Originally posted Tuesday, 16 April 2013

Written by John Sier

Understanding the Concept of “Accrual” has Significant Consequences for Bringing a Claim Timely and in Complying with the Contractual Claim Procedure

The law is fraught with many technicalities and obscure terms that can be traps for the unwary and even skilled practitioners. The concept of “accrual” has kept many lawyers employed and some awake at night over the timeliness of claims being filed and prosecuted. Each state has slightly different rules for determining when a claim “accrues” and the time for filing an action on the claim is running. As a corollary of the concept of accrual is the difference between a statute of repose and a statute of limitations. A statute of repose typically cuts off claims from accruing at all while a statute of limitations establishes the time within which an accrued claim must be brought. Some states have very specifically-worded statutes of limitation and repose that likewise are fertile ground for legal disputes and require experienced counsel to address these issues in the contract documents.

For example, in Washington State Major League Baseball Stadium Public Facilities District v Huber, Hunt & Nichols-Kiewit Construction Company, the Washington Supreme Court determined the language of the contract, using the AIA A201-1997 General Conditions, established that a claim “accrued” no later than the date of substantial completion of the project. As a result, the Washington Statute of Repose, which bars claims that have not accrued within six years of substantial completion, did not apply to bar the Owner’s claim for defective construction. The home field for the Seattle Mariners was substantially completed July 1, 1999; in February 2005, the Mariners’ president noticed blisters appearing on the face of the structural steel, and the Owner brought an action in August 2006 for defective construction. While the usual statute of limitations in Washington for a breach of contract is six years from accrual, Washington implements the ancient doctrine of “nullum tempus occurrit regi,” meaning “no time runs against the king.” Effectively, there is no statute of limitations that applies to bar claims by or for the benefit of the state. However, the Statute of Repose in Washington does apply to claims by the State. The Statute of Repose provides, “Any cause of action which has not accrued within six years after such substantial completion of construction, or within six years after such termination of services, whichever is later, shall be barred.”

Thus, the issue was whether the claim “accrued” within six years of substantial completion. In reading the language of the A201-1997 General Conditions, claims were deemed to have accrued not later than the date of Substantial Completion. As a result, the claims necessarily “accrued” within six years of substantial completion, so the Statute of Repose did not bar the action by the State. The 2007 edition of the A201 no longer contains that language and now uses a more generic statement that claims are to be brought within the time periods prescribed by state law and no event later than ten years following substantial completion. The ConsensusDOCS documents are silent on that issue and leave the concept of accrual and timing to the applicable state law.

At the opposite end of the claim allowance spectrum was the 2012 decision of the United States District Court of Maryland in the case of The Chesapeake Bay Foundation, Inc. v. Weyerhaeuser Company that dismissed the claims by the Owner seeking recovery for alleged defective glue-laminated wood members because of the lapse of time between when the Owner reasonably should have known of a wrong and when the action was initiated. The Phillip Merrill Environmental Center was the first LEED Platinum certified building, and its design used recycled and natural materials where possible, including the use of Parallam posts, beams and trusses. Construction was complete in late 2000, and the Center began to experience leaks in early 2001. A consultant opined in 2001 among other things that the Parallam did not appear to be properly treated. A subsequent investigation by another consultant observed various issues, including splitting and movement of the columns and trusses in 2002. The manufacturer disagreed with the reports and assured the Owner that the wood members were functioning, and the manufacturer participated in some remediation efforts to stop the water leaking through 2004. During an annual inspection in 2009, the Owner discovered that the Parallams were deteriorating, and a further investigation recommended that certain members be replaced. The litigation was commenced in 2011, and Weyerhaeuser sought dismissal of the action due to the expiration of the three year period of limitations from the date the action accrued.

Maryland applies the “discovery rule” to determine when a claim accrues for purposes of applying the limitation period. Thus, a claim accrues when the claimant knows or reasonably should have known of the wrong. The Owner asserted that the earliest it could have known was upon discovering the deterioration of the wood members since the prior consultants’ conclusions were denied by Weyerhaeuser who also participated in the remediation without disclosing any issues to the Owner. On the other hand, Weyerhaeuser claimed that the fact that those consultants reached those conclusions should have led the Owner to take action earlier. The judge agreed with Weyerhaeuser that the early reports should have informed the Owner of a problem or defect. This case is currently pending review by the Fourth Circuit Court of Appeals.

In addition to the statutory time periods, Ownerss need to be aware of the contractual time requirements for bringing claims. The Owner in RCR Building Corporation v Pinnacle Hospitality Partners withheld liquidated damages from a final payment to the contractor due to delayed completion of the project. Even though some of the delays were attributable to the Owner, the Owner argued that the contractor had failed to request additional time according to the claims procedure of the contract. However, the Owner had not given notice of its intent to assess liquidated damages until the amount was deducted from the final payment. The parties’ contract utilized the A201-1997 General Conditions that required claims by either party to be initiated within 21 days of the occurrence giving rise to the claim – a contractual accrual provision. [Similar language is in the 2007 edition of the A201; there is not a similar timing requirement on Owner claims in the ConsensusDOCS documents] The trial court allowed the Owner to assess liquidated damages, but the Tennessee Court of Appeals reversed the trial court in finding that the imposition of liquidated damages is a “Claim” for purposes of the mandatory claims procedure; therefore, the failure of the Owner to provide notice within 21 days barred the Owner’s’s ability to retain the liquidated damages. In short, if the contract provides that claims by either party must follow the claims procedure, what is sauce for the goose is sauce for the gander.

Arbitration Can Generate Issues that Would Not Otherwise be Encountered in Litigation

Parties to contact generally can design a dispute resolution process that fits their needs, assuming that the parties pay attention to the language of the contract creating the dispute resolution process. Sometimes, the dispute resolution language does not get reviewed until a dispute arises or the language gets modified but not entirely defined so the dispute resolution process actually generates additional disputes. The American Arbitration Association has been developing an online tool for those who are interested in arbitration and mediation as methods of dispute resolution called Clause Builder at http://www.clausebuilder.com/. Currently, the tool deals with commercial contracts, but construction contract language is being developed.

Templates can provide drafting assistance to assist the parties in clarifying the intent in attempting to limit the scope of arbitrable disputes because the devil can be in the details. In Harrison County Commercial Lot, LLC v H. Gordon Myrick, Inc., the parties used a modified A201 General Conditions document to require mediation and arbitration any claim arising out of or relating to the contract “except claims relating to aesthetic effect….” Perhaps not surprisingly, the greatest dispute was defining the claims “relating to aesthetic effect.” Since the contract did not define that term, the Supreme Court of Mississippi consulted The American Heritage Dictionary of the English Language and other resources to glean the parties’ intent on the scope of the exception from arbitration. Both the trial court and the Mississippi Supreme Court struggled with the distinction between aesthetics which was not arbitrable and function which was.

For instance, [Owner] listed a complaint as “handles missing on many windows.” Without a handle, it may be difficult to open and close a window – an issue of functionality. But also, the missing handle could not be pleasing to the eye. So, is this an aesthetic claim?

The matter was remanded to the trial court to make specific findings on each item on the Owner’s punchlist to determine which was “aesthetic” and which was functional. The time and cost involved in that exercise is stunning to consider.

In addition to the types of claims that are subject to arbitration is the issue of who is required to arbitrate. Since arbitration is a matter of contract, the parties are understandably bound to arbitrate if the agreement so requires. However, the expansion of that requirement to third parties is less clear and depends on a particular third party’s relationship to the underlying contract. On projects with performance bond sureties, that question occurs when the principal on the bond is compelled to arbitrate a dispute, and the surety has separate defenses. In Great American Insurance Company v. Hinkle Contracting Corporation, the Fourth Circuit Court of Appeals compelled the surety to arbitrate its defenses to claims on the bond.

Great American provided a performance bond to a subcontractor to Hinkle Contracting that incorporated the terms of the subcontract, which included an arbitration provision requiring all claims “arising from or relating to” the subcontract to be arbitrated at the option of Hinkle. The subcontractor had difficulties performing, so in lieu of defaulting the subcontractor, Hinkle issued a change order allowing an extension of time, but also imposing liquidated damages for delayed completion. When the subcontractor failed to perform under the change order, Hinkle defaulted the subcontractor and demanded payment under the performance bond. Great American filed a complaint seeking a declaratory ruling that the surety was discharged by the material alteration in the financial obligations under the subcontract created by the change order to which the surety did not consent.

Great American argued that its defenses to the bond were not subject to arbitration under the subcontract, and the trial court agreed, but the Court of Appeal reversed because of the breadth of the underlying arbitration clause that was incorporated by reference into the bond. Relying on the United States Supreme Court decision in Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 US 1 (1983), the Court of Appeals emphasized that doubts or uncertainty or ambiguities about the scope of arbitrable claims are resolved in favor of arbitration when interpreting a broadly-worded clause.

However, the incorporation by reference should be explicit in order to include an arbitration provision, no matter how broadly worded. The rather generic language at the bottom of AIA documents are not sufficient to demonstrate an intent to incorporate the A201 General Conditions into an agreement when there are other indications that the parties did not intend an incorporation of those terms. The United States District Court in Maryland found that the A201 General Conditions were not incorporated by reference into a subcontract based on an unnumbered statement on the cover page and a generic reference to “General Conditions” in the definition of Contract Documents. However, the A201 General Conditions document was not listed in the section “Enumeration of Contract Documents.” The court in J.E. Dunn Construction Co. v. S.R.P. Development Limited partnership, noted that other references to the A201 had been deleted by the parties, which provided further evidence that the parties’ intent was to avoid incorporating the A201 by reference, and thereby avoid incorporating a mandatory mediation and arbitration provision.

Assuming that the parties have made a conscious decision to incorporate arbitration into the agreement, an important aspect of arbitration to consider is the administrative fees and arbitrator fees. Occasionally, one or both parties are unable or unwilling to pay the administrative fees of the American Arbitration Association (AAA) or the fees of the arbitrator(s). There are typically not explicit statutes in place on the method of addressing that issue. The AAA has R-56 that provides

R-56. Remedies for Nonpayment

  • (a) If arbitrator compensation or administrative charges have not been paid in full, the AAA may so inform the parties in order that one of them may advance the required payment.
  • (b) Upon receipt of information from the AAA that payment for administrative charges or deposits for arbitrator compensation have not been paid in full, to the extent the law allows, a party may request that the arbitrator issue an order directing what measures might be taken in light of a party’s non-payment.

    Such measures may include limiting a party’s ability to assert or pursue their claim. In no event, however, shall a party be precluded from defending a claim or counterclaim. The arbitrator must provide the party opposing a request for such measures with the opportunity to respond prior to making any such determination. In the event that the arbitrator grants any request for relief which limits any party’s participation in the arbitration, the arbitrator shall require the party who is making a claim and who has made appropriate payments, to submit such evidence as the arbitrator may require for the making of an award.

  • (c) Upon receipt of information from the AAA that full payments have not been received, the arbitrator, on the arbitrator’s own initiative, may order the suspension of the arbitration. If no arbitrator has yet been appointed, the AAA may suspend the proceedings.
  • (d) If arbitrator’s compensation or administrative fees remain unpaid after a determination to suspend an arbitration due to non payment, the arbitrator has the authority to terminate the proceedings. Such an order shall be in writing and signed by the arbitrator.

A California appellate court ruled in Casady v The Waffle, LLC, that the contractor was required to arbitrate its claims against the Owner, which included paying the arbitrator’s fees to avoid the impact of a dismissal of the arbitration. The Owner did not pay the contractor the final draws for the construction of a restaurant, so the contractor recorded a lien and initiated litigation. The Owner obtained an order compelling the contractor to arbitrate as a third-party beneficiary to the contract with the designer that specifically contemplated hiring the contractor. The contractor claimed indigence to the AAA, and the AAA ultimately deferred and waived the administrative fees. While the arbitrator was not inclined to waive his fees, he did offer to discount the fees. However, the contractor still declined to pay citing indigence; the trial court expressed skepticism at the contractor’s assertion and refused to reinstate the litigation in lieu of the arbitration. Finally, the arbitrator terminated the arbitration due to nonpayment of the fees. The trial court was affirmed by the appellate court in finding that the termination was an award on the merits, so the contractor was precluded from seeking further relief in court.

If [Contractor] could not afford the cost of arbitration, then [Contractor’s] inability to gain access to a forum for his claims would be harsh. Nonetheless, the harsh result would be unavoidable given that [Contractor] was compelled to arbitrate his claims and [Arbitrator] had the authority to dismiss the arbitration due to the nonpayment of fees. The record, however, suggests that [Contractor] refused to pay his share of the arbitration costs even though he was able. [Contractor] admittedly had cash and assets. Instead of paying his arbitration fees, he wanted to pay other bills and otherwise reserve money for living expenses. That was a choice he made and one he must live with. A party who is compelled to arbitrate should not be permitted to avoid the arbitration process by refusing to pay his share of the costs.

The amount of administrative fees that are paid to any entity overseeing an arbitration together with the arbitrator’s fees can be a substantial financial burden for parties that is unique to arbitration. A judge and his staff are paid by public funds and the filing fees are relatively modest. However, when the parties choose arbitration as the method of dispute resolution, that attendant cost becomes unavoidable.

John Sier, with the firm of Kitch Drutchas Wagner Valitutti & Sherborook in Detroit, Michigan, is Associate Counsel to COAA.