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November 3, 2022
In a 5-4 decision, the Washington Supreme Court recently ruled in Tadych v. Noble Ridge Construction, Inc. that a contract provision providing a one-year limitation period for filing a construction defect lawsuit was “unconscionable” and therefore unenforceable.
The court's ruling revives a lawsuit filed by Gregory and R. Sue Tadych against their homebuilder, Noble Ridge Construction (NRC) for alleged construction defects in their Seattle home. The case also calls into question the enforceability of other contractual time limitations on claims, which are common in construction contracts.
The trial court had granted NRC summary judgment because the Tadychs did not file suit within one year of occupying the home, as required by a provision in their construction contract. The Washington Court of Appeals affirmed the trial court's ruling, but the Supreme Court reversed and remanded the case for trial, reasoning that the one-year limitation provision is “substantively unconscionable” because it “unduly benefits the contractor at the expense of the homeowner's right to bring a legitimate claim” that would otherwise be allowed under the six-year statutory limitation and repose period provided by the Revised Code of Washington.
The Tadychs executed their contract with NRC in 2012. The contract included a warranty provision that stated in relevant part:
“Warranty ... Any claim or cause of action arising under this Agreement, including under this warranty, must be filed in a court of competent jurisdiction within one year (or any longer period stated in any written warranty provided by the Contractor) from the date of Owner's first occupancy of the Project or the date of completion as defined above, whichever comes first. Any claim or cause of action not so filed within this period is conclusively considered waived.”
The Tadychs moved into their home in April 2014. In February 2015, the Tadychs observed that their home had shifted and their flooring was unlevel. NRC assured the Tadychs the home was fine and promised to fix the flooring. Over the next two years, the Tadychs notified NRC of various other issues with their home, which NRC repeatedly promised to fix but never did. In early 2017, the Tadychs hired an expert who identified numerous construction defects in the home. On Aug. 1, 2017, well after the one-year period had elapsed, the Tadychs filed a lawsuit against NRC for breach of contract.
NRC moved for summary judgment, citing the one-year contractual claim period specified in the contract. The trial court granted NRC's motion and awarded NRC close to $160,000 in attorney's fees and costs pursuant to an attorney fee provision in the contract. The Tadychs appealed the decision, arguing, among other things, that the one-year limitation period is substantively unconscionable.
The Court of Appeals affirmed, but the Supreme Court accepted review and reversed. The court noted that a contract term can be deemed substantively unconscionable if it is “one-sided or overly harsh,” “shocking to the conscience,” “monstrously harsh,” or “exceedingly calloused,” and its analysis focused on whether the contract limits a statutorily established right. The court found that the one-year limitation provision in the Tadychs' contract deprived them of their ability to exercise their statutory right to seek damages for faulty construction within the six-year period allowed by statute. In effect, the court reasoned that the Legislature's balancing of competing interests in enacting statutes of limitation and repose should be weighed heavily against the parties' ability to privately order their own time limitations.
However, the court also went out of its way to note that the Tadychs are “laypersons,” that NRC drafted the contract, that the warranty provision was buried within several paragraphs, and that “(no) indication exists that this one-sentence (claim limitation) provision was bargained for, negotiated, or any separate consideration paid.” These facts, indicative of a disparity in bargaining power and legal sophistication between the contractor and the homeowner, appear to have been central to the majority's decision.
The court stated the new rule as follows: “A contract provision becomes substantively unconscionable when it eliminates otherwise established statutory rights and is one sided, benefiting the contract drafter, is also not prominently set out in the contract, is not negotiated or bargained for, and provides no benefit to the affected party.” It remains to be seen whether the Tadych decision will be limited in its applicability to similar factual scenarios involving an imbalance of bargaining power and legal sophistication between laypersons and businesses, and whether limitations on claim timing in construction between sophisticated negotiating parties will remain enforceable.
A vigorous dissent argued that one year to bring a lawsuit is not unreasonable, particularly given that the Tadychs were aware of problems with their home within the first year of occupancy. The dissent also pointed to prior Washington cases in which contractual limitations periods were enforced, cases that the majority did not distinguish.
Home purchasers can learn a valuable lesson from this new decision: Read contracts with care, both at the time of the transaction and later. Had the Tadychs reviewed the warranty clause when they first noticed problems with their home and commenced a timely lawsuit, they could have avoided years of costly litigation.
There are lessons here for home sellers too. To manage risk by limiting purchaser claims, consider the following (all of which would need to be adapted to the needs of a specific transaction):
Make limitations on the purchaser's rights prominent (bold type, larger font size) to avoid any suspicion that the clause was not understood.
Tie the purchase price to the protective clauses, e.g., “The purchase price is based on the claim limitation clause; an extension of the claim limitation period is available at an additional charge.”
Offer warranty walk-throughs during the claim period.
Promptly fix problems noted.
As with any court decision, care should be taken to understand the reasoning and context when applying it to a new set of facts.
Karl Oles, Mark Barak, Evan Brown and Sean James are attorneys based in the Seattle office of Stoel Rives LLP. Oles, Barak and Brown are members of the firm's Real Estate, Development & Construction practice group, and James is a member of the firm's Litigation practice group.