Most private construction contracts contain binding arbitration clauses and apply the “law of the state where the project is located.” While arbitration is less formal than court/litigation, legal defenses are often raised, including whether a claim is barred by a statute of limitation or, in the case of construction claims, 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,” the claim is barred if not brought within a specific period of time after substantial completion. For example, in Tennessee a claim must be brought within four years of substantial completion or that claim is barred by the statute or repose. However, a recent arbitration ruling raises concerns about whether such statutes will apply in arbitration.
Most statutes of repose (and limitation) apply to “any and all actions.” In a recent arbitration case, an owner brought a $1.5 million defective work claim against its prime contractor 10 years after substantial completion of a project that was located in Tennessee. The contractor moved to dismiss the claim based upon Tennessee’s four-year statute of repose. However, the owner cited a few reported court cases (none from Tennessee) and argued that the word “action” in the statute of repose was intended by the legislature to apply only to court cases, not to arbitration. One point made by the owner was that the statute of repose was passed decades prior to any state passage of arbitration laws allowing courts to enforce arbitration agreements. The contractor argued that if statutes of repose (and limitation) do not apply when the parties agree to binding arbitration, contractors (and subcontractors) would have unlimited liability for years–even decades–after substantial completion.
A few states have surprisingly adopted the owner’s argument. However, in most of those cases, the state legislatures jumped in to clarify the law (but not in time for the particular contractor who had lost the argument).
The Tennessee arbitration panel ruled that the four-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 defend the owner’s alleged defect claim. While the panel ultimately found in favor of the contractor, the legal and arbitration fees were extensive and would have been avoided if the arbitration panel had applied the statute of repose.
What can be done to avoid such a result? One way is not to agree to arbitration. However, there are many other reasons to choose arbitration, and it has become the preferred method of dispute resolution in most design and construction contracts. Another suggestion is to check each state’s statute of repose to determine if the applicable state statutes use the same word “action” and then review any published case law on the issue. A proactive approach might include lobbying state legislatures to amend their statutes to ensure that “arbitration” is included in the definition of “action.” Finally, a helpful contract drafting suggestion would be to include, in any contract that calls for binding arbitration, a provision that states that in any arbitration the parties agree that the arbitrator(s) must apply any applicable statutes of repose and limitation.