Perils of third party practice in construction litigation: avoiding substantive and procedural pitfalls to preserve and assert your rights.

• Author: Kubes, Jeffrey T.

THIS article highlights some of the substantive and procedural issues and pitfalls that may arise in construction litigation where an owner seeks to recover economic losses and/or other damages from some (but not all) of the entities that were involved in a construction project, but who may not be solely responsible for the owner's alleged damages. Numerous contractual and quasi-contractual relationships exist in this type of litigation and practitioners must decide early in the litigation what third parties should be brought into the litigation, what type of claim should be asserted, and when that claim should be asserted. Although the decision that practitioners reach will necessarily depend upon the forum in which suit is brought and the substantive law that applies, this article intends to alert practitioners to anticipate issues to consider early in litigation and to avoid potential pitfalls.

Who Can Be a Third-Party Defendant?

A defendant can file a third-party complaint against any person who is not a party to the action and who is or may be liable to the third-party plaintiff for all or part of the plaintiff's claim against the third-party plaintiff. (1) Depending upon where the lawsuit is brought, a defendant need not obtain leave of court to file a third-party complaint so long as the third-party complaint is filed within the time the defendant is required to answer the complaint. (2)

What Type of Claims Can Be Asserted?

Generally, the only claims that may be brought in a third-party complaint are those claims that are derivative in nature, i.e., the claim must seek to pass some or all of the defendant's liability to the plaintiff or to the third-party defendant. (3) Where the claim is not derivative in nature, it is not properly asserted as a third-party claim. One type of derivative claim is a right of indemnity. Indemnity is a common-law doctrine that shifts responsibility for a loss from a party who has been compelled to pay a loss to another party who was actually at fault. The right to indemnity may be expressed or implied in law based upon the parties' relationship. Examples of quasi-contractual relationships that give rise to a duty to indemnify include: lessor and lessee, employer and employee, owner and lessee, and master and servant.

An example of express indemnity is where A (architect) and O (owner) expressly agree that A will indemnify O for any damages O incurs that are caused by A's design errors or omissions. An example of implied indemnity is where A contracts with E (engineer) to prepare structural drawings to be incorporated into A's design for O. After construction is completed, O discovers numerous structural defects in the building and demands that A pay the cost to repair the defects. A makes payment to O and then files suit against E for indemnity. The term indemnity used here contemplates the situation where E's breach of its contract with A caused A to breach its contract with O. A's claim against E is for breach of con-tract seeking indemnity for any damages A had to pay O that resulted from E's breach of its contract with A.

Another derivative claim that is frequently raised via a third-party complaint is a fight of contribution. A direct defendant who is sued in tort may be able to assert a claim for contribution against a third party who the plaintiff did not (or could not) file suit against, seeking to have a judge or jury apportion liability among the defendant and third party based upon the pro rata fault of each party. (4) A claim for contribution can generally only be asserted against a third party if the defendant/third-party plaintiff and the third-party defendant are "subject to liability in tort" for the plaintiff's alleged injuries or damages. (5) Consequently, where the plaintiff is seeking to recover solely economic losses, a contribution claim is unavailable. (6)

The following examples present some of the perils of third-party practice in the construction litigation context. The purpose of these examples is not to provide answers, but rather to alert the practitioner to potential pitfalls.

1. Timeliness of Filing Claims for Indemnity

   Hypothetical: O (owner) files suit against G (general contractor) alleging that G breached its contract with O by constructing a home that contained numerous design and construction defects. O voluntarily dismisses its lawsuit twenty months later. After six months, O re-files a new action against G alleging breach of contract and implied warranty of habitability claims. G then files a third-party complaint against S (subcontractor) for breach of contract, alleging that S's failure to perform its work resulted in the damages being claimed by O.

   Question: The state where suit is filed has a four-year statute of limitations that applies to any claims arising out of any act or omission in the design, planning, supervision, observation, or management of construction. (7) The state also has a two-year statute of limitations for filing claims for contribution or indemnity. (8) S moves to dismiss G's third-party complaint, arguing that G failed to file its third-party complaint within the two-year statute of limitations applicable to indemnity actions. Should the court grant S's motion?

   Analysis: The Illinois Supreme Court was faced with a similar question in Guzman v. C.R. Epperson Construction, Inc. (9) Although the facts in Guzman are distinguishable, the court held that third-party claims for indemnity in the construction context must be filed within the two-year statute of limitations for claims for contribution and indemnity, as opposed to the four-year construction statute of limitations. In holding that the two-year statute of limitations applied, the court noted that the general contractor's claim, although designated as one for breach of contract, sought indemnification from its subcontractors for the damages claimed by the plaintiff. The court reasoned that the general contractor's claim was derivative in nature and, thus, fell within the two-year statute of limitations applicable to claims for indemnity and contribution.

   The Guzman court further held that the two-year statute of limitations for filing claims for indemnity and contribution commences when the defendant is served with the original action. In reaching that conclusion, the court looked to the plain language of section 13-204, which provides in pertinent part that:

   In instances where an underlying action has been filed by a claimant, no action for contribution or indemnity may be commenced more than 2 years after the party seeking relief has been served with process in the underlying action or more than 2 years from the time the party or his privy, knew or reasonably should have known of the act or omission giving rise to the action for contribution or indemnity, whichever period expires later. (10) The court noted that section 13-204 of the Illinois Compiled Statutes requires a party seeking indemnity from another party to file its claim for indemnity within two years of being served with summons or when the party knew or reasonably should have known of the act or omission giving rise to the claim for indemnity. (11)

   The majority opinion in Guzman did not address the question of what effect, if any, plaintiff's decision to voluntarily dismiss its original complaint had on defendant's ability to assert a third-party complaint in the re-filed action where the two-year statute of limitations had already expired. A concurring opinion was filed by Justice Harrison, however, raising the issue. Justice Harrison opined that a defendant should be able to assert an indemnity claim in a re-filed action because the re-filed action is not a continuation or reinstatement of the prior action. (12) Instead, once a complaint is voluntarily dismissed and re-filed, it commences an entirely new and separate proceeding, giving a defendant a complementary right of two years in which to raise its claim for indemnity.

   The Guzman decision provided defendants with a bright line of demarcation for when indemnity action claims accrue and, thus, when the two-year limitations period commences to run. However, because the majority did not discuss the effect of a plaintiff's voluntary dismissal of its lawsuit before a defendant files an indemnity claim, a gaping hole exists for the unsuspecting practitioner. In light of that potential pitfall, the practitioner...