In Miller-Davis Company v. Ahrens Construction, Inc., --- NW2d ---, 2012 WL 967840 (Mich. App. 2012), the Michigan Court of Appeals was asked to determine when a general contractor’s breach of contract and indemnity claims accrued against a roofing subcontractor in connection with the construction of a YMCA recreational facility (the “Project”).
The Project consisted of building a natatorium for the YMCA complex and defendant as a subcontractor with the responsibility of installing a proprietary wooden roofing system over which other roofing materials would be installed by other subcontractors. The general contractor alleged that the subcontractor failed to “comply with the terms and requirements of the plan specifications” in constructing the roof and, therefore, breached the parties’ contract.
In holding that the general contractor’s claims were time-barred, the court noted that under MCL § 600.5827, “[a] claim accrues at the time the wrong upon which the claim is based was done regardless of the time when damages results.” Relying upon previous decisions from the Michigan Court of Appeals, the court recognized that “[a] cause of action for breach of a construction contract accrues at the time work on the contract is completed.” Because the subcontractor completed its work on the roof by the end of February 1999, the wrong that the general contractor complained of (i.e., that the subcontractor deviated from the plans and specifications) must have occurred at that date. However, the general contractor did not file its complaint until May 12, 2005, more than six years after February 1999 and more than six years after the general contractor accepted the subcontractor’s work and paid the defendant in full. Based on these facts, the court found that the general contractor’s claims were time-barred.
The court rejected the general contractor’s arguments that the claim accrued at the date the Project was certified as substantially complete or, alternatively, the date the certificate of occupancy was issued. On appeal, the general contractor claimed that it never “accepted” defendant’s work on the roof and, therefore, the “charge-back” provision of the subcontract was breached. According to the general contractor, defendant breached the subcontract when the general contractor demanded in 2003 that it correct the defective work and the defendant refused. In rejecting this argument, the court reasoned:
Although plaintiff asserts in never “accepted” defendant’s work on the roof, plaintiff’s own actions in accepting defendant’s certification that the roof work had been completed, and then paying for that work, speaks louder than its litigation denials.
The final contract claim asserted by the general contractor was that the subcontractor breached the indemnity clause by not reimbursing the general contractor for the costs of the 2003 corrective work, lost business profits, and attorneys’ fees for this action. The trial court below rejected this argument ruling that plaintiff had no cause of action for contractual indemnity because “no claims, suits, actions, recoveries, or demands were ever made, brought or recovered against” plaintiff within the meaning of the indemnity contract with defendant. While the owner made demands upon the general contractor to correct the defects in the roof installed by the subcontractor, the general contractor voluntarily agreed to perform the corrective work without necessitating a formal claim or lawsuit. The Court of Appeals affirmed the lower court’s ruling and concluded that “no one brought a claim or demand against plaintiff within the meaning of the indemnification clause.” Thus, because no claims or demands were “made, brought or recovered against” plaintiff, the indemnity provision of the subcontract could not be used as an alternative accrual date for its underlying breach of contract claim against defendant. Finally, the court emphasized that indemnity provisions are not intended to be used as a sword or shield in disputes between contracting parties with respect to the performance of the contract itself.
Notably, the court appeared to backtrack on its conclusion that the indemnity provision was not triggered by the owner’s informal demand upon the general contractor to correct the subcontractor’s work. The court suggested that even if the owner’s “demand” was sufficient to trigger the subcontractor’s indemnity obligations, the general contractor had failed to proffer any evidence that the moisture problems were the result of the subcontractor’s failure to perform the work in accordance with the plans and specifications. According to the Court of Appeals, the general contractor’s circumstantial proofs were mere conjecture and did not “facilitate reasonable inferences of causation.”
This case has important ramifications for how general contractors should respond to demands made by owners to correct defective work performed by subcontractors. It appears from the court’s decision that a formal claim or lawsuit must be asserted against the general contractor before a subcontractor’s indemnity obligations are triggered. Such a ruling will put general contractors in a precarious situation when responding to owner claims involving work performed by subcontractors. Should such situations arise, it is important for the general contactor to proceed with caution and consult an attorney prior to engaging in corrective work.© 2013 BARNES & THORNBURG LLP