A Contractual Defect: Washington Supreme Court Rules Contractual Time-Limitation Provision Unenforceable in Construction Defect Case

From the Desk of Brian Schiewe:

The general rule in Washington is that contracting parties will be bound to the terms of their agreement. However, sometimes contract provisions can be found substantively unconscionable and therefore void and unenforceable. Here, the Washington Supreme Court analyzed a construction contract that limited the statutory rights of one of the parties and determined that the provision was unconscionable because the limit to file a claim was substantially shorter than the statute of limitations.  

Claims Pointer:

In this 5-4 decision, the Washington Supreme Court addressed the validity of a provision in a construction contract that limited the statutory time-limit for a plaintiff to sue under that contract from six years to one year. The Court ultimately held that provisions that limit a contracting party’s statutory rights can be substantively unconscionable when they burden one party and benefit the other.

Tadych v. Noble Ridge Constr., Inc., 200 Wash.2d 635 (2022).

Facts:

The Tadych family contracted with defendant Noble Ridge Construction to build a custom home. The relevant construction contract for the home build included a warranty provision that limited the time to bring any claim arising from the construction project to either one year after the completion of the contract, or the Owner’s first occupancy of the home, whichever came first.

In April 2014, the Tadychs moved into the completed home. In February 2015, the family noticed that the house was shifting and that the flooring had become unlevel. The Tadychs hired a construction expert to review these issues. The expert reviewed photos and the architectural plans of the house and reported that the home’s ventilation system may not be up to code. The Tadychs informed their home contractor of their expert’s findings and the potential issues with the home within the one-year contract limitation period. In response, the contractor assured the Tadychs that there was no problem with the house and discouraged the Tadychs from pursuing litigation.

Months later, after the one-year contract limitation period had passed, even more problems with the house arose. The contractor repeatedly promised to make repairs and assured that any necessary repairs would be completed by January 2017. No repairs were ever performed.

After several months of no response from the contractor, the Tadychs hired a construction expert to examine the house. The expert discovered significant construction defects in the home including water intrusion, code violations, poor structural framing, and poor structure ventilation.

In late 2017, the Tadychs filed suit for breach of contract against Noble Ridge. Noble Ridge moved for summary judgement, arguing that because the Tadychs had filed suit outside of the one-year limit detailed in the warranty provision of the construction contract, that their claim should be dismissed. The trial court granted this motion and awarded Noble Ridge attorney’s fees and costs. The Court of Appeals affirmed. 

Law:

Under RCW 4.16.310, a plaintiff must bring their claim within six years after substantial completion of construction, or within six years after the termination of construction services under RCW 4.16.300, whichever is later.

Additionally, Washington courts will not enforce terms in contracts found to be “unconscionable.” An unconscionable term in a contract is one that is “one-sided or overly harsh,” “[s]hocking to the conscience,” “monstrously harsh,” or “exceedingly calloused.” Gandee v. LDL Freedom Enterprises, Inc., 176 Wash. 2d 598, 603, 293 P.3d 1197, 1199 (2013).

Contractual provisions can be substantively unconscionable if they impact statutorily established rights in a manner contrary to public policy. Adler v. Fred Lind Manor, 153 Wash.2d 331, 103 P.3d 773; Gandee, 176 Wash.2d 598, 293 P.3d 1197. Previous Washington Courts have deemed contractual provisions that function to reduce a statute of limitations from 3-4 years to 180 days or less to be substantively unconscionable. Gandee, 176 Wash.2d at 607, 293 P.3d 1197.

Analysis:

In this case, the Supreme Court considered whether the warranty provision in the construction contract that limited the time to bring claims relating to the construction of the house to one year was substantively unconscionable. The Court analyzed RCW 4.16.310, which provides that actions for construction defects must be brought within six years of substantial completion of construction or of termination of the construction services, whichever is later. The Court noted that while the Tadychs did file suit outside of the one-year contractual time limit, they had filed suit within three years of discovering the construction defects, making their claim timely under the statutory time limit established by RCW 4.16.310.

As to the limitation provision itself, the Court noted the one-sidedness of the contractual time limit and that the provision functioned to advantage the contractor and disadvantage the homeowner, in contradiction to the public policy goals of RCW Chapter 14. Specifically, the Court noted that the RCW 4.16.310 statutory period served to balance the rights of both parties, giving the homeowner an appropriate time period to discover a defect and bring a suit and giving the contractor certainty that their potential liability will end after six years.

The Court emphasized that a contract provision becomes substantively unconscionable when it eliminates otherwise established statutory rights and is one sided, benefiting the contract drafter, is not prominently set out in the contract, is not negotiated or bargained for, and provides no benefit to the affected party, To this end, the Court noted the unequal bargaining power between the Tadychs and Noble Ridge, the fact that the warranty provision was not prominent (hidden deep within the body of a 14-page contract) and that the provision itself, while included in the warranty section of the contract had “little, if anything, to do with a warranty.” The Court additionally noted that there was no evidence that the Tadychs ever had any chance to bargain or negotiate with Noble Ridge regarding the provision.

Based on this analysis, the Court concluded that the limitation provision was substantively unconscionable, and therefore void and unenforceable.

Big Picture:

For contracts that include claims limitation provisions, these provisions may still be enforceable if thoughtfully drafted to address the unconscionability factors discussed in Tadych. Contract drafters may consider making the language more prominent (e.g., in bold and large font), adding specific acknowledgements, and space for the parties to initial to confirm that it has been reviewed and bargained for, and increasing the limitation period. However, defending these types of claims based on a contractual limitation post-Tadych is no guarantee.