The potential consequences of an attempted defense
The high cost and low profit margins of the current home construction market make it tempting for contractors and subcontractors to conceal defects in order to complete work on time and within budget. Contractors know that correcting work adds time and money to the project, and often feel pressure to mask the problem.
Beyond the obvious ethics of such concealment, covered defects often cause further damages to the project over time and extend the legal liability for years or even decades. There are several strategies contractors and developers attempt to use in defending against defective work, but the most compelling is the statute of repose.
Counting down the clock
Statutes of repose are legal defenses used against claims of negligent construction and breach of contract and express and implied warranty after construction is completed. In the context of construction defects, statutes of repose typically start running on the substantial completion date or the date a certificate of occupancy is issued and can extend anywhere from four to 15 years. The contractor and/or developer is no longer liable for the project after the period has run.
To protect against defendants attempting to exploit the statutes of repose, many states have passed or included fraud exceptions to their statutes of repose. For example, in North Carolina the statute of repose specifically excludes anyone guilty of fraud, or willful negligence in making improvements to property, and anyone who wrongfully concealed the fraud or willful or wanton negligence. To use this on, a claimant is usually required to prove that the defendant deliberately covered up defects or defects it should have known about, with conscious disregard for the rights of the property owner.
A property owner’s last resort
The standard for being able to use the fraud exception is so high that the property owner may have to resort to a common law principle known as equitable estoppel. Equitable estoppel protects a party from being harmed by another’s voluntary conduct, which can be an action, silence, acquiescence, or concealment of material facts. It keeps a defendant from using statutes of limitations or repose as a defense.
Again, using North Carolina law as an example, the standards are high. In order to invoke equitable estoppel the following is required:
- Conduct of the defendant amounts to a false representation or concealment of material facts
- The intention of that conduct will be acted on by property owner
- Actual or constructive knoweldge of the real facts by the property owner
Likewise, the defending party must
- lack knowledge and means of knowledge as to the facts in question
- depend on the conduct of the party sought to be estopped.
In Trillium Ridge Condominium Association, Inc. v. Trillium Links & Village, LLC, the plaintiff was a condominium owner association. The builder and developer were sued by the association over construction defects found in the condo complex. When the defendants invoked the statute of limitations and the statute of repose, the association made an equitable estop counter argument. The court ruled against the contractor but released the developer from liability. This was because the association’s board had received the inspection report and had the same information the developer had. In other words, the developer hadn’t concealed information from the association.
The contractor, however, was proven to have learned that defects needed to be corrected and didn’t communicate that information to the association or certify the defects were repaired. The association argued it had been deprived of any opportunity to discover the defects preventing a timely filing of the lawsuit against the contractor. The key to achieving an equitable estoppel ruling is that a delay in filing is due to conduct by the defendant.
An example of a failed equitable estoppel argument is the ruling in Wood v. BD & A Construction, LLC. The homeowner alleged the contractor was told of ongoing issues with water seeping in around the windows in the house. The defendants acknowledged that the windows were causing the leaks and replaced them. There were no further incidents for five years until the homeowners discovered other problems. The court ruled that the delay in filing the complaint wasn’t caused by the defendants, who had resolved the original problem, but was due to the plaintiffs’ subsequent discovery of other defects.
Obviously, by the time a case get to court, numerous motions have been filed and legal fees have mounted, to say nothing of potential fines and settlement costs. The best way for contractors and developers to prevent huge outlays of time, effort, and money is to disclose and repair all suspected or known defects prior to closing out a project. Which is really what our grandmothers meant when they said, “A stitch in time saves nine.”
Source: Bryan G. Scott, “It’s Not the Crime, It’s the Cover-Up: Equitable Estoppel in Construction Defect Claims,” JDSupraBusinessAdvisor.com, 22 Dec. 2014.