It's Not the Crime, It's the Cover-Up: Equitable Estoppel in Construction Defect Claims
More than 20 years ago, the Watergate scandal taught us “it’s not the crime, it’s the cover-up” that does the damage. The ensuing decades have brought a steady stream of individuals and companies that had to learn the truth of this adage the hard way. Construction companies and developers are not immune. High costs, low margins, and critical path schedules all introduce tension into the relationship between contractors and owners, who expect every project to come in on time and under budget. In this environment, incentives are high for contractors (or their subcontractors) to cover up defective work - rather than miss interim milestones or completion dates. After completion, the expense of uncovering and correcting work only increases the pressure to keep covered defects hidden. This cover-up, however, can significantly increase damage to the completed project and extend the contractor’s legal liability for defective work years—and in some states, decades—into the future.
I. Statutes of Repose
Of all the defenses potentially available to contractors and developers in construction defect cases, none is more powerful than the statute of repose. In the construction context, statutes of repose act as substantive barriers to legal claims based on breach of contract, expressi and implied warranty, negligent construction, and other theories once a specified period has passed after the completion of construction. Statutes of repose for improvements to real property frequently begin to run on the date of substantial completion or issuance of a certificate of occupancy and extend from four to 15 years. Once the statute of repose has run, the contractor or developer should rest easy knowing its liability for a project has ended.
For example, the North Carolina statute of repose provides that “[n]o action to recover damages based upon or arising out of an improvement to real property shall be brought more than six years from the later of the specific last act or omission of the defendant giving rise to the cause of action or substantial completion of the improvement.” N.C. Gen. Stat. § 1-50(a)(5)(a). Over the years, North Carolina’s appellate courts have frequently described the statute of repose as an “unyielding and absolute barrier that prevents a plaintiff’s right of action even before his cause of action may accrue.” See, e.g., Monson v. Paramount Homes, Inc., 133 N.C. App. 235, 240-41, 515 S.E.2d 445, 449-50 (1999). And whereas statutes of limitations are procedural rights subject to waiver by the defendant, statutes of repose are typically considered substantive rights that literally afford defendants a “vested right not to be sued if the plaintiff fails to file within the prescribed period.” Id. These statutes of repose are not, however, entirely without exception.
II. Fraud Exceptions
Because of the obvious danger posed by dishonest defendants concealing defects to take advantage of the statute of repose, many state legislatures have enacted fraud exceptions to their statutes of repose. The North Carolina statute of repose explicitly excludes “any person who shall have been guilty of fraud, or willful or wanton negligence” in the course of improving real property, and further excludes any person who has “wrongfully concealed” the fraud or willful or wanton negligence. N.C. Gen. Stat. § 1-50(a)(5)(e). Establishing the fraud or willfulness or wantonness necessary to invoke this exception is a high standard and typically requires proving the contractor or developer deliberately covered or concealed defects that it knew or should have known of in conscious disregard of the eventual owner’s rights. Where the defendant’s actions do not rise to this level, the North Carolina statutory exception does not apply.
III. Equitable Estoppel
In such cases, the property owner may still find relief from the statute of repose in the related common law doctrine of equitable estoppel, which operates to toll (or suspend) the running of the statute. The North Carolina Court of Appeals reaffirmed the application of equitable estoppel to construction defect disputes in its September 2014 decision in Trillium Ridge Condominium Association, Inc. v. Trillium Links & Village, LLC,
No. COA14-183, ___ N.C. App. ___ (Sept. 16, 2014) (slip op.).
As explained in Trillium Ridge, equitable estoppel is available in proper cases under North Carolina law to bar a defendant from relying on either a statute of limitations or statute of repose. Equitable estoppel requires “(1) conduct on the part of the party sought to be estopped which amounts to a false representation or concealment of material facts; (2) the intention that such conduct will be acted on by the other party; (3) knowledge, actual or constructive, of the real facts.” White v. Consol. Planning, Inc. 166 N.C. App. 283, 305 (2004), disc. review denied, 359 N.C. 286 (2005). The party asserting the defense must have “(1) a lack of knowledge and the means of knowledge as to the real facts in question; and (2) relied upon the conduct of the party sought to be estopped to his prejudice.” Id. at 807. Furthermore, the plaintiff must have been induced to delay filing its legal action by the defendant’s misrepresentations. Jordan v. Crew, 125 N.C. App. 712, 720, disc. review denied, 346 N.C. 279 (1997).
In Trillium Ridge, the plaintiff condominium owner’s association sued the builder and developer over construction defects in six buildings throughout the condominium complex. The defendants argued that the association’s claims were barred by the applicable statute of limitations and the statute of repose. Trillium Ridge at 19-25. The association countered by arguing that, among other things, the defendants were equitably estopped from asserting either statute as a defense. Id. at 29-33. The Court of Appeals ruled in favor of the association against the contractor, but not the developer.
First, the association argued the developer’s property manager had reviewed an inspection report outlining some of the defects and advised the association that further investigation would be necessary. However, because the entire association board received the inspection report and, for that reason, had the same information available to the developer, the developer had not concealed any information that should have been made available to the association. Id. at 31. In addition, the record contained no evidence the association was “induced to delay filing of the action by the misrepresentations of” the developer. Id. (citation omitted). As a result, the developer was not equitably estopped from relying on expiration of the limitations and repose periods.
The contractor did not fare as well. The association pointed to evidence that the contractor had placed other building materials over subsurface construction defects before the alleged defects could be observed and further argued the contractor had learned various defects needed to be repaired without either passing the information along to the association or ensuring the defects were corrected. Id. at 32. As a result, the association alleged it had been deprived of the opportunity to discover the defects in a timelier manner and, thus, delayed the filing of its lawsuit against the contractor. Id. For its part, the contractor argued the inspection report had put the association on notice of the alleged defects more than three years before suit was filed and, for that reason, the association was precluded from relying on equitable estoppel to avoid operation of the statutes of limitations and repose. Id. The Court of Appeals held that a factual question remained as to whether the association “lacked ‘knowledge and the means of knowledge as to the real facts in question’” to invoke equitable estoppel against the contractor. Id. at 32-33. As a result, the appellate court overturned the trial court decision granting summary judgment to the contractor on the statutes of limitations and repose. Id. at 33.
As the disparate results in Trillium Ridge demonstrate, relying on equitable estoppel can be risky. Application of the doctrine depends entirely on the specific facts of each case. The key is that a plaintiff must have been actually induced to delay filing his action because of the defendant’s conduct.
For example, in Wood v. BD & A Construction, LLC, 166 N.C. App. 216, 221 (2004), the plaintiff homeowners alleged in their complaint they told the defendants they were continuing to experience water intrusion around the windows in their home. The defendants had previously told the homeowners the specific type of windows in the home were the cause of the leaks and then replaced the windows. Wood at 221-22. Five years passed with no other apparent issues, at which point the homeowners discovered other problems. Id. The court held that the “cause of delay in filing in the instant action was not the defendants’ representations that it had addressed the window problem, but rather the plaintiffs’ delay in discovering the other defects in the home.” Id. Without an allegation as to how the plaintiffs’ reliance on a particular representation about the windows prevented them from filing suit within the applicable period of repose, the homeowners did not sufficiently plead a basis for equitable estoppel. Id.
Compare the result in Wood with another case in which the North Carolina Supreme Court did find a basis for equitable estoppel. In Nowell v. Great Atlantic & Pacific Tea Co., 20 N.C. 575 (1959), the plaintiffs hired the defendant contractor to construct a building the plaintiffs then leased to a third party. Nowell at 576. After the plaintiffs experienced problems with the building, the defendant assured them he would perform any necessary correction to the building in the future due to reoccurring problems in his construction work. Id. at 578. The plaintiffs entered possession of the building, and after the statute of limitations had run out, the defendant refused to assume further responsibility or correct the continuing problems with the building. Id. The Supreme Court concluded the plaintiffs had effectively pled equitable estoppel and had “relied upon the promise and did not sue while efforts to correct the structural error were under way. The [defendant], by its promises, invited the delay and should not complain that the invitation was accepted.” Id. at 579.
By the time most defect cases are filed, the contractor or developer has long since moved on to other projects. The last thing any contractor wants to do is revisit a closed project. To permanently close the door, it is imperative that contractors and developers err on the side of disclosure and repair of known or suspected defects to preserve their rights under statutes of repose and limitations. Engaging in the cover-up is never an option and always worse than the crime itself.
The parties in Trillium Ridge
have filed for discretionary review with the North Carolina Supreme Court. The editors of The Construct
will follow the petition in the Supreme Court and report further developments in the case when they occur.
In the recent case of Christie vs. Hartley Construction Inc.
, previously discussed here
in The Construct
, the North Carolina Court of Appeals held that expiration of North Carolina real property improvement statute of repose bars damages claims for alleged breach of express warranty. This case is currently on appeal to the North Carolina Supreme Court.
UPDATE: By order dated December 18, 2014, the N.C. Supreme Court denied the defendant's petitions for discretionary review of the Court of Appeal's decision. The case has now been sent back to Jackson County for trial.