Supreme Court of Michigan Rules in Favor of General Contractor and Clarifies the Accrual of Indemnification Claims in the Construction Industry
After nearly a decade of litigation, on April 15, 2014, the Michigan Supreme Court issued its second opinion in the case of Miller-Davis Company v. Ahrens Construction, Inc. and Merchants Bonding Company, No. 145052 ("Miller-Davis II"). In Miller-Davis Co. v. Ahrens Constr., Inc., 489 Mich. 355 (2011)("Miller-Davis I"), the Supreme Court held that breach of contract actions against contractors are governed by the six year period of limitations under MCL 600.5807(8), and not the Statute of Repose, MCL 600.5839, which applies only to tort actions against contractors and design professionals. Because the decisions by the Michigan Court of Appeals in both Miller-Davis I and Miller-Davis II conflicted with the standards, practices, and expectations of the construction industry, Clark Hill PLC filed amicus curiae briefs on behalf of the Associated General Contractors of Michigan (AGC of Michigan), providing the Supreme Court with an industry perspective of the devastating effect the Court of Appeals decisions would have on the industry as a whole.
In Miller-Davis II, the Supreme Court was confronted with a request to review the decision of the Michigan Court of Appeals that the general contractor was not entitled to indemnification from its subcontractor. Specifically, the Court of Appeals had held that: 1) the indemnification obligation was not triggered because no one had brought a formal claim or demand against the general contractor; 2) the general contractor failed to prove that the problems encountered by the owner were caused by the subcontractor's failure to comply with the plans and specifications; and 3) the indemnification claim was time-barred by the six year statute of limitations under MCL 600.5807(8) because it accrued at the same time as the underlying breach of contract claim, i.e. when the subcontractor breached the contract by failing to comply with the plans and specifications.
Background: Miller-Davis, the general contractor, hired Ahrens Construction, Inc., a subcontractor, to install the roof system in the natatorium for the Sherman Lake YMCA ("YMCA"). After a certificate of substantial completion was issued in 1999, the YMCA experienced excessive condensation in the natatorium. Miller-Davis notified Ahrens of the moisture problem and Ahrens returned to complete remedial work, but the problems persisted. When the project architects opened the roof, they discovered significant deficiencies with Ahrens' installation of the roofing system, and determined that it was not in substantial compliance with the contract plans and specifications. Miller-Davis notified Ahrens and its surety of the default and the parties met to discuss remedial measures. After Ahrens failed to provide a corrective work plan, Miller-Davis explicitly declared Ahrens in default and terminated Ahrens' right to perform the contract. Miller-Davis then entered into an agreement with the YMCA to perform corrective work, and subsequently filed suit against Ahrens for breach of contract and for indemnification for the costs of correcting the roof.
Supreme Court's Reversal: The Supreme Court of Michigan reversed the decision of the Michigan Court of Appeals as it related to the indemnification claim. The Supreme Court first reasoned that the successful resolution of the dispute between Miller-Davis and the YMCA without having to resort to litigation did not alter Ahrens' obligations to indemnify Miller-Davis for the costs of the corrective work. The Court concluded that the indemnification provisions did not require the YMCA to prove liability or initiate a legal proceeding against Miller-Davis for Miller-Davis to seek indemnification from Ahrens for the corrective work.
Second, although causation is an essential element of any breach of contract claim, the Supreme Court noted that the Court of Appeals focused on the wrong damages. There was no dispute that Miller-Davis incurred costs in undertaking the corrective work and that Miller-Davis claimed those costs as damages. Therefore, the Supreme Court reasoned that "to the extent that Ahrens was obligated to indemnify Miller-Davis for the costs of the corrective work, its breach of that obligation caused Miller Davis' claimed damages. Whether Ahrens' nonconforming work caused the [moisture problem] is not relevant to this analysis."
Finally, consistent with the position urged by the AGC of Michigan, the Supreme Court concluded that Miller-Davis' claim for indemnification survived the statute of limitations pursuant to MCL 600.5807(8). The Supreme Court noted that the Court of Appeals failed to recognize that Ahrens breached the contract twice: 1) when it failed to install the roof system in accordance with the contract; and 2) when it refused to indemnify Miller-Davis for the corrective work. The Supreme Court agreed that the breach for failure to perform in accordance with the plans and specifications indeed accrued more than six years before Miller-Davis filed its complaint and was therefore barred under MCL 600.5807. However, the Supreme Court held that Ahrens' breach of its indemnity obligations provided the basis for an independent cause of action or claim which accrued when Miller-Davis "sustained the loss" by incurring costs to perform the corrective work. The breach of the indemnification provision necessarily occurred after the breach of the promise to comply with the contract plans and specifications. Accordingly, the Court held that "Miller-Davis' indemnity claim for Ahrens' failure to undertake corrective work is logically distinct from its breach of contract claim for Ahrens' faulty installation of the roof system, and necessarily accrued at a later point." The Court further reasoned that although the claims were both based on terms within the same agreement, nothing in MCL 600.5807 or contract law principles dictated that the claims must share a common point of accrual. Determining that the indemnification claim accrued after the initial notice of the defective work in 2003, the Court concluded that Miller-Davis' claims were well within the six year statute of limitations.
Clark Hill PLC is pleased that it could serve the AGC of Michigan and the interests of the Michigan construction industry in this matter. However, despite the victory for general contractors and the construction industry as a whole, championed by Miller-Davis and the AGC of Michigan, there are several issues regarding the application of the various statutes of limitation and repose which require further clarification by the courts. Because the applicable periods of limitation and accrual dates vary depending on the type of claim and against whom the claim is asserted, and because contractors, architects and engineers use varying types of standard form contracts, you may wish to seek legal counsel to review and revise the indemnification provisions in your contracts and determine the date by which claims must be filed in order to avoid being time-barred.
If you have any questions regarding the application of the various statutes of limitation or any construction issues, contact Thomas M. Keranen at firstname.lastname@example.org, Brian P. Lick at email@example.com or another member of Clark Hill's Construction Practice Group at (313) 965-8300.