Don't Ignore the Importance of Contracts, Because the Courts Won't

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A couple of new Supreme Court cases, one from Washington and one from Oregon, provide another reminder of the importance that construction and design contracts be drafted carefully.

In a case involving arbitration of a claim under securities laws, the Washington Supreme Court reversed a decision that the claim was time-barred by the state statute of limitations. The court held that because the language of the statute referred only to "actions" and not specifically to arbitration proceedings, the statute of limitations did not apply automatically to claims that parties had agreed by contract to refer to arbitration.

In the case before it, the Supreme Court took the unusual step of reviewing and reversing an arbitration decision because the arbitration award was "erroneous on its face" for applying the statute of limitations to bar the claim as too late. Without an applicable statute of limitations, the claim was allowed to proceed.

Arbitration agreements are frequently made to resolve construction and design claims, and the parties may inadvertently be opening themselves to liability of unlimited duration when agreeing to arbitrate in Washington.

Fortunately, the Washington Supreme Court did give some guidance about how to avoid this fate. The court specifically noted that the parties had not explicitly stated in their agreement to arbitrate that their securities claims would be subject to the statute of limitations.

The clear implication is that, if the parties had done so, the court would have applied the statute to bar the claim. Essentially, the Washington Supreme Court invited contracting parties to negotiate and agree for themselves how to address the limitations issue.

The Oregon Supreme Court has not ruled on this issue yet, but the lesson to be learned is that, whether in Washington or elsewhere, arbitration clauses should not be inserted in construction and design contracts without inclusion of a provision to address the limitations period for claims.

A recent Oregon Supreme Court case, Abraham v. T. Henry Construction Co., also shows the critical importance of using contracts to define parties' rights, responsibilities and remedies. The issue was whether a homeowner who contracted to have a house built had both a contract claim and a negligence claim against the contractor when the house experienced property damage because of water intrusion.

Prior case law had left some doubt whether an owner would be limited to contractual remedies against a contractor or whether a negligence claim would be possible. This issue is important because contract claims generally are barred from substantial completion after six years, but a negligence claim normally can be brought within two years of the discovery of damage. The damage in this case was discovered more than six years after the completion date.

After considering its prior cases, the Oregon Supreme Court held that a party does not waive its negligence claims based upon the failure to meet the standard of care solely by virtue of entering into a contract.

For physical damage to real property like that caused by construction defects, the court held that generally the property owner can attempt to recover both in negligence and for breach of contract. (For cases involving purely "economic losses" without property damage, the court suggested that it might be more restrictive in allowing recovery outside the contract by requiring that the claim involve a "special relationship" between the parties.)

The Oregon Supreme Court did make an important observation that again underscores the importance of written contracts in governing the rights and responsibilities of the participants in a construction project. The court pointedly noted that the construction contract at issue did not contractually limit the owner's remedies or eliminate the contractor's liability for negligence outside the contract.

The clear invitation from the court is for the parties in their contract to address what rights and remedies they have under their agreement, including whether remedies will be permitted outside the contract. Specifically, the court referred to case law permitting parties to limit their liability, when that is done clearly by contract.

It is tempting at times to think that working out all the details in a contract is not worth the time and effort, particularly in the boilerplate provisions. These two cases are good reminders that in any dispute, the contract is king.

The time for parties to think about their respective risks and remedies if a dispute arises is up front, at the time of contracting. If they don't do so at that time, they may find their rights being defined by a judge or jury after a problem has arisen. Construction and design work is risky enough already.

Originally published in the Oregon Daily Journal of Commerce, April, 2011.

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Guy A. Randles
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