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Contractors pride themselves on building projects that will stand the test of time. Unfortunately, however, claims often arise after final completion of a project. In these instances it is important to know that the Idaho Legislature has enacted statutory limitation periods which set a maximum period of time in which a contractor is liable for these claims.

A statute of limitations sets the maximum period for which a claim may be brought after a cause of action has accrued. A cause of action generally accrues when the person knows, or reasonably should know, that he or she has a claim against another party. A statute of repose, on the other hand, bars any claim brought after a specified period of time, regardless of the when the action accrued.

Claims against contractors arising after final completion of the project generally fall into two categories: (1) breach of contract actions by a party to the contract seeking economic damages; and (2) negligence actions by third parties seeking damages for personal injury or injury to property. The application of Idaho’s statute of limitations and statute of repose differ depending on which cause of action is sought by the claimant.

The majority of claims against contractors are founded on breach of contract. Generally, the rights and obligations of parties to construction contracts are memorialized by executing a written contract. Any action for breach of contract which is founded upon an instrument in writing must be brought within five years of the time of accrual. The statute of repose provides, however, that a contract action arising out of supervision or construction of improvements to real property accrues at the time of final completion of the project. As a result, claims founded on breach of a written construction contract are generally barred if not asserted within five years from the project’s final completion date.

The Idaho Supreme Court has even upheld this statute of repose where a contractor discouraged an owner from filing suit until the limitation period had lapsed. The contractor and owner unsuccessfully attempted to remedy the defects throughout the five year limitation period. Eventually, the owner remedied the construction defects for $3.4 million and brought suit against the contractor for breach of contract. The Court barred the owner’s claim for breach of contract because it was brought five years and four months after the parties executed the acceptance certificate for the project.

The Idaho statute of limitations for negligence claims accrues at the time the act or omission complained of occurs, and runs for a period of two years. Idaho courts distinguish between latent defects and patent defects when determining the time of accrual for negligence claims.

Patent defects are project defects that are apparent to a normally observant person upon its final completion. A negligence cause of action based on a patent defect accrues at the final completion of the project because it should have been discovered at that time. Therefore, the statute of repose for a negligence claim based on a patent defect is two years from the project’s final completion date.

Latent defects, on the other hand, are project imperfections that are not discoverable by reasonable inspection at final completion. A negligence cause of action based on a latent defect generally accrues when the party bringing the claim discovers the defect. Under Idaho’s statute of repose, however, any negligence cause of action against a contractor for damages resulting from latent defects in an improvement to real property accrues six years from final completion of the project if it has not previously accrued. Consequently, a negligence claim arising out of construction of improvements to real property must be brought within two years of discovery and in no event later than eight years following project completion. This eight year statute of repose is generally the longest period of time for which a contractor may be held liable for claims based on construction of a project under Idaho statute.

The Idaho statute of repose is helpful to contractors in two ways. First, it defines the minimum time period for which a contractor should preserve evidence related to a project. This can be vital for a contractor’s defense in the event a claim arises for either breach of contract or negligence. It also allows contractors to focus on current and future obligations without the threat of incurring liability from projects that have been complete for a reasonable period of time. Although these are the general principles related to the time in which a lawsuit can be filed against a contractor, an attorney should be consulted for particular circumstances.

(Published in the Idaho Business Review, August 2007)

Most contractors with experience on federal construction projects are familiar with the federal False Claim Act (“FCA”) which provides for civil and administrative penalties for anyone who knowingly submits or causes the submission of a false or fraudulent claim to the United States. The civil penalties range from $5,500 to $11,000 for each false claim submitted to the federal government, plus three times the amount of damages sustained by the government. The administrative remedies include suspension or debarment from work on future federal projects.

The FCA has evolved since it was introduced in 1863 to reflect a growing concern about fraud against the federal government. It was amended in 1986 to encourage private citizens known as whistleblowers to bring lawsuits against alleged violators of the FCA on behalf of the United States. In addition to providing financial incentives to whistleblowers, the FCA protects these individuals from retaliation if they bring a lawsuit against their employer. Recoveries under these lawsuits have dramatically increased over the years from less than $400,000 in 1986 to approximately $3,000,000,000 in 2010. The trend is a result of increased education to potential whistleblowers and the expanding scope of the FCA provided by the courts and statutory amendments.

Many states, including Montana, Nevada and California, have false claim statutes that address claims made to state governments based on the FCA model. Contractors should determine whether these statutes exist and what potential liabilities they provide when performing state and local government work in other states.

Although Idaho has not enacted a state false claims statute, a recent revision to the FCA has expanded its applicability to contractors performing state and local government work in Idaho. The number of contractors performing government work in Idaho has also increased due to the economic downtown over the last several years. Many contractors who previously bid primarily private construction projects are now bidding government projects. Contractors must be more mindful than ever of FCA and its reach.

The FCA was significantly expanded in 2009 to cover all projects funded at least in part by federal funds. A large number of state and local projects in Idaho are at least partially funded by federal money. These projects now fall within the scope of the FCA even without federal agency involvement.

Another expansion of the FCA impacts subcontractors and suppliers. Federal courts were historically divided on whether subcontractors, sub-tier contractors, and sub-tier suppliers were subject to FCA liability. In a 2008 decision, the Supreme Court found that the FCA applied to a subcontractor who makes a false statement to the prime contractor intending that it be passed through to the federal government. The Court rejected the notion that the FCA extended liability to any entity receiving federal funds directly or indirectly. In response to the decision, the 2009 revision expands the scope of the FCA to cover subcontractors and suppliers at all tiers.

FCA liability can arise in a number of situations at every stage of the project. Although each phase of a project presents different potential false claims, several bases for FCA liability are worth noting.

False statements in bids or negotiations often result in FCA liability. These statements can include everything from knowingly identifying an unavailable employee as the project manager or superintendant to identifying a sham disadvantaged business enterprise subcontractor for the project.

Certifications of payment and compliance with laws and regulations are also common bases for liability. Contractors must be vigilant to ensure that subcontractors comply with environmental regulations, the Davis-Bacon Act, and Buy America Act. Certification can also lead to FCA liability when a prime contractor withholds funds from a subcontractor or supplier due to an alleged breach of contract. A contractor should notify the government agency in writing anytime it requests payment that it does not intend to pass through to the party performing the work or supplying the material or equipment. Similarly, a prime contractor should never hold retention from a subcontractor when it has received full payment from the government.

Probably the most recognized act giving rise to FCA liability is false or inflated pricing which typically arises during the change order process. Contractors should avoid using the word “cost” when submitting pricing to perform extra work on government projects. If the contract requires that change order requests are based on cost estimates, contractors should carefully analyze all costs to ensure accuracy and retain supporting documentation. If a cost- based change order results in overpayment by the government, a contractor’s failure to refund the overpayment may result in FCA liability.

Given the expansion of the FCA, the steep liability for violations, and a substantially more aggressive attitude by the federal government toward enforcement, contractors that perform government work at any level should establish an internal education and compliance system to reduce potential liability under the FCA.

(Published in the Idaho Business Review, April 2011)

An award for consequential damages against a contractor can turn a profitable project into a potential for bankruptcy. Consider this example: In 1983 a contractor was hired as construction manager on a project to renovate an Atlantic City casino. The contract stated that the contractor would coordinate with the owner and architect, supervise the trade contractors, and set a guaranteed maximum price for the project in exchange for a fee and expenses.

Although a great deal of the project was completed on time, construction of the façade designed to attract customers passing by the casino was late. The owner terminated the contract because of the delay on the façade, and the contractor brought an action for wrongful termination and the balance of the fee. In turn, the casino sought damages for lost profits and was awarded $14,500,000 in arbitration which was later upheld by the New Jersey Supreme Court. This scenario demonstrates the impact of a consequential damage award and illustrates the importance of contractually managing these risks.

In 1997 the American Institute of Architects (AIA) revised its form contract language pertaining to consequential damages in its general conditions (AIA A201). The A201 general conditions adopted a mutual waiver of consequential damages in reaction to the decision referenced above. The pertinent section reads as follows:

“The Contractor and Owner waive all claims against each other for all consequential damages arising out of or relating to this Contract. This mutual waiver includes:
Damages incurred by the Owner for:
  • Rental expenses;
  • For losses of use, income, profit, financing, business and reputation; and
  • For loss of management or employee productivity or of the services of such persons; and
Damages incurred by the Contractor for
  • Principal office expenses including the compensation of personnel stationed there;
  • For losses of financing, business and reputation; and
  • For loss of profit except anticipated profit arising directly from the Work.”

This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination. Nothing contained in this shall be deemed to preclude an award of liquidated direct damages, when applicable, in accordance with the requirements of the Contract Documents.

On its face, this language seems to favor contractors because the largest consequential damage claims (like the one referenced above) are those recoverable by owners. Lost profits may be recoverable by contractors but typically those losses are not comparatively as large. Although it seems to favor contractors, the A201-1997 mutual waiver of consequential damages language may not eliminate owners’ options for recovering consequential damages for construction delays.

Owners may attempt to recover lost profits, loss of use or other consequential damages as liquidated damages even if the parties agree to the mutual waiver of consequential damages. The A201-1997 document uses the term “liquidated direct damages” in an attempt to remove “consequential” damages from an award for liquidated damages. The definition of “liquidated direct damages” is not included in the document and has not been addressed by the courts.

In Idaho, two requirements must be met for recovery of liquidated damages: (1) an accurate determination of the actual damages that might be incurred upon breach must be difficult or impossible to determine; and (2) the amount of the liquidated damages must bear a reasonable relationship to the actual damages anticipated to be incurred. This seems to contradict the idea of “liquidated direct damages” because eliminating consequential damages leaves only recovery for damages which should not be difficult or impossible to determine at the time the contract is entered into. However, Idaho courts have held that the fact that there is an accepted means of calculating damages does not necessarily mean that the amount of the damage will be easily determined.

Liquidated damages, although likely inclusive of consequential damages, are somewhat beneficial to contractors in that they define a limitation of risk resulting from construction delays. Contractors should discuss what types of costs a liquidated damages provision is intended to cover when negotiating contract terms with an owner and try to limit the recovery amount to direct damages.

Additionally, contractors should consider including a liquidated damage provision which applies in the case of owner-caused delays and disruptions. This way contractors may recover for those overhead, bonding capacity and onsite costs which continue to be incurred as a project is delayed. While the drastic results of an award of consequential damages have been addressed by A2011997, neither party is entirely without crafting a liquidated damage provision which attempts to address delay damages.

Contractors should consider having their legal consultant periodically review their contracts to manage their risk exposure in the contract’s liquidated damage provisions and in language pertaining to consequential damages.

(Published in the Idaho Business Review, January 2007)

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