Contractors and subcontractors should be aware of their lingering liability under contractual indemnity provisions that might currently be overlooked. These obligations and the potential for liability can outlast other types of contract claims because they might not accrue until long after the project is done.
Statutes of limitation and repose bar claims that are not timely made. It is critically important to understand when the clock begins to run (i.e., when the claim “accrues”) to determine whether a claim is viable, or liability still exists. A typical claim for breach of contract is subject to a six-year statute of limitations, accruing on the date of the breach. Construction contracts also commonly include indemnity provisions, obligating one party to indemnify the other for third-party claims arising out of the work performed. Distinctly different from the accrual of a typical breach of contract claim, a claim for breach of an indemnity obligation does not accrue (the clock doesn’t start running) until a party refuses to indemnify. This important distinction was the focal point of the Michigan Supreme Court’s decision in Miller-Davis Company v. Ahrens Construction, Inc.
In Miller-Davis, the general contractor, Miller-Davis, sued its subcontractor, Ahrens, on two theories: (1) breach of contract for installing a roof that did not conform to the plans and specifications; and (2) indemnity. Ahrens completed its work in April 1999. Miller-Davis filed its lawsuit in May 2005. After winding its way through the appellate court system, the Supreme Court eventually concluded that the breach of contract claim for defective work was clearly time barred because Miller-Davis filed its lawsuit more than six years after Ahrens failed to perform in accordance with the contract.
The key issue before the court was whether the claim for contractual indemnity was also time barred, and more specifically, when did the claim for contractual indemnity accrue. In its analysis, the court considered that a breach of indemnity “necessarily occurred” after Ahren’s breach of the underlying promise to install the roof system according to specifications. Logically then, the statute of limitations did not begin to run until Ahrens refused to indemnify Miller-Davis. The facts in the case were not clear as to when Ahrens refused indemnity. The court implied a refusal at one of three points: (1) when the nonconforming work was discovered; (2) when Miller-Davis was forced to correct the work; or (3) when the corrective work was completed. Because Miller-Davis sued Ahrens within six years of each of these three points, its claim for contractual indemnity was not time barred.
The takeaway? The contractual duty to indemnify may arise well after completion of the project or even after the typical breach of contract claim for defective work expires. This could mean extended protection for an indemnitee and, correspondingly, extended exposure to liability for an indemnitor beyond what the indemnitor otherwise might have expected. Like the in-laws that overstay a visit, liability under an indemnity obligation may come as an unwelcome surprise.