial completion” and is not subject to a date of discovery standard, such as might be the case with the three-year statute of limitations. The specific uncertainty relates to whether there can be different substantial completion dates for the contractor and each of its subcontractors, such that time limits begin to run at different times.
In Gaston County Board of Education v. Shelco, LLC, et al., No. COA21-618, 2022-NCCOA-550, 877 S.E.2d 316 (August 16, 2022), the Court of Appeals addressed the definition of substantial completion in the context of a dispute where the owner sued a contractor, an engineer, an architect, and the architect's subcontractor over a cracked retaining wall. The owner, contractor, and architect had signed a Certificate of Substantial Completion for the project generally. However, the engineer and the architect's subcontractor had not.
The Court considered the statutory definition for substantial completion which is “that degree of completion of a project, improvement or specified portion thereof… upon attainment of which the owner can use the same for the purpose for which it was intended.” NC Gen. Stat. § 1-50(a)(5)c. The statute also allows the parties to agree in writing upon the date of substantial completion, which in the industry is generally reflected in a Certificate of Substantial Completion.
The court in the Gaston County case found that even though the contractor and the architect had signed a Certificate of Substantial Completion, that Certificate did not bind the engineer or the architect's subcontractor because they had not signed that Certificate. Of course, subcontractors typically never sign certificates of substantial completion. So, does this mean that there are separate substantial completion dates for subcontractors? Maybe. North Carolina courts have not interpreted “substantial completion” in terms of construction projects which have multiple stages or scopes of work performed by subcontractors completed at different times, which, of course, is every project. In other words, the question is whether substantial completion for purposes of the statute of repose begins as to a subcontractor when it finishes its scope of work, as opposed to when the contractor finishes the project generally. Should the court's analysis focus on the contractor's or subcontractor's “specified portion thereof” or on the owner's ability to use the work for the “purpose for which it was intended”? The Court's opinion has the potential to create uncertainty on that point.
Even though they had not signed the Certificate of Substantial Completion, the Gaston County court reinstated the Complaint as to the engineer and the architect's subcontractor because of specific pleading rules as to the statute of repose defense. The engineer and the architect's subcontractor have sought discretionary review by the North Carolina Supreme Court in order to provide clarity regarding the pleading requirement and clarity on “when the date of substantial completion begins to run for portions of the work.” The AGC has requested permission to file a friend-of-the-court brief. The AGC wants the court to “clarify the manner in which the statute of repose applies to construction claims” in order to avoid “the risk that it [the opinion] introduces substantial uncertainty into the industry.”1It remains to be seen whether the Supreme Court will agree to review the Court of Appeals' decision and, if it does, what will happen on appeal, but in the interim and whatever the outcome of any appeal, there are several things that contractors can do to eliminate the uncertainty and to manage the risk.
First, for new contracts, contractors can insert language in their subcontracts specifically noting the subcontractor's agreement that the date of substantial completion of the project generally or the date agreed to by the contractor in a Certificate of Substantial Completion, shall be the date of substantial completion of the subcontractor's work.
Second, for existing contracts, contractors need to be aware that they may have to track separate claim deadlines for each subcontractor involved with the project.
South Carolina dealt with this issue in Lawrence v. General Panel, 822 S.E. 2d 800 (SC 2019) where, based on a different statute, the South Carolina Supreme Court held that when a contractor completes its part of the project (“a specified area or portion thereof” such as the foundation or installation of windows), the project is substantially complete as to that contractor's work and the statute of repose clock as to that work begins to tick, even if the entire project's substantial completion is years or months away. While one may or may not agree that there should be separate substantial completion dates for purposes of the statute of repose, at least there is certainty in South Carolina over that point. The Lawrence court went on to find that under the applicable statute, the issuance of a Certificate of Occupancy was prima facie proof of “substantial completion,” notwithstanding ongoing work on an area or portion of the project. So, South Carolina basically uses bookends when it comes to this issue.2
As for North Carolina, stay tuned for further clarification from the Court as to the potential for varying substantial completion dates but in the meantime protect yourself by taking the above steps now to deal with this issue.
1 The Author acknowledges reliance throughout this Alert upon the pleadings filed by the parties and the AGC in connection with the petition for discretionary review in the Gaston County case.
2 See 1.15.19 Law Alert by Nexsen Pruet's Cheryl D. Shoun re: “South Carolina Supreme Court Clarifies Statute of Repose”.
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