Earlier this year, the Oregon Court of Appeals provided further clarification on the application of Oregon’s 10-year “statute of ultimate repose” – ORS 12.135(1) – which bars construction defect lawsuits from being filed 10-years after the statutory period. (For information on Washington’s statute of repose see our blog articles dated March 5, 2013, and August 7, 2012). Oregon’s statute of ultimate repose provides, in relevant part, that:
“[a]n action against a person, whether in contract, tort or otherwise, arising from such person having performed the construction, alteration or repair of any improvement to real property * * * shall be commenced within 10 years from substantial completion or abandonment of such construction, alteration or repair of the improvement to real property.
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“(3) For purposes of this section, ‘substantial completion’ means the date when the contractee accepts in writing the construction, alteration or repair of the improvement to real property or any designated portion thereof as having reached that state of completion when it may be used or occupied for its intended purpose or, if there is no such written acceptance, the date of acceptance of the completed construction, alteration or repair of such improvement by the contractee.”
(ORS 12.135(1) and(3)). In a recent case the Oregon Court of Appeals consolidated three appeals to discuss Oregon’s statute of ultimate repose in a case involving the construction of a hotel and to decide whether (1) the owners’ negligent construction claim is barred against the general contractor and (2) the general contractor’s third party claims for indemnity are barred against two subcontractors.[i][ii] On February 13, 1997, the owners filed a “Notice of Completion” (for lien purposes under ORS 87.045), Washington County issued a Certificate of Temporary Occupancy (“TCO”), and the hotel began operations and accepting guests. Washington County issued the final Certificate of Occupancy (“C of O”) on September 24, 1997, after additional work was completed and county approvals were made. The owners subsequently sold the hotel in 2006, and the new owners discovered multiple, significant construction defects with the “building’s envelope and other components,” resulting in water intrusion and property damage.
The new owners filed suit for negligent construction against the general contractor on May 23, 2007 – more than 10 years after the “notice of completion” was recorded, but less than 10 years after the C of O was issued on September 24, 1997. The general contractor filed a third-party lawsuit for defense and indemnity against relevant subcontractors. The general contractor moved for summary judgment and dismissal arguing the owners claims were barred by ORS 12.135(1) because the “notice of completion” issued on February 13, 1997, constituted a qualifying “written acceptance” under the first clause of the ultimate repose statute. The trial court decided the “notice of completion” did not constitute a “written acceptance” under the first clause of the statute. However, the trial court reasoned that the existence of the notice in combination with select terms of the construction contract, evidence that the hotel was occupied and commenced operations, and lack of evidence that work performed after February 13, 1997, were a subject of the owners’ claims, meant the project was substantially completed, which satisfies the second clause of the statute that provides absent “written acceptance” the statute begins to run on “the date of acceptance of the completed construction…” The subcontractors also moved for summary judgment under ORS 12.135(1) against the general contractor’s indemnity claims, and the trial court also granted their summary judgment motions. The owners appealed the general contractor’s summary judgment, and the general contractor appealed the subcontractors’ summary judgments.
The Court of Appeals first held, “no matter how much work has been done on an improvement to real property, that improvement will be considered ‘substantially complete’ under the first clause of ORS 12.135(3) only if the contractee has accepted in writing that it has ‘reached that state of completion when it may be used or occupied for its intended purpose.'” The Court of Appeals then agreed that nothing about the February 13, 1997, “notice of completion” purports to constitute “written acceptance” under the first clause of the statute. The Court disagreed, however, that the notice or any other evidence established – as a matter of law under the second clause of the statute – that the original owners had “accepted” the “completed” improvement on February 13, 1997. The Court of Appeals held that “substantial completion” only applies to the first clause of the statute and that use of the term “completed” under the second clause “does not incorporate any notion of less-than-total completion.” The Court cited to Webster’s Dictionary to distinguish “substantial completion” from actually “completed.” The Court of Appeals then held that a jury could infer from the evidence that the original owners would not have “accepted” the construction as “completed” until all the remaining work was finished and final approvals from the County were obtained on September 24, 1997. Thus, the summary judgment against the owners was reversed and remanded.
In the same decision, the Court of Appeals upheld the trial court’s dismissal of the general contractor’s indemnity claims against the subcontractors. The general contractor’s primary argument was that the duty to indemnify does not “arise from” the subcontractor’s performance of construction, but from the indemnity provisions in the contract. The Court of Appeals disagreed and held (again, with the help of Webster’s dictionary) that “arise from” as stated in ORS 12.135 applies to indemnity actions against subcontractors because any “contractual right to indemnity  necessarily would arise from the subcontractors’ performance of their contractual construction-related duties.” Once the Court of Appeals established the statute of ultimate repose applied to the indemnity claims, the court then held that the indemnity claims were barred because the general contractor conceded in its summary judgment and appeal that its indemnity claims were not commenced within the 10 years of the hotel’s substantial completion. The Court does not elaborate whether the general contractor’s concession qualifies as a “written acceptance” of “substantial completion.”
This is obviously a tough decision against general contractors. An owner is not barred from pursuing claims against the general contractor based on when the owner accepts a “completed” project, yet under the same facts the statute bars a general contractor from seeking indemnity from the subcontractors because the general contractor concedes the building was substantially completed. Under this scenario, how does a general contractor successfully bar an owner’s claim under the statute without conceding substantial completion? Ironically, the Oregon Court of Appeals concludes its decision by quoting the following from a previous decision:
“As with other statutory periods of ultimate repose, the 10-year period in ORS 12.135(1) serves two purposes: (1) to avoid “the lack of reliability and availability of evidence after a lapse of long periods of time;” and (2) to allow people, “after the lapse of a reasonable time, to plan their affairs with a degree of certainty, free from the disruptive burden of protracted and unknown liability.” (internal citations and quotation marks omitted).”
The Court goes on to state, “[w]e perceive no reason why those rationales do not apply as strongly to general contractors’ claims against subcontractors as they do to property owners’ claims against general contractors…” It appears Oregon’s statute of ultimate repose does not only apply as strongly, but more strongly against general contractors.
[i] PIH Beaverton LLC v. Super One, Inc., 254 Or.App. 486 (2013).
[ii] The owners also argued that the statute of repose under ORS 12.115 should apply, should ORS 12.135(1) bar their claims against the general contractor. The Court of Appeals further held that ORS 12.135(1) controls construction claims over the more general negligence provision limiting suit under ORS 12.115.