Virginia Supreme Court Rules Prime Contractor's Lawsuit is too Late to Obtain Indemnity from Subcontractors and Their Sureties

In the recent decision of Hensel Phelps Construction Company v. Thompson Masonry Contractor, Inc., Record No. 151780 (November 3, 2016), the Virginia Supreme Court affirmed a circuit court’s dismissal of a prime contractor’s lawsuit against its subcontractors and subcontractors’ sureties for indemnity for defects in work completed at least fourteen (14) years prior to the lawsuit.  The litigation resulted from a 1997 contract between Virginia Polytechnic Institute & State University (“Virginia Tech”) and Hensel Phelps Construction Company (“Hensel Phelps”) for the construction of a student health and fitness center on Virginia Tech’s campus.  Construction began in 1997, and the project was substantially completed a year later, with all work, including repair work by one subcontractor, completed by June 2000.  Several years later though, Virginia Tech discovered defective workmanship and removed, replaced, and repaired those defects.  Then, in April 2012, Virginia Tech asserted a claim against Hensel Phelps for the costs of remedying the defective work, which totaled in excess of $7 million.  Hensel Phelps ultimately settled with Virginia Tech for $3 million, and then Hensel Phelps filed its lawsuit against its subcontractors and their sureties for indemnification and breach of contract.  In response, the subcontractors and sureties sought to dismiss the case against them, arguing that Hensel Phelps’ claims were barred by the statute of limitations.  The circuit court agreed, dismissing the suit.  

 

On appeal to the Virginia Supreme Court, Hensel Phelps argued that based on terms in the prime contract which flowed down to its subcontractors, Hensel Phelps’ subcontractors waived the five-year statute of limitations.  The Virginia Supreme Court rejected Hensel Phelps’ argument, stating that a general provision which incorporates the prime contract into subcontracts is insufficient to expressly waive a statute of limitations.  The Court also found that the prime contract itself did not expressly waive the statute of limitations, but rather, because Virginia Tech was an agency of the Commonwealth of Virginia, the university was not subject to any statutory limitations periods.  

 

Having lost its primary argument, Hensel Phelps then raised an alternative argument that its claims against its subcontractors did not accrue until the date of Hensel Phelps’ settlement with Virginia Tech in 2014.  However, the Court also rejected that alternative theory, first ruling that the subcontractors could not be liable under the indemnification terms of their subcontracts because those terms were so broad that the subcontractors were in effect indemnifying Hensel Phelps from claims arising from Hensel Phelps’ own negligence, which violates Virginia’s Anti-Indemnity statute.  The Court then looked at several other subcontract terms which contained some degree of indemnification-like language, but the Court concluded that those terms were not contemplated by the parties as separate independent indemnification provisions which could require the subcontractors to indemnify Hensel Phelps for the recovery it sought.  

 

Finally, the Court rejected Hensel Phelps’ remaining argument that the subcontractors’ obligations to Hensel Phelps were a continuing obligation, finding that the subcontracts were for a finite period which was completed upon performance and expiration of the subcontractors’ guarantee.  Thus, Hensel Phelps’ cause of action was held to have accrued upon the breach of the performance obligations of the subcontracts, which arose at some point between the commencement of construction in 1997, completion in 1998, or the repair work in 2000. Utilizing any of these dates, the five-year statute of limitations had long since run when Hensel Phelps filed its lawsuit against the subcontractors and their sureties in 2014.  Citing to standard surety law, the Court ruled that because the statute of limitations had expired against the subcontractors, it had similarly expired against the subcontractors’ sureties.