Now You See it, Now You Don’t, Now You See It Again (Maybe)-Contribution & Indemnity Claims Under § 541.051

Now You See it, Now You Don’t, Now You See It Again (Maybe)-Contribution & Indemnity Claims Under § 541.051

August 1, 2007

By Stephen A. Melcher

“Don’t it always seem to go, that you don’t know what you got ‘til it’s gone?” 
(Joni Mitchell, 1970)

With all of the changes to Minn. Stat. § 541.051 during the past fifteen months, it’s hard to keep track of how construction claims are being affected by this important statute. So, if you’re asking yourself, “What is the status of my claim under § 541.051?,” you’re not alone. Knowing the answer to this question may mean the difference between saving or losing a valuable claim.

For more than 40 years, the statutory limitations and repose periods in Minn. Stat. § 541.051 have closely regulated the ability of parties to sue for claims arising out of the design or construction of a defective and unsafe improvement to real property in Minnesota. The statute’s relatively brief limitations period and repose period work together in an attempt to achieve a balance between providing a fair opportunity for recovery by injured parties and providing construction industry participants relief from open-ended exposure to claims long after a project has been completed.

The rules under Minn. Stat. § 541.051 are a moving target. The statute has been the subject of numerous amendments and court interpretations over those 40 years, resulting in an ever-changing legal landscape as the court and legislature clarify and modify the statute. On a few occasions, the court’s interpretation of the statute has signaled the need for still further legislative action to address (or counteract) specific aspects of a court’s decision.
An example of this occurred this past year, in fact, when the Minnesota Supreme Court’s interpretation of the statute in Weston v. McWilliams & Assoc., Inc., 716 N.W.2d 634 (2006) raised such great concern within the construction industry that it spawned a successful effort to lobby the legislature to amend the statute and reverse the effect of the Court’s decision this year. Such changes to the statute have very significant effects on all participants in the construction industry.

This Briefing Paper will: (1) provide a brief summary of Minn. Stat. § 541.051 and how it affects claims; (2) explain the Court’s startling interpretation of the statute and its dire ramifications on construction industry participants caught between claimants and the responsible parties; (3) note the construction industry’s strong reaction to the Court’s interpretation; (4) explain the legislature’s corrective amendment to the statute this year and the current status of claims affected by the amendment; and (5) flag some questions that have surfaced in the wake of the revised statute that will, no doubt, be the subject of further court decisions during the next several years.

1.  Fundamentals of § 541.051

In order to appreciate the significance of the Weston decision, it is important to have an understanding of the fundamental provisions of § 541.051.[1] At the heart of the statute are two basic deadlines.

First, the statute establishes a deadline for commencing a lawsuit[2] of two years from the date when the claimant discovered (or reasonably should have discovered) that it had suffered some injury to person or property. This two-year deadline is called the “limitations” period.

Second, the statute establishes a deadline for a cause of action to accrue (one might think of this as a deadline for discovering the injury to person or property) of ten years from the date when the project was substantially completed. This ten-year deadline demarcates the time after which it is no longer possible for a claim to arise. In other words, even if an injury becomes apparent to an injured party, it is too late to seek legal redress for the injury. This ten-year period is called the “repose” period.[3]

Applying these basic principles to a construction project consisting of a commercial office building and parking lot, let’s assume that the project is substantially completed on December 31 of Year 0, and that major sinkholes show up in the parking lot on May 1 of Year 5. The Owner of the project would need to bring its lawsuit within the two-year limitations period and, so long as the Owner commenced the lawsuit by May 1 of Year 7, it would be allowed to pursue its claim for damages to the parking lot. Now, let’s assume that in year 11 major cracks are discovered in the walls of the building. Because this injury was not discovered until after the ten-year repose period, the Owner would be precluded from pursuing a claim for the damage to the building.

So far, we have been discussing how the statute applies to the claims between the injured party and those most closely associated with the injured party. In our example of the damaged parking lot and building, the project Owner (the injured party) would typically sue the party that it contracted directly with, e.g., the designer and/or the general contractor. Those parties who are sued by the Owner could, in turn, assert “third-party” contribution or indemnity claims against others who are more directly responsible for the damage. We will now look at how the statute applies to these third-party contribution and indemnity claims.

In the case of the parking lot defects, for example, the lead designer might turn to its civil engineering consultant and the general contractor might turn to its grading and paving subcontractors. Under § 541.051 as it was generally interpreted prior to the Weston decision, neither the designer nor the general contractor were under any immediate time constraints to bring such third-party claims. Because the general contractor and architect did not actually suffer the injury (i.e., it was not their parking lot that was damaged), the statute allowed them to assert their third-party contribution and indemnity claims any time within two years of the date they actually paid the Owner, whether such payment was as a result of a negotiated settlement, arbitration award or a court judgment. Therefore, the general contractor and designer could choose to bring their third-party claims as part of the ongoing lawsuit commenced by the Owner, or they could wait to see how that lawsuit turned out and decide later whether it made sense to pursue such other parties. So long as they asserted their third-party claims within two years of actually paying the Owner, their third-party claims were considered timely under the statute. As discussed next, it is this aspect of the statute, i.e., the timeliness of third-party contribution and indemnity claims, that was upended by the Weston decision.

2.  Contribution & Indemnity under Weston

In Weston, the Minnesota Supreme Court held for the first time that a party’s third-party contribution and indemnity claims, in addition to being subject to the two-year limitations period, are also subject to the ten-year repose period.

In Weston, the general contractor had been sued by a home owner late in Year 10 for water intrusion problems. Assuming it could bring third-party contribution and indemnity claims against its subcontractors and supplier any time within two years of its paying the home owner, the general contractor did not feel any urgency to assert such claims when it was initially sued and, instead, held off asserting its third-party claims until Year 11. To the general contractor’s surprise and dismay, however, the Minnesota Supreme Court threw out the general contractor’s lawsuit against its subcontractors and supplier saying that the general contractor could not even have a claim for contribution or indemnity unless it had paid the owner prior to the expiration of the ten-year statute of repose. Because the general contractor had not paid the owner’s claim within the ten-year repose period, its potential claim for contribution or indemnity was snuffed out before it ever came into being. In essence, the game clock had run out before the general contractor could get possession of the ball.

3.  Industry’s Reaction to Weston

The repercussions of Weston sent a shock-wave throughout the construction industry. The practical implications of Weston meant that a general contractor sued by an owner (for example) could no longer assume that it would be able to hold its subcontractors and suppliers responsible for contributing to the owner’s damages. Regardless of whether the general contractor was sued in Year 1 or Year 10, the general contractor would have to pay the owner’s claim before the end of Year 10 in order to pursue its third-party contribution and indemnity claims.

And that’s not even the worst of it. Because the statute allows the owner to bring its lawsuit against the general contractor (for example) within two years after discovering its injury, an owner that discovered damage to its project during Year 9 or Year 10 could sue the general contractor any time before the end of Year 11 or Year 12, respectively. So, if the owner waited until Year 11 or Year 12 to sue the general contractor, it would be practically impossible for the general contractor to pay the owner’s claim before the end of Year 10 and, therefore, the general contractor would have absolutely no opportunity to hold its subcontractors and suppliers liable for their share of the damage.

This result was so illogical and unfair that, within days of the announcement of the Weston decision, efforts were underway to craft legislation to amend the statute during the 2007 session.[4]

4.  Legislative Response to Weston

On May 21 2007, the Minnesota legislature enacted an amendment to § 541.051 that effectively reversed the impact of the Weston decision. First, the statute now provides that the ten-year repose period has no application to a contribution and indemnity claim. Under the amended statute, the general contractor (for example) can bring its third-party claim any time within two years of its accrual without regard to the ten-year repose period. In this respect, the amendment essentially restored the commonly-held interpretation of the statute prior to the Weston decision.

The amendment goes further, however, and redefines when a third-party contribution or indemnity claim accrues for purposes of applying the two-year limitations period.

Prior to the amendment, such a contribution or indemnity claim accrued when the general contractor paid the owner’s claim (using our earlier hypothetical for illustrative purposes). The amended statute now states that such a contribution or indemnity claim accrues when the general contractor is sued by the owner (or pays the owner’s claim, whichever occurs first[5]).

So, under the amended statute, if the owner sues the general contractor (for example) in Year 11 or Year 12, the general contractor’s contribution and indemnity claims will not be snuffed out before the general contractor has an opportunity to assert them against its subcontractors and suppliers, as was feared in the wake of Weston. Instead, the general contractor has a full two years from when it is sued by the owner to bring its third-party claims against any responsible subcontractors and suppliers.

Unlike the manner in which the statute had been interpreted prior to Weston, however, the general contractor (for example) can no longer wait an indefinite period of time to see whether it makes sense to pursue the contribution and indemnity claims. Under the amended statute, the general contractor must assert those claims within two years of being sued by the owner (or paying the owner, whichever comes first).

5.  Lingering Questions

Although the legislature’s amendment of § 541.051 reversed much of the mischief caused by the Weston decision, questions about how the amended statute will be applied remain unanswered. For example, the amended statute is retroactively effective June 30, 2006 (the day after the Weston decision was issued). Did the legislature intend that a party with a potential contribution or indemnity claim who had neither been sued by a claimant under the statute nor paid such a claim more than two years before June 30, 2006, would have a viable contribution or indemnity claim as of June 30, 2006? If so, what about such a party who obtained such a right without realizing it and then lost it before it knew it had such a right?

Take, for example, a general contractor who was sued in April 2005 for work it performed on a project that had been substantially completed in August 1995: (1) before the Weston decision, this general contractor would have probably believed it had two years from the date it paid the claimant to assert its contribution or indemnity claim and it would have been in no hurry to assert those claims; (2) after the Weston decision on June 29, 2006, the contractor would have learned that its contribution or indemnity claim had become barred by the 10-year statute of repose in August 2005; (3) the legislature’s amendment of the statute in May 2007 would have informed the contractor that the 10-year statute of repose did not apply to its contribution or indemnity claim, but that it must bring such a claim within two years of being sued, i.e., by April 2007. Thus, this general contractor would not have had notice of its revived rights under the amended statute in time to assert them. Does this comport with the legislature’s intent? Does it comport with due process as required by the Minnesota and U.S. constitutions? These and other questions will undoubtedly need to be resolved by future court decisions and, if necessary, further legislative action. Stay tuned . . . !

This discussion is generalized in nature and should not be considered a substitute for professional advice. © FWH&T

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