By Daniel Katzenbach of Cranfill Sumner LLP
Published March 1, 2022
Three cases have come out in the last year that will significantly impact construction law in North Carolina.
1. The Court in Crescent v. Trussway held that an owner of a commercial project cannot sue a subcontractor or supplier in tort because the contracts in place for the project govern even if there is no contractual relationship between the owner and subcontractor/supplier.
2. The Court in Wright Construction Services v. The Hard Art Studio held that the licensure defense does not apply to professional negligence claims asserted against a design professional by a general contractor meaning that unlicensed contractors can sue design professionals.
3. The Court in Chisum v. Campagna held that the discovery rule for a statute of limitation defense applies to breach of contract claims, therefore plaintiffs’ claims only begin to run at the time the plaintiff becomes aware or should have become aware of the defendant’s breach of contract.
CRESCENT V. TRUSSWAY
Crescent, the developer, retained AP Atlantic (AP) as the general contractor, by written contract, to construct an apartment complex. AP then entered into its own contracts with various subcontractors. The framing subcontractor purchased floor trusses from Trussway. After the project was completed, UNC Charlotte students hosted a “dance party” in one of the apartment units in the complex. As a result of the party, the ceiling of the unit directly below the dance party was sagging and cracking, allegedly as a result of the trusses supplied by Trussway. Crescent sued Trussway directly in tort under a negligence theory.
The key issue in Crescent involved the application of North Carolina’s economic loss rule, which bars recovery in tort by a plaintiff for a “simple failure to perform [under a] contract, even though such failure was due to negligence or lack of skill[,]”. In Crescent, the question was whether the economic loss rule barred an owner of a commercial construction project from bringing a tort claim against a subcontractor or supplier, where the parties had no contractual relationship. Before Crescent, the answer was no, and the owner could sue a subcontractor in tort.
The Court held that since there are contracts in place in commercial projects, even though there was a lack of privity between the parties in the case, those contracts govern the dispute and owners cannot bring a tort claim directly against the subcontractor or supplier. The Court distinguished this case from Oates v. JAG, which was a residential project where the Court allowed the owner to bring a tort claim against a subcontractor. The Court distinguished residential and commercial projects by pointing to the level of sophistication of the parties and contracts, which generally take into account various risk transfer considerations not present in residential contracts.
WRIGHT CONSTRUCTION SERVICES V. THE HARD ART STUDIO
Wright entered into a contract to serve as the general contractor for a mixed-use development. At the time Wright submitted its bid and entered into the contract with the project’s owner, Wright was not yet licensed as a general contractor in North Carolina. The project encountered many delays and design-related issues, and Wright was subsequently terminated. Wright and the owner asserted claims against each other in arbitration. Following arbitration, Wright sued The Hard Art Studio and Collins Structural Consulting, asserting professional negligence.
The issue in Wright was whether Wright’s claims were barred by the “licensure defense,” which bars an unlicensed contractor from recovering against an owner for their breach of contract, because of the lack of valid licensure.
The Court held that the licensure defense does not apply to claims asserted against a design professional by a general contractor because the licensure statute is not meant to protect professionals; it was meant to protect the public. This means that unlicensed contractors can maintain legal actions against design professionals.
CHISUM V. CAMPAGNA
Chisum and Campagna were partners in various commercial real estate businesses where each of their entities were governed by written operating agreements. The partners had a falling out, and Chisum sued Campagna for multiple claims including an assertion that he had breached the entities’ operating agreements.
The issue in Chisum was whether the three-year statute of limitations for the breach of contract claim barred the claims.
For almost 40 years, the North Carolina Supreme Court had held that the statute of limitations for breach of contract claims started to run on the date that the contract was breached regardless of the plaintiff’s lack of knowledge of the claim. This made for a very easy determination of when the statute of limitations had run out, and when the claim was time-barred.
The court overturned its prior opinions and held that, based on “basic notions of fairness,” the discovery rule applies to breach of contract claims, and, therefore, the plaintiff’s claims only “began running at the time that he became aware or should have become aware of the Campagnas’ breaches of the operating agreements.” This is great news for plaintiffs, but not for defendants. This decision will certainly lead to increased litigation regarding when the plaintiff had “discovered” the breach of contract.
THE IMPACT ON FUTURE CONSTRUCTION CLAIMS
For commercial projects, Crescent reduces the risk of tort liability, which generally allows for higher damages for subcontractors and suppliers. Wright increases the risk of tort liability for design professionals, by potentially exposing them to claims by unlicensed contractors. Finally, Chisum increases the risk of liability for breach of contract by essentially extending the length of time for when claims may be brought.
Article written with assistance from Cranfill Sumner LLP clerk Devin Honbarger.