Statute of Repose and Substantial Completion: What You Call It Matters

By Larry Watkins, Esq. (AR)

This post briefly discusses the importance of using the term substantial completion in construction contracts and carefully defining the term in order to realize the protections of a statute of repose.* A statute of repose is a state law that bars claims or relief for an injury if the injury occurred more than a specified number of years after substantial completion of a construction project. The statute applies primarily to claims by third parties but a number of statutes of repose also bar claims by the owner. From Connecticut to California and from Arizona to Arkansas, every state has enacted a statute of repose for construction projects.


A statute of repose is a state legislature’s response to the break-down of privity of contract defenses. Prior to state courts obliterating the privity defenses, injured third parties, such as the owner’s employee or an invitee, could not sue a contractor, architect, engineer, or subcontractor (project participants) because there was no contract between the injured party and any of these project participants. The courts opened a Pandora’s Box when they began allowing third party claims against project participants. For example, an Architect who received a small fee for a design could be liable for millions of dollars in injury damages resulting from the design for many, many years after the project was built and occupied. State legislatures decided to bar such actions if the injury occurred more than 5, years, 10 years, or 15 years from the date of substantial completion.


Although a statute of repose provided much needed protection for construction companies, design firms, and individuals working for them, another problem arose: If a claim is barred after 5 years from substantial completion, when does substantial completion occur? Across the US, state courts have defined substantial completion differently. This problem is further compounded when the customs and terminology for diverse types of industries and projects either define substantial completion differently or do not use the term at all. For example, some contracts for energy and industrial projects define the point when the project has been completely built but not operational as mechanical completion . On the other hand, the same contracts define a completely built and fully operational project as commercial operations or final completion.


The good news is that courts have generally recognized contractual definitions of substantial completion for purposes of starting the clock for a statute of repose. However, this means architects, engineers, contractors, and subcontractors must ensure they do two things: First, besides the schedule, progress payment, retention release, and liquidated damages reasons, make sure the term substantial completion is used in the contract. Second, define substantial completion in such a way that requirements for its achievement are clear and that the definition does not conflict with the applicable statute of repose for the project. Don’t role the dice and allow a court to decide what substantial completion means during your $10 million lawsuit.


In conclusion, states have provided design & construction professionals and firms with a valuable protection against third party claims long after the project has been turned over to the owner. Make sure you take full advantage of your state’s statute of repose.*


*The information in this article does not constitute legal advice and is for general educational purposes only.