Say What? Statutes of Repose/Limitation may not be defenses in an Arbitration

Construction and Procurement Law News, Q1 2019

Client Alert

Author(s) ,

Most private construction contracts contain binding arbitration clauses and call for the application of the “law of the state” in which the project is located. While arbitration is less formal than litigation in court, legal defenses are often raised, including whether or not a claim is legally barred by a statute of limitation or, in the case of a construction claim, a statute of repose. A statute of repose, as opposed to a statute of limitation, with a few exceptions, means that no matter when the claimed defect is “discovered,” there is a legal bar to such claims if a formal legal claim is not brought within a specific period of time after a specified event, often  substantial completion. Many states have different time periods for statutes of repose. However, a recent ruling by an arbitration panel in a case should give pause to all parties and counsel relying on such time limitations.

Most state statutes of repose (and statutes of limitation) contain a reference to “any and all actions.” In the arbitration case, a $1.5M defective work claim was brought by an owner against a prime contractor ten years after substantial completion of the project, which was located in Tennessee. The general contractor filed a request with the arbitration panel to dismiss the claim based upon Tennessee’s 4-year statute of repose. However, the owner cited to a few reported court cases (not in Tennessee) and argued that the word “action” in the statute of repose was intended by the legislature to apply only to litigation, cases filed in court, not to claims made when the parties agree to binding arbitration. One point made by the owner was that the statute of repose was passed decades prior to any state passage of arbitration laws that allowed courts to enforce arbitration agreements.

The contractor argued that if statutes of repose (and statutes of limitation) do not apply when the parties agree to binding arbitration, there would be unlimited liability for contractors (and subcontractors) for years – and even decades – after substantial completion. In some of those few state cases which adopted such an argument from an owner, state legislatures jumped in to clarify the law (but not in time for that particular party).

Surprisingly, the arbitration panel in Tennessee ruled in favor of the owner and stated that the 4-year statute of repose did not apply in arbitration, even though it was undisputed that the arbitration was commenced 10 years after the project was completed. The panel commented that this problem was up to the Tennessee legislature to fix. The contractor was then forced to substantively defend the claimed defect claim. While the panel ultimately found in favor of the contractor, the legal and arbitration fees were extensive and would have been avoided had the arbitration panel applied the statute of repose.

What can be done to avoid such a result? One suggestion is to check each state’s laws on construction statutes of repose and determine if there is any case law on the issue or if that state’s statutes use the same word “action.” Another is, of course, to not agree to binding arbitration (which has many pros and cons as compared to litigating in court). Another possibility is to lobby the state legislature to amend the statutes to ensure that “arbitration” is included in the definition of “action.” Finally, one other “drafting” suggestion would be to include, in any contract which calls for binding arbitration, a provision which states that in any arbitration, the parties agree that the arbitrator(s) shall apply any statutes of repose and statutes of limitation in that jurisdiction, notwithstanding that a court may have, or may in the future, have ruled that such statutes do not apply to arbitration proceedings.