Construction Law in North Carolina; Role of Lawyers in Construction Claims

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Construction Law in North Carolina; Role of Lawyers in Construction Claims

The construction of a house or building in North Carolina raises numerous complex
legal relationships, as well as potential claims among these persons. The persons involved in construction are typically the owner, general contractor, subcontractors, inspectors, architect, lender etc. The legal issues which arise are failure to perform, failure to pay, defective work, etc.

photo of outlet  photo of fire damage

This shows an electrical outlet during construction. Faulty wiring
during construction can lead to extensive fire damage later.

Construction disputes and litigation in North Carolina can arise in many contexts. A construction defect, such as defective wiring, during construction can lead to a fire. Similarly, faulty work at windows, roofs, and at the exterior can lead to costly damage later from water intrusion.

photo of house painting
Here, workers paint a house. Injuries on the jobsite can lead to liability for
the owner or for others on the job.

Personal injuries also occur during construction. A worker injured on the site is limited
to a “workers compensation” claim against his direct employer. He can, however, assert
against other trades creating a dangerous condition on the site; as well as a claim against
the general contractor (assuming he works for a subcontractor) or the owner, if those
parties were negligent in creating a dangerous condition or allowing one to exist.

There are many developments in North Carolina construction law. A recent case (December 3, 2013) from the North Carolina Court of Appeals addressed the application of the six year statute of repose to a homeowner’s claim against a builder.

A recent case (August 7, 2012) from the North Carolina Court of Appeals applied the “completed and accepted” doctrine to prevent one worker from suing another worker for his injuries.

People having a claim against a contractor (builder, sub-contractor, architect etc.) often need the assistance of a lawyer to get through the claims process, and to file suit if necessary. The lawyer can help to document the claim (by e.g. taking photographs, consulting with engineers and other experts), and to determine which parties are liable. The lawyer can also work with any insurance companies involved to negotiate a settlement of the claim. The law regarding the liability of contractors, the damages recoverable, the time in which to sue etc. is very complicated, and there are many pitfalls for persons not using the services of a lawyer in these claims.

John Kirby has represented many parties in complex construction claims. He has represented the homeowner, as well as the builder and the insurance company. He has taught continuing education seminars on the application of insurance to construction claims.

This Article addresses some of these issues that arise in North Carolina in construction cases. This Article does not extensively address liens, or bonds (e.g. performance bond, payment bond). The focus of this Article is the liability for defective construction work. The Article on insurance has specific sections regarding coverage for construction work in North Carolina.

I. Nature of Claim Against Contractor (and Manufacturers)

There are several claims which can arise against a general contractor. This
article does not address those claims between the contractor and subcontractors for
payment for services, and does not address the lien statutes (such as the materialmen’s
lien). The contractor can be sued by various parties, including the property owner, a third
party who sustained an injury, and by a subcontractor.

A.Suit by Property Owner

The owner of the property can sue the general contractor for any defects in the
contractor’s work.

1.Express Contractual Term

The most obvious defect would be if the general contractor were to simply fail to
meet the terms of the express agreement. For example, if the contractor did not complete
construction on time, or if it did not use the appropriate materials, then it would be liable
in damages for breach of contract to the owner. Determining whether such a breach
occurred will generally involve a detailed examination of any plans and specifications, and
any subsequent modifications or subsequent work orders that were prepared.
However, where the general contractor complied with the owner’s architect’s
specifications, it cannot be liable. “[W]here a contractor is required to and does comply
with the plans and specifications prepared by the owner or the owner’s architect, the
contractor will not be liable for the consequences of defects in the plans and
specifications.” Thus, where a roof fails not due to the contractor’s breach, but due to the
architect’s poor design, then the contractor is not liable.
Similarly, where the owner hires an architect to plan the project and to assure
compliance with those plans, and the architect and the owner sign a Certificate of
Completion stating that the work was completed in accordance with the requirements of
the plans, and the wiring was done in accordance with the plans, and a fire later destroys a

portion of the project, the claim against the general contractor alleging a loose connection
in the busway joint that the contractor constructed and installed was properly dismissed
because the general contractor had followed the plans. There was no breach of contract,
and moreover any breach could have been discovered by the owner in the exercise of
reasonable diligence. The architects and the engineer were agents of the client and their
knowledge, including observation of the work as it progressed, was imputed to the client.

In a related vein, where work is accepted by the owner with knowledge that it has not
been done according to the contract or under such circumstances that knowledge of its
imperfect performance may be imputed, the acceptance will generally be deemed a waiver

of the defective performance. But this rule does not apply to latent defects.
The builder is liable for any express warranties it made to purchasers.
Where the express warranty limits recovery under the warranty, those limitations are
enforced. For example, where the warranty provides that the contractor will repair the
defects, the owner is limited to that recovery, and is not entitled to recover the cost of
repair. Similarly, a time limitation for submitting a claim for an express warranty is
binding.
In order to create an express warranty, the terms must be sufficiently clear. Where, for
example, the seller of real property states that water found in crawl space under a newly
constructed house was “probably” left over from construction and that it “should” dry up in
a short time, that everything had been covered over and that water “couldn’t get in there
any more” and that the contractor was a “good contractor” and built “good homes” that
were “substantial,” it did not create an express warranty either that house would be
constructed in workmanlike manner when completed or, specifically, that water in the
crawl space would create no problems. On the other hand, where the builder said he was
“a builder of high quality homes,” that “this home was to be a Parade home,” that this
house was intended for display, that “The lumber was nice and clean, very little knots,”
and “the quality of the home in Hope Valley was exactly the same as the quality of the
home” they bought “in materials and workmanship,” there was sufficient evidence of a
breach of express warranty.
In order for the buyer to recover, he is generally required to show that he relied on the
express warranty.
A claim based on express warranty may extend beyond the original parties to the
warranty.

2.Implied Contractual Term
The other type of contractual claim which can arise is for an implicit contract
term. In many contexts, courts will sometimes impose implied terms where it is equitable
to do so. In the context of commercial construction, there are not many North Carolina
cases addressing implicit terms on the general contractor relating to its work. The parties
will generally be bound by the terms of the agreement.
In the residential context, our courts have held that the contractor impliedly
warrants that the house is constructed in conformity with the building code.
In the commercial context, however, the cases do not use this terminology. They

do say, however, that it is “negligence per se” for the builder to not build in conformity with
the code. As indicated earlier, however, the owner’s claim against the builder will usually
be for contract, and not for negligence, and hence it is not clear how a building code
violation affects the owner’s claim.
It would seem, however, that the builder impliedly warrants that the structure is built in

conformity with the code, such that a code violation is actionable. “[T]he Code imposes
liability on any person who constructs, supervises construction, or designs a building or
alteration thereto, and violates the Code such that the violation proximately causes injury
or damage.”
“However, to impose liability for such a violation it must be established that the
violation was a proximate cause of the alleged injury.” Thus, in one case, the owner’s
failure to obtain a permit was not the proximate cause of a fire.
a)Implied Warranty New Home
In the context of residential construction, our courts have adopted an implied
warranty of habitability. The leading case on this issue in North Carolina is Hartley v.
Ballou. In that case, the Court essentially held that when a person in the business of
constructing homes builds a new home for a consumer, the builder-vendor impliedly
warrants that the house is free from major structural defects. The court stated:

In every contract for the sale of a recently completed dwelling, and in every
contract for the sale of a dwelling then under construction, the vendor, if he be in the
business of building such dwellings, shall be held to impliedly warrant to the initial vendee
that, at the time of the passing of the deed or the taking of possession by the initial vendee

(whichever first occurs), the dwelling, together with all its fixtures, is sufficiently free from
major structural defects, and is constructed in a workmanlike manner, so as to meet the
standard of workmanlike quality then prevailing at the time and place of construction; and

that this implied warranty in the contract of sale survives the passing of the deed or the
taking of possession by the initial vendee.

Hartley v. Ballou, 286 N.C. 51, 62, 209 S.E.2d 776, 783 (1974).

Numerous cases have had to address what constitutes a breach of this implied
warranty. In Ballou, the evidence was sufficient to support a finding that the builder-
vendor breached an implied warranty that the house had “been sufficiently waterproofed,
in accordance with the standards of workmanlike quality then prevailing in that area, to
prevent water leakage under normal weather conditions.” The plaintiff could recover for
inconvenience during the time that the defendant conducted repairs to the property, but
not for the time subsequent repairs were made for damage that resulted from a hurricane.

“[S]uch implied warranty falls short of an absolute guarantee that the waterproofing was
sufficient to protect the basement area from damage by water in the event of hurricanes or

other extreme weather conditions.”
It is not clear what is encompassed within the implied warranty of habitability. For
example, a house can breach the warranty even where it is livable. This doctrine is applied

on a case-by-case basis.
North Carolina cases have held as follows regarding implied warranties:

  • The implied warranty includes a warranty that there will be an “adequate supply
    of usable water,” which is “absolute essential utility to a dwelling house.”
  • The septic tank comes within the implied warranty.
  • A fireplace and chimney must adequately remove smoke.
  • Where the foundation is not sufficiently waterproofed, and the window sashes of
    several windows failed to stay up properly and water passed under the garage door
    whenever it rained “fairly hard,” there was a breach.
  • A defective air conditioning system is a major structural defect.
  • Where there were numerous cracks in the interior and exterior of house, including
    cracks in the floor, foundation wall, and sheetrock, and foundation did not conform to the
    minimum requirements of the building code and plans, the construction of the foundation
    created a “major structural defect.”
  • Synthetic stucco cladding (EIFS) which did not resist moisture may constitute a breach
    of implied warranty.
  • “The implied warranty of the builder-vendor does not extend to defects of which the
    purchaser had actual notice or which are or should be visible to a reasonably prudent man
    upon an inspection of the dwelling.”

One of the other issues that our courts have not thoroughly fleshed out all is the issue
of time. Our courts have held that the implied warranty of habitability extends to a “newly
constructed dwelling” for a “reasonable” time, but they have not set forth any clear
guidelines on what is a “reasonable” time. “Among some of the factors which may be
considered in determining this question are the age of the building, the use to which it has
been put, its maintenance, the nature of the defects and the expectations of the parties.”
An air conditioner which was installed four and one-half years prior to sale may be covered
by the warranty.
Also, our courts have recently stated that it is possible, in certain circumstances,

to disclaim an implied warranty: If parties to a contract desire to disclaim the implied
warranty, they may do so, but the disclaimer must be made with clear, unambiguous
language that reflects the fact that the parties fully intended to disclaim the implied
warranty. The exclusionary language must be very specific; e.g., even the following
language failed: “Other than the Expressed Warranties contained herein, there are no other

warranties expressed or implied including Implied Warranty of Merchantability or Implied
Warranty for Particular Purpose, which implied warranties are specifically excluded,” “This
language does not clearly and unambiguously show that both parties intended to exclude
the implied warranty of habitability or workmanlike quality of construction.”
In the commercial context, the law seems to recognize the right of the parties to waive
implied warranties.
b)Privity Issues
As discussed in a later section, a claim for implied warranty generally requires that the
parties be in privity. Therefore, as a general rule, the home owner can sue the builder for
implied warranty only if he is in privity with the builder. As noted in the negligence section,

however, North Carolina recognizes a negligence action against the builder by a
subsequent purchaser.
3.Defenses
If a defect or nonconformity is shown by the plaintiff, the defendant may, of
course, raise various defenses. The defendant would obviously be entitled to a statute of
limitations or statute of repose defense in an appropriate case. Similarly, the defendant
may be able to raise as a defense a breach of contract by the plaintiff, such as a non-
payment by the plaintiff.
4.Damages
If a breach of contract is shown, the contractor is liable for the damages
resulting from the breach of contract. In the context the implied warranty for a new home,
it has been said:

Where, however, there is a breach of the implied warranty, the vendee can
maintain an action for damages for such breach “either (1) for the difference between the
reasonable market value of the subject property as impliedly warranted and its reasonable

market value in its actual condition, or (2) for the amount required to bring the subject
property into compliance with the implied warranty.”

Griffin v. Wheeler-Leonard, Inc., 290 N.C. 185, 200-01, 225
S.E.2d 557, 567 (1976) (quoting Ballou).
The general measure of damages for a non-conforming construction project
would be the cost to render the project in conformity with the contractual terms. The only
exception to this is where the repair would require that “a substantial portion of the work
completed be destroyed. In such case, the diminution in value method may be the better
measure of a party’s damages.”
It should be noted that where the owner has a claim for negligence (such as
where the contractor’s work damages other property), then the normal measure would be
diminution in value. “In cases where the injury [to real property] is completed or by a single
act becomes a fait accompli, and which do not involve a continuing wrong or intermittent
or recurring damages, the correct rule for the measure of damages is the difference
between the market value of the property before and after the injury.”
The plaintiff/owner is also under a duty to mitigate his damages. The burden is on the defendant to show those damages which could have been avoided if the plaintiff had taken appropriate steps to minimize his losses.

a)Consequential Damages
The plaintiff may also seek recovery beyond the mere repair of its structure. It
may, for example, assert a claim for lost profits or loss of use arising from the non-
conformity. The general measure for these damages is whether these damages were
within the “contemplation of the parties” at the time the contract was entered.

[W]hen the action is for a breach of contract, the damages recoverable are
such as naturally flow from the breach, and such special or consequential damages as are
reasonably presumed to have been within the contemplation of the parties at the time they

made the contract, as the probable result of a breach of it. In ascertaining what damages
come within the rule, it is proper to examine, not only the terms of the contract, the subject
-matter, etc., but also to inquire whether such circumstances or conditions as produced
special damages were communicated to the defendant. We apprehend that the same rule
prevails when an action in the nature of tort is brought for the breach of a duty arising out
of contract, . . .

Story v. Stokes, 178 N.C. 409, 413 (1919).
Similarly, other losses, such as clean-up costs resulting from a breach, are
recoverable.
In a case for breach of contract, the plaintiff would be entitled to pre-judgment interest
at the rate of 8% per year, running from the date of the breach.
b) Bodily Injury
An individual homeowner may also have a claim for personal injuries arising
from the breach of contract. For example, we are now seeing sporadic claims by
homeowners alleging that they have sustained bodily injury as a result of mold in their
residences, due to a defect in construction which has allowed the penetration of water. Our

courts have not thoroughly addressed the extent to which a homeowner may assert a claim

for bodily injury based on a breach of contract by the contractor.
5.Negligence.
The owner (i.e. the first person owning the property, who contracted with the
contractor) will sometimes assert a claim of “negligence” against the contractor. Our courts

have, however, severely limited the extent to which an owner can sue the person with
whom he contracted in negligence. The leading case on this issue in North Carolina is
Ports Authority v. Lloyd A. Fry. In this case, the North Carolina Supreme Court essentially
held that where two parties contract for the construction of a structure, the owner cannot
sue the contractor for defects under a theory of negligence, unless the case falls into one of
four categories. As stated by our Supreme Court, “Ordinarily, a breach of contract does not
give rise to a tort action by the promisee against the promisor.” In Ports Authority, the
plaintiff hired the defendant-general-contractor to build two buildings. The general
contractor hired a sub-contractor to build the roofs. The plaintiff then sued the general
contractor and the sub-contractor for leaks in the roof. The Supreme Court affirmed
summary judgment for the General Contractor against the plaintiff on the negligence
claims, stating:

In the present case, according to the complaint, Dickerson contracted to
construct buildings, including roofs thereon, in accordance with agreed plans and
specifications. It is alleged that Dickerson did not so construct the roofs. If that be true, it
is immaterial whether Dickerson’s failure was due to its negligence, or occurred
notwithstanding its exercise of great care and skill. In either event, the promisor would be
liable in damages. Conversely, if the roofs, as constructed, conformed to the plans and
specifications of the contract, the promisor, having fully performed his contract, would not
be liable in damages to the plaintiff even though he failed to use the degree of care
customarily used in such construction by building contractors. Thus, the allegation of
negligence by Dickerson in the second claim for relief set forth in the complaint is
surplusage and should be disregarded. Consequently, the only basis for recovery against
Dickerson, alleged in the complaint, is breach of contract and the Court of Appeals was in
error in its view that the complaint “alleges an action in tort” against
Dickerson.

Regarding the exceptions to the doctrine, the Court wrote:

[T]here are many decisions of this and other courts holding a promisor liable
in a tort action for a personal injury or damage to property proximately caused by his
negligent, or wilful, act or omission in the course of his performance of his contract.
However, such decisions by this Court, which have been brought to our attention, appear to
fall into one of four general categories:

(1) The injury, proximately caused by the promisor’s negligent act or omission

in the performance of his contract, was an injury to the person or property of someone other

than the promisee.
(2) The injury, proximately caused by the promisor’s negligent, or wilful, act or omission in
the performance of his contract, was to property of the promisee other than the property
which was the subject of the contract, or was a personal injury to the promisee.
(3) The injury, proximately caused by the promisor’s negligent, or wilful, act or omission in
the performance of his contract, was loss of or damage to the promisee’s property, which
was the subject of the contract, the promisor being charged by law, as a matter of public
policy, with the duty to use care in the safeguarding of the property from harm, as in the
case of a common carrier, an innkeeper or other bailee.
(4) The injury so caused was a wilful injury to or a conversion of the property of the
promisee, which was the subject of the contract, by the promisor.

It may well be that this enumeration of categories in which a promisor has been held
liable in a tort action by reason of his negligent, or wilful, act or omission in the
performance of his contract is not all inclusive. However, our research has brought to our
attention no case in which this Court has held a tort action lies against a promisor for his
simple failure to perform his contract, even though such failure was due to negligence or
lack of skill.

North Carolina State Ports Authority v. Lloyd A. Fry Roofing Co.,
294 N.C. 73, 81-83 (1978).
This doctrine has been applied to a claim where the plaintiff sued the
defendant for negligence in the construction and installation of a mobile home. Similarly,
where the builder was sued for damages arising from the presence of beetles in wood, the
negligence claim was dismissed.
Further, it has been held that a violation of the building code does not give rise
to a tort claim by the owner.
Thus, in a routine construction case, where there is no damage to other property,

and where there is no bailment or no common carriage of goods or persons, the courts
generally restrict the owner’s theory to one of breach of contract.
In those cases in which the general contractor can be sued for negligence, one
will have to consider the issues peculiar to that claim, such as whether the negligence of a
sub-contractor is imputed to the general contractor. This issue is discussed in a succeeding

section.
Also, the plaintiff-owner may be contributorily negligent. For example, where
the buyer of a house is signed a synthetic stucco disclosure, and prior to closing they
received a copy of an inspection report that disclosed at least one area of high moisture
intrusion and two areas of medium moisture intrusion, their failure to engage the services
of a qualified inspector to inspect the synthetic stucco before they purchased the
townhouse constituted contributory negligence as a matter of law, barring their negligence
claim against the seller. Also, where the owner should detect a violation of the building
code, it will be negligent per se, negating its claim against a contractor.
a)Damages
With regard to negligent damage to property, the rule has been stated as follows:

With regard to the plaintiffs’ claim for negligent damage to real property, the
general rule is that where the injury is completed (as opposed to a continuing wrong) the
measure of damages “is the difference between the market value of the property before
and after the injury.” Nonetheless, replacement and repair costs are relevant on the
question of diminution in value and when there is evidence of both diminution in value
and replacement cost, the trial court must instruct the jury to consider the replacement cost

in assessing the diminution in value.

The Plaintiff can also recover those damages proximately caused by the
negligence, including lost profits in an appropriate case.
Notwithstanding the “economic loss rule” discussed infra regarding claims against
manufacturers, which generally prohibits a party from suing the maker of a product for
damages to that product for negligence, there is one North Carolina case which seems to
allow for recovery for damage to the house against the builder of the house upon a
negligence theory.
In Oates v. Jag, Inc., 314 N.C. 276, 277, 333 S.E.2d 222, 223-24 (1985), the court
stated, “The precise issue to be answered in this appeal is whether an owner of a dwelling
house who is not the original purchaser has a cause of action against the builder and
general contractor for negligence in the construction of the house, when such negligence
results in economic loss or damage to the owner. We conclude that such a cause of action
exists.” This is ironic because the initial purchaser would not have had a negligence action.

In Warfield v. Hicks, et al., 91 N.C. App. 1, 370 S.E.2d 689 (1988), the Court of Appeals
strictly limited the range of Oates to subsequent home purchases and upheld the general
rule that claims of a contractual nature cannot be brought as tort actions:

In Oates, the Court did recognize, without discussing Ports Authority, that
such a cause of action exists in favor of an owner who is not the original purchaser.
However, nothing in that decision suggests an intent to overrule the Court’s earlier holding
in Ports Authority with respect to claims by the initial purchaser. We therefore presume
that the Court intended to leave that holding intact, and to merely recognize a means of
redress for those purchasers who suffer economic loss or damage from improper
construction but who, because not in privity with the builder, have no basis for recovery in
contract or warranty. (emphasis in original)

Furthermore, the Oates court went on to establish the existence of a negligence claim
for the plaintiff based on the defendant’s actions outside of any contractual obligations
owed to the plaintiff, i.e., the court found that the defendant breached general duties owed

irrespective of contractual duties, which allows for a negligence claim irrespective of the
contract claim.
Note that in an unpublished opinion, the Court of Appeals has upheld both the general

rule that a tort action does not arise out of contractual obligations or duties (versus
common law duties, such as in Oates) and that the economic loss rule bars tort actions.

6.Negligent Misrepresentation.
A contractor (or sub-contractor) may also be sued for negligent
misrepresentation. Regarding such a claim in this context, our courts have adopted the
Restatement position, which states:

One who in the course of his business or profession supplies information for
the guidance of others in their business transactions is subject to liability for harm caused
to them by their reliance upon the information if

a) he fails to exercise that care and competence in obtaining and communicating the
information which its recipient is justified in expecting, and
(b) the harm is suffered

(i) by the person or one of the class of persons for whose guidance the
information was supplied, and
(ii) because of his justifiable reliance upon it in a transaction in which it was intended to
influence his conduct or in a transaction substantially identical therewith.

Davidson and Jones, Inc. v. New Hanover County, 41 N.C.App.
661, 669, 255 S.E.2d 580, 585 (1979).
In order to prevail, the plaintiff must have reasonably relied upon the
information.
7. Fraud
Similarly, homeowners sometimes assert a claim in fraud against the
contractor. The elements of fraud are:

(1) That defendant made a representation relating to some material past or
existing fact; (2) that the representation was false; (3) that when he made it, defendant
knew that the representation was false, or made it recklessly, without any knowledge of its
truth and as a positive assertion; (4) that defendant made the representation with
intention that it should be acted upon by plaintiff; (5) that plaintiff reasonably relied upon
the representation, and acted upon it; and (6) that plaintiff thereby suffered injury. A false

representation is material when it deceives a person and induces him to
act.

Thus, where the seller of land misrepresents the tobacco allotment on the land, the
buyer has a claim for fraud.
In a case involving residential construction, the builder warranted that the homes were
built in accordance with the plans, but there was evidence that they were not, and the
houses developed cracks. The lower court found that the builder “falsely represented to . . .

Plaintiffs that [Plaintiffs’ house] had been constructed in substantial conformity with plans

and specifications approved [for the house].” The jury found that the builder committed
fraud, and the appellate court affirmed, stating:

In this case, Plaintiffs presented evidence regarding cracks in approximately
thirty other houses constructed by Roberts Construction between 1994 and 1996. These
other houses were constructed using the same slab on grade method used by Roberts
Construction to construct Plaintiffs’ house, and Wilson testified these houses contained
cracks in their foundations and floors that were similar to the cracks found in Plaintiffs’
house. Additionally, Wilson testified that, similar to Plaintiffs’ house, these other houses
did not meet various building code standards for average PSI, concrete thickness, and
compaction below the slab. Based on this evidence of cracks in the floors and foundations

of these other houses, a reasonable person could find Roberts Construction had actual
knowledge of structural defects in Plaintiffs’ house at the time Plaintiffs purchased their
house. Accordingly, the trial court properly denied Defendants’ motion for a directed verdict

on the issue of fraud.

Allen v. Roberts Constr. Co., 138 N.C. App. 557, 567-568
(2000).

Where there is no evidence of an intent to deceive, there is not a fraud claim. For
example, where the builder-vendor said that there would not a problem with wooden
beams infested with beetles, “the plaintiffs’ evidence taken in the most favorable light
shows merely that Mr. Hicks made a general unspecific statement of opinion about the
potential future consequences of using beetle infested beams and does not support a
reasonable inference that he intended to deceive or mislead the Warfields.” Warfield v.
Hicks, 91 N.C. App. 1, 8 (1988).

Many cases, however, deny a fraud claim where the plaintiff’s reliance is not
reasonable.
8.Unfair and Deceptive Acts or
Practices
Some plaintiffs also allege that the contractor’s conduct constitutes unfair and
deceptive acts and practices, in violation of Chapter 75 of the North Carolina General
Statutes. A violation of this statute would entitle the plaintiff to treble damages, in
addition to potentially recovering their attorney’s fees. This law has been summarized as
follow:

N.C. Gen. Stat. Sec. 75-1.1(a) . . . declares unlawful “unfair or deceptive acts
or practices in or affecting commerce.” . . . A “practice is unfair when it offends
established public policy as well as when the practice is immoral, unethical, oppressive,
unscrupulous, or substantially injurious to consumers.” In essence, “[a] party is guilty of an

unfair act or practice when it engages in conduct which amounts to an inequitable
assertion of its power or position.” The concept of “unfairness” is broader than and
includes the concept of “deception.” An act or practice is deceptive “if it has the capacity or

tendency to deceive.” The facts surrounding the particular transaction and the impact the
practice has in the marketplace determine whether a particular act is unfair or deceptive.
Further, “[i]n determining whether a representation is deceptive, its effect on the average
consumer is considered.

Warfield v. Hicks, 91 N.C. App. 1, 8-9 (1988).
In the Warfield case, the builder informed the buyers that the beetle infestation
of the ceiling beams would pose no problems other than a little sawdust. In fact, the house

could not pass a pest inspection and that, as a consequence, it potentially would be
difficult for them or future buyers to obtain financing on the house, and house had
diminished value.
Further, the buyers contested some of the change orders at trial, contending that
certain items were included in the original plans and should not have been denominated
“extras,” that the buyers felt coerced into signing the orders by financial pressures and fear
of delays in construction, and that some of the punchlist items were never completed and
that various other defects or problems discovered during the warranty period were not
remedied by the builder, despite his representations that they would be. The court held
that the Chapter 75 claim was properly dismissed:

In the present case, the Warfields presented testimony of Mr. Butts that he
had told both defendant Hicks and the Warfields that the beams “had been infested at
one time or another” with beetles. Mr. Warfield testified that when he asked Hicks about
the matter, Hicks merely responded that he had had an old piece of furniture in his house
for years that had dust beetles in it, that they just made a little bit of sawdust, and that the

beetles were not a problem. Applying the foregoing criteria to these facts, we find that the
alleged representation by Mr. Hicks simply does not rise to the level of oppressive,
unscrupulous, or deceptive conduct which would constitute an unfair or deceptive act or
practice within the intended purview of N.C. Gen. Stat. Sec. 75-1.1. Nor does our review of
the record disclose the existence of any other facts which would establish a violation of the
statute.

In Allen v. Roberts Constr. Co., 138 N.C. App. 557, 569 (2000) the court held that the
Chapter 75 judgment against the individual (owner of general contractor) was supported
where he “conceal[ed] material facts relevant to [Plaintiffs’ house] from . . . Plaintiffs which

he knew at the time of purchase that . . . Plaintiffs could not discover in the exercise of due
diligence” and “falsely represented to . . . Plaintiffs that [Plaintiffs’ house] had been
constructed in substantial conformity with plans and specifications approved [for the
house].”

9.Indemnity
The owner may also have a claim against the contractor for indemnity. Where,
for example, the owner incurs liability to a third person arising from a defect on the
property, then the owner theoretically should have a common-law indemnity claim against
the contractor. Unfortunately, our North Carolina case law is not very well developed on this

point. In addition, the owner may have a contractual indemnity provision in his contract
with the contractor. These provisions, however, have generally been struck down by our
courts as violating G.S. Sec. 22B-1.

B.Claims by Third Person.
A “third party” may also have a claim against the contractor. In this section,
third party refers to any person other than the parties originally contracting for the
construction of the structure.
1.Bodily Injury Claims by Third
Persons.
A person who sustains an injury on the property will sometimes assert a claim
against the contractor.
A persons injured by a contractor can sue the contractor for negligence even
notwithstanding the absence of a contract with the contractor. “[P]rivity of contract is not
required in order to recover against a person who negligently performs services for another
and thus injures a third party.” Thus, a pedestrian may have a claim for injuries arising
from the contractor’s work.
a)Completed and Accepted Doctrine
Where the work has been completed by the contractor and accepted by the owner, a
claim by a third person will generally be barred by the “Completed and Accepted” Doctrine.

Pursuant to this doctrine, where the contractor builds a structure, and the owner accepts
the structure without any objection, then the contractor is relieved of any further potential
liability. The theory is that beyond this transaction, the contractor had no control over the
property. This doctrine has been described as follows:

In North Carolina, the “completed and accepted work” doctrine provides that
“an independent contractor is not liable for injuries to third parties occurring after the
contractor has completed the work and it has been accepted by the owner.” [T]he
contractor is not liable even if the contractor “was negligent in carrying out the contract.”
There are exceptions by which a contractor may be liable even after it has turned over the
completed work. Among the exceptions is the so-called “imminently dangerous” work
exception. Plaintiff argues that defendant remains liable here because it turned over work
to the State that was “imminently dangerous.” . . . “contractor is liable . . . where the work
done and turned over by him is so negligently defective as to be imminently dangerous to
third persons, provided, . . . the contractor knows, or should know, of the dangerous
situation created by him, and the owner or contractee does not know of the dangerous
condition or defect and would not discover it by reasonable inspection”. Our Supreme
Court has stated that an object is “imminently dangerous” if injury will reasonably occur
when the object is used for its declared purpose. Other courts have stated that to be
imminently dangerous, “‘there must be knowledge of a danger, not merely possible, but
probable.'” Black’s Law Dictionary defines an “imminently dangerous article” as “one that
is reasonably certain to place life or limb in peril.”

Nifong v. C.C. Mangum, Inc., 121 N.C. App. 767, 769 (N.C. App. ,
1996).

In Nifong, an injured party filed suit against the contractor after sustaining an
injury as a result of a vehicle accident on a road constructed by the contractor pursuant to
a state contract. The injured party’s expert witness testified that the contractor turned over
work that was imminently dangerous because it created a hazardous hydroplaning
condition. The court affirmed summary judgment for the contractor, as follows:

Regardless of whether defendant knew or should have known of a difference
between the road as constructed and the road as designed, plaintiff has failed to present
any forecast of evidence to show that defendant’s work was imminently dangerous. Don
Moore’s opinion that the difference in the transition of the curve created a hazardous
hydroplaning condition does not show that defendant turned over to the State work that
was imminently dangerous. Because we have determined that plaintiff failed to forecast
evidence to bring her claim within the “imminently dangerous” work exception to the
“completed and accepted work” doctrine, we conclude that defendant owed no legal duty
to plaintiff under the “completed and accepted work” doctrine.

This doctrine does not necessarily apply beyond the true construction context.
For example, where the defendant supplied ice to a grocery store, and in doing so left water

on the floor, even though the grocery store had accepted the work and product of the ice
delivery company, a person injured by slipping on the water could nevertheless maintain
an action against the ice delivery company.
b)Third-Party Beneficiary
A plaintiff may sometimes argue that he or she is a “third-party beneficiary” of
the original contract, such that he or she can sue for breach of the construction contract. In

general, our courts have rejected this argument.
In Matternes v. City Of Winston-Salem, 286 N.C. 1, 15 (1974), accident victims
filed an action against defendant (a city), seeking to recover damages for injuries when an
automobile skidded on an accumulation of snow and ice and plunged off a bridge. The
defendant had a contract with the Board of Transportation to maintain the highway. The
court held that the plaintiffs were merely incidental beneficiaries of the contract and could
not maintain an action against the city for breach of its terms.
c) Liability for Subcontractors’ Work
The general contractor will generally not be liable in negligence for the acts of its
independent contractors. As discussed in more detail in the next section, a general
contractor is generally not liable for the torts (i.e. negligence) of a subcontractor.
2.Claims by Workers During Construction.
Where the general contractor is negligent and injures a worker, it may be held liable to
the sub-contractor’s employee. Thus, where it provides a ramp which does not comply with
OSHA, the worker may sue the contractor.
The contractor’s own employee cannot sue the employer due to the workers
compensation laws, unless the employer was “grossly negligent.”
a) Liability for Subcontractor’s Negligence
“Generally, one who employs an independent contractor is not liable for the
independent contractor’s negligence unless the employer retains the right to control the
manner in which the contractor performs his work.” One case held that the property owner
“was in nowise liable for the negligence of either of [the independent contractors], and was
liable only for such of its own negligence, if any, as contributed to the death of the
plaintiff’s intestate,” which was caused by an electrical wire on the jobsite.
“If the negligence which caused the injury was that of the injured person’s own
employer, and it is found as a fact that his employer was an independent contractor, the
general contractor is not liable for the injury unless he or his own employees participated in
the negligent act.” Where a plaintiff was injured when a ditch caved in on him while
working for his employer (sub-contractor), and general contractor had no control over the
manner or work methods used to perform this job, contractor was entitled to summary
judgment. And where the contractor hired a subcontractor to string television cable, and
the subcontractor’s employee was killed when a truck struck a cable the employee had
been stringing, the contractor was entitled to summary judgment because there was no
showing it participated in the negligent act that caused the employee’s death.
(1)Exceptions
In Woodson v. Rowland, 329 N.C. 330, 407 S.E.2d 222 (1991) the Court stated the
general rule that one who employs an independent contractor is not liable for the
independent contractor’s negligence but recognized exceptions when: (1) the employer
retains the right to control the manner in which the contractor performs his work and (2)
the independent contractor is employed to perform an inherently dangerous activity, in
which case the duty is non-delegable.
(a)Right to Control
It is not clear what constitutes “right to control the manner in which the contractor
performs his work.” Woodson cited to a case in which a landowner was held liable for the
injury to sub-contractor’s employee who sustained an electrical injury on the land, because
the owner exercised dominion over the land and was required to turn it over in a
reasonably safe condition to the contractor and was therefore liable for any negligence in
failing to elevate, remove, or warn against the wires. Many cases find that the general
does usually not retain the right to control the manner of the subcontractor’s work.
(b)Non-Delegable Duty
Regarding a non-delegable duty, the cases are fairly stringent on what
constitutes this activity. Woodson noted that some activities have been held non-delegable
(maintaining an open trench in a heavily populated area, blasting, and installing electrical

wires), and others have been held delegable (sign erection, building construction).
Some cases seem to make the non-delegable duty dependent on the
contractor’s control. For example, where the contractor hired a subcontractor to string
television cable, and the subcontractor’s employee was killed when a truck struck a cable
the employee had been stringing, the contractor was entitled to summary judgment under
the nondelegable duty exception because it did not exercise dominion and control of the
workplace at the time of the accident.
(c) Oversight, Selection of Subs
The general contractor is probably liable for failing to use due care in hiring a
competent sub-contractor. It has been recognized that the owner may be liable under this
theory.
Similarly, the general contractor is probably liable in negligence for failing to
oversee the sub-contractors. A GC owes the buyer “a duty to supervise the construction of
the house.”
In a case where the builder was sued for breach of warranty and negligence for various
defects in a house, the appellate court affirmed the following jury instruction:

As contractor and seller of the house, Mr. Chesnutt and his company would
be responsible for any actions of his subcontractors either in failing to use good quality
materials or to construct in a workmanlike manner, or any negligent conduct on their part,
if he knew or reasonably should have known as general contractor or builder of the house
of those conditions. He is not to be responsible for any such things which a reasonable
man in his position as builder and contractor of the house would not have discovered, but
the mere fact that work was done by a subcontractor does not relieve the contractor of
responsibility if he by the exercise of reasonable care knew or should have known of the
existence of those conditions.

In Sullivan v. Smith, 56 N.C.App. 525, 525, 289 S.E.2d 870, 871 (1982),
“Defendant Smith was the general contractor on a house which plaintiffs purchased from
his original vendees.” The house was destroyed in a fire, and the evidence, including a
building code violation which was negligence per se, “permitted a finding that the masonry

subcontractor, defendant Hooker, negligently constructed the fireplace, and that this
negligent construction proximately caused the fire. The case could go to the jury against
the general contractor, defendant Smith, however, only if the evidence permitted a finding
that he too violated some duty.” The court held that there was sufficient evidence of a
breach by the GC, stating:

Plaintiffs presented evidence which permitted a jury finding that defendant
Smith, as a reasonably careful and prudent contractor under the circumstances, knew or
should have known of the defective workmanship of his subcontractor, defendant Hooker.
Defendant Hooker testified that he “saw [defendant Smith] on the job from time to time
during the two weeks that [he] built [the] chimney and fireplace,” but that he “never saw
him looking at the work [Hooker] was doing.” He further testified that the exterior brick
work was visible while it was under construction; that the exterior and interior bricks “go
[up] together”; that other contractors “usually [went] up and look[ed] at the work outside of

the fireplace and chimney that they [could] see” when he first did a job for them; and that
this was the first job he had done for defendant Smith.

3.Claims by Subsequent Purchasers.
Another set of persons who may attempt to sue the general contractor (other than the
party with the original contract) is a subsequent purchaser of the property. Under
traditional privity rules, a subsequent purchaser of property is not in “privity of contract”
with the contractor. For that reason, she is generally not able to sue the contractor for
breach of contract or warranty. “Our courts, as a general rule, have continued to require
that one seeking to recover on an implied warranty prove privity of contract.” Jones v.
Clark, 36 N.C.App. 327, 330, 244 S.E.2d 183, 185 (1978).

The North Carolina Supreme Court has now held that a subsequent purchaser of

property may, however, sue the general contractor in negligence. In Oates v. Jag, Inc., 314
N.C. 276, 277, 333 S.E.2d 222, 223-24 (1985), the court stated, “The precise issue to be
answered in this appeal is whether an owner of a dwelling house who is not the original
purchaser has a cause of action against the builder and general contractor for negligence
in the construction of the house, when such negligence results in economic loss or damage
to the owner. We conclude that such a cause of action exists.”
The JAG case has left many issues unresolved in North Carolina. For example, it

is not clear what constitutes “negligence” by a general contractor, especially when he or she

initially built the structure pursuant to a contract presumably with specific contract terms
(i.e. can the general contractor be liable for negligence where it completely complies with
the terms of its contract with the original owner?) As indicated earlier, the general
contractor may be negligent in using an incompetent sub-contractor, or in failing to
supervise his sub-contractor, Sullivan.
Another issue which is not resolved by the JAG case is the effect of a limitation
or waiver given by the original owner. If, for example, the original owner sufficiently waived
any implied warranties, and took the property “as is,” then it would seem that the general
contractor should not be liable to a subsequent purchaser for any alleged defects or
negligence. Under the JAG case, however, it is not clear whether these waivers and
concessions would bind a subsequent purchaser.
Where the builder returns for follow-up work at the residence, a subsequent
purchaser does not have a negligence claim based on the follow-up work.
C. Subcontractors.
The subcontractor may also have a claim against the general contractor. Where, for
example, the sub-contractor’s liability arises from the general contractor’s plans and
specifications, the sub-contractor may obtain indemnity against the general contractor.
Where the sub was under the direct supervision and control of the general contractor, and
was instructed by the GC to install damaged glass, the sub has an indemnity claim.

“In situations wherein one party controls or instructs another party and an
accident results, the controlling party may be held actively negligent and the obeying party
passively negligent. This obtains even though the obeying party actually committed the act
which caused the injury.” “[A]ction or movement, under some circumstances, could be
passive negligence.” [Illinois case] The Illinois court further stated that “[c]ategorizing
negligence as active or passive, involves making a ‘qualitative distinction between the
negligence of two tortfeasors.

Hartrick Erectors, Inc. v. Maxson-Betts, Inc., 98 N.C. App. 120,
124 (1990).
II. Other Claims
The previous section addressed claims against the general contractor. This section
addresses claims against other persons involved with the construction project.
A. Claims against Owner
Sometimes the owner of a structure is sued for damages arising from the
construction or building. Generally, the owner is not liable for the acts of his independent
contractors. For example, where the plaintiff sued a defendant-landownder for negligence
of the defendant’s independent contractor in cutting down a tree, which resulted in
personal injury, the defendants’ negligence should not have been submitted to the jury.
“Generally, one who employs an independent contractor is not liable for the independent
contractor’s negligence.”
In general, where an owner erects a structure, the builder’s acts are not imputed

to the owner, and the duties of construction are delegable. In one case, the owner hired the

defendant to build a roof, and the defendants who built the roof argued that the owner
was contributorily negligent based on the roof defects, and that the construction duties
were non-delegable, and hence could not recover. The court rejected this argument as
follows:

Defendant Carlisle argues that Olympic was under a nondelegable duty to
ascertain whether its building would support the new roof because reroofing a building is
intrinsically dangerous. If Olympic was under a nondelegable duty to check the roof
support, any negligence in failing to adequately determine the support would be imputed
to Olympic, if it were a proximate cause of Olympic’s damage, whether the negligence was
on the part of a servant or independent contractor. However, our Supreme Court has found
that the erection of a building is not “intrinsically dangerous” and does not fall within those

activities considered nondelegable in nature. We similarly conclude that the reroofing of a
building is not within the purview of “intrinsically dangerous” or “specially hazardous”
work. Furthermore, we find no other grounds for a nondelegable duty on Olympic arising
from the reroofing project.

Olympic Products Co., Div. of Cone Mills Corp. v. Roof Systems,
Inc., 88 N.C. App. 315, 334 (1988).

An owner will be liable in negligence for a building code violation only if it knew of the
violation.
Another “exception” to the general rule (that a contractor is not liable for the
acts of a sub-contractor) is for “failing to use due care in securing a competent contractor if
the contractor is negligent and proximately causes injury or damage.”
An employer is subject to liability for physical harm to third persons caused by his
failure to exercise reasonable care to employ a competent and careful contractor (a) to do
work which will involve a risk of physical harm unless it is skillfully and carefully done, or
(b) to perform any duty which the employer owes to third persons.”
B. Claims against Architect, other
Professionals
The architect can be liable for negligence to the owner. Further, the homeowner may
sue an architect with whom he is not in privity. Further, a general contractor who sustained

economic loss in a construction project that was proximately caused by supervising
architect’s negligent performance has a cause of action against architect despite lack of
privity of contract.
This liability may extend to other professionals, such as soil inspectors. Our
courts have discussed a claim against such a professional, based on negligent
representation, as follows:

One who in the course of his business or profession supplies information for
the guidance of others in their business transactions is subject to liability for harm caused
to them by their reliance upon the information if

(a) he fails to exercise that care and competence in obtaining and
communicating the information which its recipient is justified in expecting, and
(b) the harm is suffered

(i) by the person or one of the class of persons for whose guidance the
information was supplied, and
(ii) because of his justifiable reliance upon it in a transaction in which it was intended to
influence his conduct or in a transaction substantially identical therewith.

Davidson and Jones, Inc. v. New Hanover County, 41 N.C.App.
661, 669, 255 S.E.2d 580, 585 (1979). In this case, a contractor and the sub-contractors
were allowed to sue engineers for their soil investigative report causing injury to them.
“Such liability [of a surveyor or engineer] is based on negligence, and lack of privity of
contract does not render [engineers] immune from liability to the general contractor or the
subcontractors for damages proximately resulting from submitting a bid or conducting
work in reliance on negligently prepared soil test reports.”
C. Claims against sub-contractor
In general, the owner does not have a claim against a sub-contractor. In the
Ports Authority case, the plaintiff hired a contractor to erect a warehouse, and the
contractor hired a subcontractor for the roofing work, which ultimately failed. The Court
held that the owner did not have a claim against the subcontractor, as follows:

There was also no error in dismissing the action against Scott [subcontractor].
Scott asserted in its answer the defense that the complaint fails to state a claim upon
which relief may be granted against it. In this, Scott was correct. Although the complaint
states that the plaintiff seeks recovery against Scott “in tort for the negligent installation of
the roofs on these two buildings,” it alleges that the defendant Scott was the roofing
subcontractor of Dickerson, the general contractor, and that Scott failed properly to apply
the roofing material, in consequence of which failure the roofs leaked. This is simply an
allegation that Scott did not properly perform its contract with Dickerson and, for the
reasons above set forth, does not allege a cause of action in tort in favor of the plaintiff
against Scott.

As Scott asserts in its answer, it “did not enter into any contract with the plaintiff for the
construction of the roofs and there exists no privity of contract between this answering
defendant and the plaintiff.” The plaintiff may not sue Scott for the breach of Scott’s
contract with Dickerson on the theory that the plaintiff is the third party beneficiary thereof,
it being only an incidental beneficiary of such contract.

North Carolina State Ports Authority v. Lloyd A. Fry Roofing Co.,
294 N.C. 73, 87 (1978). The Court also cited to a case from another jurisdiction, stating
that in that case:

[A] contractor employed a subcontractor to perform certain required cement
work. The work was improperly done by the subcontractor, due, it is alleged, to his
negligence. In a suit by the owner against both the general contractor and the
subcontractor, the court held that the subcontract was not made for the owner’s benefit
and, consequently, the owner had no action against the subcontractor for the defective
performance of the work.

A case from 2007 is discussed in a subsequent section, addressing the “economic loss
rule.” In this case, the homeowners entered a contract with a general contractor
for a house. The homeowners later sued a subcontractor, who supplied trusses for the job;
the claim was based on negligence. The homeowners prevailed, and the Court of Appeals
wrote, “We hold that the 84 Lumber Defendants [subcontractors] had a duty to use
reasonable care in performing its promise to provide reliable trusses to Customized
Consulting [general contractor] for use in the construction of the Lords’ residence. Because
there was no contract between the Lords and the 84 Lumber Defendants, we further find
that the economic loss rule does not apply and therefore does not operate to bar the Lords’
negligence claims.” Lord v. Customized Consulting Specialty, Inc., 182 N.C. App. 635, 643
(2007). This case appears to be at odds with Ports Authority, which held that the owner
cannot sue a sub-contractor for negligence. The Lord case did not cite to Ports
Authority.

D. Claims against Manufacturer (and other
Sellers)
The owner may have various claims against the manufacturer of portions of his home
or structure. The primary claims are for implied warranty and negligence.
1. Implied Warranty
a. Nature of Warranty
The UCC provides that “a warranty that the goods shall be merchantable is implied in a

contract for their sale if the seller is a merchant with respect to goods of that kind.”
Merchantable is defined as meaning that the goods:

(a) pass without objection in the trade under the contract description; and

(b) in the case of fungible goods, are of fair average quality within the description; and

(c) are fit for the ordinary purposes for which such goods are used; and
(d) run, within the variations permitted by the agreement, of even kind, quality and
quantity within each unit and among all units involved; and
(e) are adequately contained, packaged, and labeled as the agreement may require; and

(f) conform to the promises or affirmations of fact made on the container or label if
any.

A home owner may have an implied warranty claim against the manufacturer of a
component of the house. This raises, however, privity issues, discussed below.
b. Privity Requirement
Where the owner attempts to sue the builder or a manufacturer for implied
warranty, his claim may be precluded a the privity requirement. “Except where the barrier
of privity has been legislatively or judicially removed, the absence of a contractual
relationship between the seller or manufacturer of an allegedly defective product and the
person injured by it continues to preclude products liability actions for breach of express
and implied warranties.” Crews v. W. A. Brown and Son, Inc., 106 N.C. App. 324, 331 (1992)
(child’s suit against vendor of freezer, alleging breach of implied warranties in sale of
freezer to church, was properly dismissed; implied warranty did not extend to child, since
child was not a buyer and was not in family etc. of buyer).

Where, however, privity has been abolished, a claimant can recover for implied
warranty.
(1) Economic Loss Rule
A small handful of cases have applied the privity rule discussed above (i.e. that the
plaintiff cannot sue a manufacturer of an item for implied warranty absent privity with the
manufacturer), but have stated more specifically, and more narrowly, that “economic
losses” are not recoverable against a manufacturer under an implied warranty theory
absent privity. It should be noted, at the outset, that it is unclear why these cases
emphasize that “economic losses” are not recoverable under an Implied Warranty theory
absent privity, because, in general, all losses (economic and otherwise) are not recoverable
under an Implied Warranty theory absent privity.
One case using this language has said “a purchaser cannot recover for economic loss
from a component supplier under breach of the implied warranty of merchantability.”
Moore v. Coachmen Indus., 129 N.C. App. 389, 400 (1998) (using this reasoning to
conclude that remote supplier of component parts is protected by limitations in vehicle
manufacturer’s warranty, requiring that they be brought within a certain time). The
reasoning given in Moore for the rule is that “component part suppliers cannot effectively
disclaim implied warranties, and purchasers have no expectation that component part
suppliers will respond to defects in finished products.”
Another case has said: “[O]utside the exceptions created by G.S. Chapter 99B [products

liability], the general rule is that privity is required to assert a claim for breach of an
implied warranty involving only economic loss.” Gregory v. Atrium Door and Window Co., 106
N.C. App. 142, 144 (1992) (home buyer’s claim against manufacturer of door is barred).
Thus, “the general rule is that privity is required to assert a claim for breach of an implied
warranty involving only economic loss.” Gregory v. Atrium Door and Window Co., 106 N.C.
App. 142, 144 (1992).
For example, one case states, “the general rule is that privity is required to assert a
claim for breach of an implied warranty involving only economic loss.” Energy Investors
Fund, L.P. v. Metric Constructors, Inc., 351 N.C. 331, 338 (2000) (claim for loss of
investment, arising from alleged breaches of implied warranty in construction of facility,
was properly dismissed).
In this author’s opinion, these cases erroneously recognize an “economic loss” rule in
Implied Warranty cases, when the true “economic loss” rule applies only to a negligence
action. For example, a case from our Supreme Court cited to Watermark Asso. v. Celotex
Corp., 784 F.2d 1183, 1186 (4th Cir. 1986) in support of its statement regarding Economic
Loss. In fact, the Watermark case applies the true economic loss rule, but holds only that it
bars the negligence claim, stating, “a negligence action cannot be maintained for an
intangible economic loss.” Watermark in fact recognized that the plaintiffs’ claims for
economic loss (in fact described as “intangible economic loss”) based on defective shingles

could proceed on the implied warranty theory, stating “we remand for a new trial on the
implied warranty claim alone.”
In general, the true “economic loss” rule operates to bar a negligence claim (in a
“products liability” action for damage to product itself), but does not affect an implied
warranty claim. See Terry’s Floor Fashion v. Georgia-Pacific Corp., 1998 U.S. Dist. Lexis
15392 (E.D.N.C. 1998) (economic loss rule barred negligence claim against manufacturer
and seller of floor products, but claims for express and implied warranty survived motion to

dismiss; focusing only on notice requirement).
None of the cases applying the Economic Loss rule to an Implied Warranty case provide

much guidance for what constitutes “economic loss.” In a succeeding section, regarding
claims for “negligence,” this article provides further analysis of what constitutes “economic
loss” in those cases.
(2) Exceptions to Privity
Requirement
North Carolina has recognized some common law exceptions to the privity
requirement.
(a) Common Law
North Carolina has abolished the common law privity rule for a person sustaining
bodily injury where the manufacturer advertised the product. It is not clear, however, how
far the rule has been abolished. In Williams v. General Motors Corp., 19 N.C. App. 337,
340 (1973), the court recognized the general privity requirement and noted that “The slight

erosion in this State of the privity requirement in breach of warranty actions appears to
have been limited to cases involving food, drink and insecticides in sealed containers,
which had warnings on the label which reached the ultimate consumer.”
There is some suggestion that the UCC, and not common law rules, determine whether
a plaintiff can sue for certain economic losses. “The U.C.C. is generally regarded as the
exclusive source for ascertaining when the seller is subject to liability for damages if the
claim is based on an intangible economic loss and not attributable to physical injury to
person or to a tangible thing other than the defective product itself.” Reece v. Homette
Corp., 110 N.C. App. 462, 466 (1993) (citing Prosser; finding that manufactured home
buyer’s claim for defective home is limited to warranty, and not tort, and that warranty
claim is time-barred).
Even in claims for bodily injury, however, the privity requirement seems to remain alive
and well at common-law. Crews (child injured in freezer cannot sue manufacturer for
implied warranty because he was not in privity); Williams (person borrowing vehicle cannot
sue manufacturer for implied warranty for personal injuries).
(b) UCC privity rules
The UCC, although not using the term “privity,” states:

A seller’s warranty whether express or implied extends to any natural person
who is in the family or household of his buyer or who is a guest in his home if it is
reasonable to expect that such person may use, consume or be affected by the goods and
who is injured in person by breach of the warranty. A seller may not exclude or limit the
operation of this section. N.C. Gen. Stat. Sec. 25-2-318.

The UCC applies only to the “sale” of a “good.” The term “buyer” is specifically defined
also. Thus, a claimant not in privity with the defendant may have an implied warranty
claim against the “seller” if he fits within these exceptions and if he has “person[al] injur
[y].”
(c) Products Liability Rules
Chapter 99B also abolished the privity requirement in certain circumstances, stating:

(b) A claimant who is a buyer, as defined in the Uniform Commercial Code, of

the product involved, or who is a member or a guest of a member of the family of the
buyer, a guest of the buyer, or an employee of the buyer may bring a product liability action

directly against the manufacturer of the product involved for breach of implied warranty;
and the lack of privity of contract shall not be grounds for the dismissal of such action.
N.C. Gen. Stat. Sec. 99B-2.

This rule therefore allows the buyer, his guest, employee etc. to sue the manufacturer.
This is more expansive than the privity relaxation in the UCC in several ways. First, extends
the warranty to an employee. Second, it does not require that it be “reasonable to expect
that such person may use, consume or be affected by the goods.” Third, it does not require

“injur[y] in person.” And fourth, it allows suit against the manufacturer (whereas the UCC
provision only allows the person injured to sue the seller).
This rule applies only to a “products liability” action, defined as: “includes any action
brought for or on account of personal injury, death or property damage caused by or
resulting from the manufacture, construction, design, formulation, development of
standards, preparation, processing, assembly, testing, listing, certifying, warning,
instructing, marketing, selling, advertising, packaging, or labeling of any product.” G.S.
Sec.
99B-1(3).
The Act is inapplicable to claims “where the alleged defects of the product
manufactured by the defendant caused neither personal injury nor damage to property
other than to the manufactured product itself.”
2. Negligence
A manufacturer’s liability in tort has been described as follows: “As a general rule a
manufacturer is under a duty to make an article carefully where its nature is such that it is
reasonably certain to place life and limb in peril when negligently made, and he is liable to

a third person for an injury resulting from a failure to perform this duty.”
In general, a negligence action may proceed in the absence of a contract with the
defendant, even in a products liability case. Where there is contractual privity, the
negligence claim may be barred by the Ports Authority issue, discussed above in the
section regarding negligence claims by the owner against the contractor.
North Carolina does, however, recognize the “economic loss rule,” which operates to bar

certain negligence actions against manufacturers.
a) Economic Loss Rule
Some cases, however, have stated that “North Carolina has adopted the
economic loss rule, which prohibits recovery for economic loss in tort.” And “Our state
courts have not decided whether, in the context of a products liability suit, purely economic
losses can be recovered in an action for negligence. The majority of courts which have
considered this question have held that purely economic losses are not ordinarily
recoverable under tort law.” Chicopee, Inc. v. Sims Metal Works, Inc., 98 N.C. App. 423,
432 (1990) (adopting rule).
One North Carolina case, for example, cited Watermark Asso. v. Celotex Corp., 784 F.2d

1183, 1186 (4th Cir. 1986). (Metric Constructors actually cited to Watermark erroneously
for the proposition that “economic losses” are not recoverable under an implied warranty
theory. In fact, Watermark expressly allowed the warranty theory to proceed for economic
losses.) Watermark held “a negligence action cannot be maintained for an intangible
economic loss.”
The application of this rule, however, is problematic. There are issues as to (i) when
the doctrine applies to a tort action, (ii) what constitutes “economic loss.”
(1) when doctrine applies
The statement in Moore (“the economic loss rule . . . prohibits recovery for
economic loss in tort”) is overly broad. There are clearly cases where a person can sue for
“economic loss” in tort.

As a general rule, a person injured by the negligence of another is entitled to all
damages flowing from the negligence. This includes compensation for items such as lost
profit. Champs Convenience Stores, Inc. v. United Chemical Co., 329 N.C. 446, 462 (1991)
(in action against supplier of chemical for negligence, when improper chemical caused
store to close, store entitled to recover lost profits, in addition to rent and note payments
while building was being repaired; “In a tort action the general rule in North Carolina is that
a plaintiff is ‘entitled to recover an amount sufficient to compensate . . . for all pecuniary
losses sustained . . . which are the natural and probable result of the wrongful act and
which . . . are shown with reasonable certainty by the evidence.'”); Howell v. Fisher, 49 N.C.
App. 488, 495 (1980) (“An action for negligent misrepresentation by third persons lacking
privity to recover economic loss has only recently gained acceptance, but it now appears to
be the prevailing American law.”).

The “economic loss rule,” preventing the recovery of “economic losses” in a
negligence claim, seems to be limited to some sort of products liability claim. The
rationale for this rule has been stated as follows:

The rationale for the economic loss rule is that the sale of goods is
accomplished by contract and the parties are free to include, or exclude, provisions as to
the parties’ respective rights and remedies, should the product prove to be defective. To
give a party a remedy in tort, where the defect in the product damages the actual product,
would permit the party to ignore and avoid the rights and remedies granted or imposed by
the parties’ contract.

Moore v. Coachmen Indus., 129 N.C. App. 389, 402 (1998).
Language from other cases suggest that the doctrine is limited to claims arising
from a defective product. Chicopee, Inc. v. Sims Metal Works, Inc., 98 N.C. App. 423, 432
(1990) (“Our state courts have not decided whether, in the context of a products liability
suit, purely economic losses can be recovered in an action for negligence.”); Reece v.
Homette Corp., 110 N.C. App. 462, 466 (N.C. Ct. App., 1993) (“The U.C.C. is generally
regarded as the exclusive source for ascertaining when the seller is subject to liability for
damages if the claim is based on an intangible economic loss and not attributable to
physical injury to person or to a tangible thing other than the defective product itself.”;
plaintiff’s claim for mobile home is limited to UCC action). ATT Corp. v. Medical Review of
N.C., Inc., 876 F.Supp. 91 (E.D.N.C. 1995) (“with respect to what loses are recoverable in a
products liability suit, North Carolina follows the majority rule and does not allow the
recovery of purely economic losses in an action for negligence.”).
Our courts have also recognized tort actions against various professionals by
persons not in privity with the professional. Alva v. Cloninger, 51 N.C. App. 602, 277 S.E.2d

535 (1981) (home buyer not in contractual privity with appraiser may recover damages for
“economic loss” proximately caused by negligence in the performance of a real estate
appraisal; the plaintiff in Alva alleged that he had suffered economic loss by relying on
defendant’s appraisal which indicated that the home purchased by plaintiff was in good
condition when in fact the house contained serious defects). Accord HBS Contrs. v.
National Fire Ins. Co., 129 N.C. App. 705, 712-713 (1998) (where architect has general
supervisory power, such that he has the final authority to determine compliance with the
contract [between the owner and the contractor], and he negligently performs a contractual

duty, a third party general contractor, who may foreseeably be injured or sustain an
economic loss [as a result of the architect’s negligence], has a cause of action against the
alleged negligent architect). Davidson and Jones, Inc. v. County of New Hanover, 41 N.C. App.

661, 255 S.E.2d 580 (1979) (economic loss foreseeably resulting from breach of an
architect’s common law duty of due care in performing his contract with the owner);
Shoffner Industries, Inc. v. W. B. Lloyd Constr. Co., 42 N.C. App. 259; 257 S.E.2d 50 (1979).

But see McKinney Drilling Co. v. Nello L. Teer Co., 38 N.C. App. 472, 476 (1978) (in the
absence of privity of contract, the supervising engineer could not be liable for negligent
performance of the contract with the general contractor to supervise the excavation caisson

shafts).
A case from 2007 clarifies that the ELR does not apply if those two parties did not
have a contract. In this case, the homeowners entered a contract with a general contractor
for a house. The homeowners later sued a subcontractor, who supplied trusses for the job;
the claim was based on negligence. The homeowners prevailed, and the Court of Appeals
wrote, “We hold that the 84 Lumber Defendants [subcontractors] had a duty to use
reasonable care in performing its promise to provide reliable trusses to Customized
Consulting [general contractor] for use in the construction of the Lords’ residence. Because
there was no contract between the Lords and the 84 Lumber Defendants, we further find
that the economic loss rule does not apply and therefore does not operate to bar the Lords’
negligence claims.” Lord v. Customized Consulting Specialty, Inc., 182 N.C. App. 635, 643
(2007). This case distinguished another case involving products (rather than a house),
based on provisions from Chapter 99B (regarding product liability actions).

(2) what constitutes “economic loss”

In those cases where the “economic loss rule” applies, (i.e. products liability cases
alleging negligence against a manufacturer), the rule prevents only the recovery of
“economic losses.” Our cases, however, have not clearly defined what constitutes
“economic loss.”
The defective product is clearly encompassed within this rule. “The courts have
construed the term ‘economic losses’ to include damages to the product itself.” Moore v.
Coachmen Indus., 129 N.C. App. 389, 401 (1998) (purchaser of RV could not sue seller or
manufacturer in negligence for loss of RV). Accord Reece v. Homette Corp., 110 N.C. App.
462, 466 (1993) plaintiff’s claim for defects in mobile home is limited to UCC action);
Terry’s Floor Fashion v. Georgia-Pacivic Corp., 1998 U.S. Dist. Lexis 15392 (E.D.N.C. 1998)
(in action against manufacturer-vendor of floor underlayment, claim for replacing defective

replacement, which damaged flooring, was barred by economic loss rule; note that
presence of privity does not affect application of doctrine).
It is not clear, however, what constitutes “economic loss” beyond this initial rule. In
other contexts, it is generally held that “economic loss” is anything other than bodily injury
or disability. Finkel v. Finkel, 590 S.E.2d 472, 474 (2004) (in equitable distribution
proceeding, “non-economic losses” are “personal suffering and disability,” as distinguished
from “economic loss”).
One case states that there may be differing tests as to what constitutes “economic
loss.” A federal court applying North Carolina law recognized that some cases define
economic loss as loss resulting from a failure of the product to perform as intended (as
opposed to resulting from “some peripheral hazard”), and other cases define it as loss
other than “physical harm” (defined as “physical injury to a person or to a tangible thing
other than the defective product itself”). ATT Corp. v. Medical Review of N.C., Inc., 876 F.
Supp. 91 (E.D.N.C. 1995) (action by purchaser of phone system against manufacturer for
phone charges incurred due to alleged defects in security of phone and system; finding
that under either theory, purchaser’s losses constitute “economic loss” and are
barred).
The economic loss rule, however, does not apply to consequential damage to
property other than the product itself. In Coachmen, the Court stated that the “other
losses” are recoverable in tort. Moore v. Coachmen Indus., 129 N.C. App. 389, 402 (1998)
(“Where a defective product causes damage to property other than the product itself, losses

attributable to the defective product are recoverable in tort rather than contract.”; claims
for contents of RV would generally be recoverable in tort; claims are, however, barred by
provision in express warranty limiting recovery of consequential damages). Accord
Chicopee, Inc. v. Sims Metal Works, Inc., 98 N.C. App. 423 (1990) (where pressure vessel
exploded, damaging fabric and chemicals used in manufacturing process, plaintiff buyer
could sue manufacturer in negligence for damage to fabric and chemicals); Reece v.
Homette Corp., 110 N.C. App. 462, 466 (1993) (limiting plaintiff’s claim in negligence
arising from defective product to “physical injury to person or to a tangible thing other than
the defective product itself.”).
It should be noted, however, that in some instances, the “economic loss” rule bars not
only a claim for the product itself, but to resulting damage. In Gregory v. Atrium Door, the
plaintiff homeowner sued the manufacturer of a defective door which leaked and caused
damage to the floor. The court applied the economic loss rule to bar a claim for implied
warranty. Gregory v. Atrium Door and Window Co., 106 N.C. App. 142, 144 (1992) (“The
general rule is that privity is required to assert a claim for breach of an implied warranty
involving only economic loss.”; “The trial court’s findings reflect that only economic loss
resulted from the alleged breach in the form of malfunctioning and deteriorating doors,
along with some water damage to flooring.”). The appellate court reversed the judgment
for the plaintiff. Although Gregory involves “economic loss” in the context of an Implied
Warranty claim, it presumably has application in a tort case in determining what
constitutes “economic loss.”
A couple of federal cases have construed Gregory, and have attempted to clarify its
holding. In Wilson v. Dryvit Systems, Inc., 206 F. Supp. 2d 749 (E.D.N.C. 2002), the home
owner sued the manufacturer of the house’s cladding in negligence, alleging that the
siding was defective and allowed water to enter the structure, resulting in damages for the
cost of replacing the siding and for damage to the sheathing, windows, doors, and sub-
flooring. The court held that the owner’s negligence action was subject to the economic
loss rule, and hence the owner could not recover for the cost of replacing the cladding. The
court stated a rule that “when a component or part of a system or product injures the rest
of the product or the system, only economic loss has occurred.” It held that “Dryvit’s EIFS
cladding is an integral component of plaintiffs’ house. The damage caused by the
allegedly defective Fastrak therefore constitutes damage to the house itself.” Accord
Higgnbotham v. Dryvit Systems, Inc., 2003 Lexis 4530 (2003) (home owner’s negligence
claim against manufacturer of stucco siding barred by economic loss rule; rejecting
attempts to distinguish case involving house from other economic loss rule cases; absence
of privity does not preclude application of rule).
One case, however, has imposed some limitation on this rule. In Terry’s Floor Fashion v.

Georgia-Pacivic Corp., 1998 U.S. Dist. Lexis 15392 (E.D.N.C. 1998), the plaintiff-retailer
bought a floor underlayment from the defendant-manufacturer. The underlayment was
allegedly defective and resulted in damage to the flooring, ultimately requiring the retailer
to repair his customers’ floors, including replacing the underlayment and the flooring. The
plaintiff-retailer then sued the defendant-manufacturer for negligence. The federal court
held that the economic loss rule barred the plaintiff’s recovery for the cost of replacing the
underlayment under the negligence action. Regarding the floor covering, however, which
was not the defendant’s product, but rather was a resulting damage, the court held that
this aspect of the negligence claim was “other property,” and was distinct from the
underlayment. It should be noted, however, that the court had another twist on its
analysis, and concluded that the “other property” (i.e. the flooring) did not belong to the
plaintiff (but rather belonged to the home owner), and hence was not subject was not to
recovery as a negligence action (because under e.g. Ports Authority a person has
negligence action in the presence of a contract only if his other property is damaged).
One case holds that the economic loss rule bars recovery for the cost of replacing a
defective item. Chicopee, Inc. v. Sims Metal Works, Inc., 98 N.C. App. 423 (1990) (where
pressure vessels were installed in plant, and one exploded, and it was discovered that
approximately three-quarters of the pressure vessels had not been manufactured in
accordance with the ASME Code, and plaintiff replaced all the defective cans, “[A]s a
matter of law, the plaintiff’s recoverable damages must be limited to actual damage to
property resulting from the alleged negligence of the defendants and cannot include
economic or pecuniary losses such as the costs to replace property not damaged by the
explosion described in the complaint.”; cost of inspecting and replacing defective pressure
vessels not recoverable in negligence).
In a similar vein, costs and damages incurred in replacing the defective item are
encompassed with the EL rule, and are generally not recoverable in tort. 2000 Watermark
Asso. v. Celotex Corp., 784 F.2d 1183, 1186 (4th Cir. 1986) (rejecting argument that when
shingles are removed, felt paper is damaged, creating actual property damage, because
“The cost of replacing the old felt is an incidental expense which may be recoverable in a
warranty action, but it will not support an action for negligence.”).
A claim for bodily injury is clearly not “economic loss.” Some cases recognize the need
to permit these claims to proceed, as follows:

The distinction that the law makes between recovery in tort for physical
injuries and recovery in warranty for economic loss is hardly arbitrary. It rests upon an
understanding of the nature of the responsibility a manufacturer must undertake when he
distributes his products. He can reasonably be held liable for physical injuries caused by
defects by requiring his products to match a standard of safety defined in terms of
conditions that create unreasonable risks of harm or arise from a lack of due care. This is
reasonable because the cost of injury may be an overwhelming misfortune to the person
injured. It is a needless misfortune since the risk of that injury can be insured by the
manufacturer and distributed among the public as a cost of doing business. This
rationale, however, does not justify requiring the consuming public to pay more for their
products so that the manufacturer can insure against the possibility that some of his
products will not meet the business needs of his customers.

2000 Watermark Asso. v. Celotex Corp., 784 F.2d 1183, 1186
(4th Cir. 1986) (S.C. Law; cited by North Carolina cases; “Watermark has never alleged that

these shingles actually leaked. The damage alleged is economic and aesthetic.
Watermark charges that the blisters have shortened the life expectancy of the roof and
destroyed its aesthetic appeal”; “The central question in this products liability case is
whether, under South Carolina law, a plaintiff can recover in negligence for an intangible
economic loss.”; “a negligent act is not in itself actionable and only becomes so when it
results in actual physical damage.”).

III. Statutes of Limitation and Repose.
Construction claims are subject to a statute of limitations and also a statute of
repose. This section addresses these two limitations on actions. If the action is not brought

within the applicable statute of limitations and statute of repose, then the action is barred
in its entirety.
A. Statute of Limitations.
In North Carolina, an action for breach of contract and an action for negligence
have a three year statute of limitations.
The statute of limitations generally begins to accrue (i.e. begin) from the date of
the breach or the date of the negligent act. Where the action is not brought within three
years, it is barred.
G.S. Sec. 1-52(16) sets forth a discovery rule, stating:

Unless otherwise provided by statute, for personal injury or physical
damage to claimant’s property, the cause of action, except in causes of actions referred to
in G.S. 1-15(c), shall not accrue until bodily harm to the claimant or physical damage to his

property becomes apparent or ought reasonably to have become apparent to the claimant,

whichever event first occurs.

Further, in the context of improvements to real property, G.S. Sec. 1-50(a)(5)f.
states:

For purposes of the three-year limitation prescribed by G.S. 1-52, a cause of
action based upon or arising out of the defective or unsafe condition of an improvement to
real property shall not accrue until the injury, loss, defect or damage becomes apparent or
ought reasonably to have become apparent to the claimant.

The statute of limitations is effectively extended, however, where the damage or
defect is not readily discoverable. Pursuant to statute, when the damage or defect is not
readily discoverable, the statute does not begin to run until the owner of the property
knows, or in the exercise of reasonable diligence should know, of the defect or damage.

Many of the appellate cases addressing the statute of limitations focus on
whether the claimant knew or should have known of the defect. The cases are somewhat
difficult to reconcile.
In one case, for example, the owner sued the builder for defects in glass panels
in the building. The building owner’s maintenance superintendent supervisor, however,
wrote memo stating that he was “very concerned about this, and rightly so” more than
three years before suit was filed. The court held that the claim was barred.
In another case, a building owner became aware of a leaking roof in 1973, but
did not file suit until 1981. Pembee Mfg. Corp. v. Cape Fear Constr. Co., 313 N.C. 488, 329
S.E.2d 350 (1985). The Superior Court granted the defendant’s Motion for Summary
Judgment, and the Court of Appeals and Supreme Court affirmed. The Court held that the
claim accrued in 1973, and was time-barred. The plaintiff attempted to distinguish the
initial damage in 1973 (leaking roof) from subsequently discovered damage in 1980
(blistering to roof) in order to save its claim. The Court rejected this argument as follows:

As soon as the injury becomes apparent to the claimant or should
reasonably become apparent, the cause of action is complete and the limitation
period begins to run. It does not matter that further damage could occur; such further
damage is only aggravation of the original injury.

The court also stated, “The fact that further damage which plaintiff did not expect was

discovered does not bring about a new cause of action, it merely aggravates the original
injury.”
The Court of Appeals decision, which was affirmed, stated “That further
evidence of the defective nature of the roof was discovered in 1980 does not permit
plaintiff to circumvent the bar of the statute of limitations.” And, “G.S. 1-52(16) . . . does
not change the fact that once some physical damage has been discovered the injury
springs into existence and completes the cause of action.”
Other cases holding that claims are barred by the three year statute are as
follows:

  • suit against builder for moisture retention causing mildew and staining was barredby G.S. 1-52 where forecast of evidence shows that plaintiffs were aware of problems more
    than three years before action was filed; summary judgment affirmed;
  • summary judgment as to contract and negligence claims affirmed where plaintiff
    admitted
    that parking deck surface was peeling and water was leaking in 1987, and plaintiff filed
    suit in 1992;
  • “Evidence that New Bern’s roof began leaking in 1975 was uncontradicted at the
    hearing
    for summary judgment. Thus, its cause of action for injuries arising from the alleged
    defects accrued in 1975.”;
  • Defendant built a gymnasium for the plaintiff, and complained to the builder of water
    leaking from the roof in 1977. The builder attempted to repair the roof, but the leaks did
    not ultimately stop. “These complaints clearly show that plaintiff knew its roof was
    defective at least as early as sometime in 1977, even if it was not aware of the extent of
    the damage. Knowing of the leaks, plaintiff was obligated to inform itself of the nature
    and extent of the roof’s defects.”;
  • Where house was struck by lightening, claim (against insurer) runs from that date,
    when
    walls were scorched and bricks were cracked, and not from notice of cracks in mortar
    discovered years later, after statute had expired;
  • Where the owner know of some damage in 1992, his claim in 1999 was barred,
    because
    “Any further damage discovered in 1999, does not permit [the owner] to circumvent the barof the statute of limitations.” “Once some physical damage has been discovered, the
    [damage or] the injury springs into existence and completes the cause of action.”

On the other hand, there are cases coming out the other way. Some cases hold
that where the plaintiff had only a suspicion of a problem, the statute did not begin to run.

For example, where the plaintiff landowners stopped using the water from their well, but
they had not been officially told that their well water was contaminated, and owners were
assured by agents of the state on several occasions that their water was not contaminated
by gasoline, and owners were doing everything that they could do to get NRCD to continue
to test their water, the claim did not begin until they were officially notified of the problem
later, because “Prior to the determination by the ACHD that their water was contaminated,
the Hills and the Wilsons did not know that they had a cause of action for contamination of

their water.”
Similarly, even thought a well owner noticed the water tasted bad and smelled funny
and he did not use the water for drinking or cooking, where he attributed the taste and
odor of the water to the presence of lime in the well, and he was initially told that the water

was “okay for use,” his claim did not accrue until he received formal notification that his
well water was contaminated with benzene. “[A] mere suspicion of contamination will not
begin the statute of limitations period.”
In the buyer’s suit against the seller for water damage, even though plaintiff discovered

water intrusion in the garage and living room, and plaintiff hired a painter who inspected
the house and notified the buyer that he had worked on the exterior of the house
previously, at which time he had painted the exterior of the house, cleaned the roof, and
sealed the roof with a “special sealer,” and told plaintiff that he had found rot on certain
windows and that he had pointed this out to the seller, and that he had noticed seller
doing “repair work on the windows quite often,” and that, as a result, “he was under the
impression that quite a number of windows had water problems,” “the evidence . . . allows
at least an inference that the alleged damage was not apparent, and should not
reasonably have been apparent, to plaintiffs ‘based on this information’,” where they
contend “that they did not discover that their home suffered significant water intrusion
damage and construction defects until” later, and that “they did not realize the nature of
the defects and the extent of the damage until” later.
B. Statute of Repose.
In actions “arising from damage to real property,” there is a six-year statute of
repose. If the claim is not brought within this period, then it is barred in its entirety. G.S.
Sec.
1-50(a)(5)a. states, “No action to recover damages based upon or arising out of the
defective or unsafe condition of an improvement to real property shall be brought more
than six years from the later of the specific last act or omission of the defendant giving rise
to the cause of action or substantial completion of the improvement.”
The first determination is whether the action arises from an “improvement to real
property.” In a case involving the construction of a house, this statute of repose will usually

apply. There is a “gray zone” in cases where, for example, a fixture is installed into a
residence or attached to real property. The general test in determining whether the action
arises from an improvement to real property is the intent of the parties. For example, an
action arising from the redesign and repair of a chairlift at a ski business is subject to the
real property statute. And claims against a manufacturer of floor coverings was subject to
this statute.
“When the rights of a third party, who is unconnected to the land or the original
transaction involving the annexation of the chattel, are concerned, the question is how the
intent of the parties to the transaction is manifested to the third party through ‘physical
facts and outward appearances.'”
When the statute applies, the six-year period begins to run from the date of
substantial completion. Many cases addressing this statute address what constitutes
substantial completion. This term has been defined as follows:

For purposes of this subdivision, ‘substantial completion’ means that degree
of completion of a project, improvement or specified area or portion thereof (in accordance
with the contract, as modified by any change orders agreed to by the parties) upon
attainment of which the owner can use the same for the purpose for which it was intended.

The date of substantial completion may be established by written
agreement.

“An owner of a residential dwelling may use it as a residence when the
appropriate government agency issues a final certificate of compliance.”
Where the action is not brought within six years, the claim is barred.
Some claims may be subject to the products liability statute of repose. For
example, a claim relating to underground storage tanks have been held to not be subject
to the statute, where the tanks were removed from the land at the termination of the
contract and were not a part of the real property at the time this action was filed.
Where the claim is deemed to be a “product liability” action, the statute of repose is
twelve years running from the date of “initial purchase for use or consumption.” G.S. Sec.
1-
50(6). Where component parts are purchased by a manufacturer, this is not the “initial
purchase for use” of the parts; rather, that occurs when the buyer purchases the
manufactured item.
Where the sub-contractor applied synthetic stucco, the statute began to run on the
owner’s claim against the manufacturer, rather than when plaintiffs purchased their
house. “The EIFS begins to perform this function at the moment of application. The EIFS,
therefore, was first ‘purchased for use or consumption,’ by the subcontractor who applied
the EIFS to the plaintiffs’ residence. Once the applicator applied the EIFS, it was
‘consumed,’ that is, ‘utilized in the construction process,’ which use resulted in its
transformation . . . and the destruction of its original form . . . .”
The statute of repose is said to be “absolute.” The owner cannot, unlike with the
statute of limitations, effectively extend the statute of repose based on his or her lack of
knowledge of the defect. In fact, with respect to a statute of repose, a claim can
theoretically be barred even before the injured party is aware of his or her damage.
1. Control Exception
G.S. Sec. 1-50(a)(5)d. states:

The limitation prescribed by this subdivision shall not be asserted as a
defense by any person in actual possession or control, as owner, tenant or otherwise, of the
improvement at the time the defective or unsafe condition constitutes the proximate cause
of the injury or death for which it is proposed to bring an action, in the event such person in

actual possession or control either knew, or ought reasonably to have known, of the
defective or unsafe condition.

The “control exception” applies only if the defendant (the defendant raising the repose
defense) was in control of the improvement at the time of the injury. Where the defendant

was in control of the property at the time of the injury, the control exception prevents him
from raising the statute of repose.
2. Fraud or willful and wanton exception
G.S. Sec. 1-50(a)(5)e. states:

The limitation …shall not be asserted as a defense by any person who shall
have been guilty of fraud, or willful or wanton negligence in furnishing materials, in
developing real property, in performing or furnishing the design, plans, specifications,
surveying, supervision, testing or observation of construction, or construction to an
improvement to real property, or a repair…or to any person who shall conceal any such
fraud, or willful and wanton negligence.

It is not clear what constitutes willful or wanton conduct so as to avoid this
provision. There is generally a high standard to invoke this provision. Thus, where a home
owner sued the contractor and drywaller for moisture intrusion from the application of a
synthetic stucco product, the evidence was insufficient to preclude the six year statute of
repose.

C. Common Law Exceptions to Doctrines
As with most defenses, claimants are sometimes able to circumvent the literal
and strict application of the rule. Courts have recognized several doctrines to allow a
claimant to pursue a claim which would otherwise be barred by the statute of limitations or

the statute of repose.
One such doctrine is a doctrine of fraudulent concealment. The cases are not
clear on whether this is a viable response to a statute of limitations defense. It has been
held that the fraudulent concealment doctrine cannot toll the statute of repose.
A plaintiff can also argue that the defendant is equitably estopped from raising
the statute of limitations defense. For example, where the plaintiff hired the defendant
construction company to erect a building, and before construction was completed, the
clients complained of defects, and the defendant said, “We have found the trouble and
made the necessary corrections. . . . My company will be entirely responsible and we will
remedy the situation, if it should occur,” and the plaintiff relied upon the promise and did
not sue while efforts to correct the structural errors were under way, the builder by its
promises, invited the delay and should not complain that the invitation was accepted.”

The defendant can also apparently be estopped from raising the statute of
repose defense. There is, however, a high standard for the plaintiff to meet to invoke this
doctrine. Thus, where the builder promised that all windows and doors were inspected and

properly flashed, but in fact the windows and doors in the entire house had not been
flashed, and the doors and windows did not reveal the presence of any sealant, as required

by the manufacturer, but plaintiffs did not offer evidence regarding defendant’s knowledge

or experience with EIFS, the trial court’s determination that estoppel did not apply was
affirmed. “Plaintiffs’ affidavits . . . failed to show that defendant’s actions constituted a
‘conscious and intentional disregard of . . . the rights and safety of others.’ Plaintiffs failed
to produce evidence to raise a genuine issue of material fact to survive summary
judgment.”
In an action for breach of warranty, it has been held that “A statute of
limitations is tolled during the time the seller endeavors to make repairs to enable the
product to comply with a warranty.”

Another argument which is sometimes made is that the defendant’s conduct
was “continuous,” such that the statute of limitations or repose is effectively tolled or
extended. The doctrine was initially applied to the malpractice area, in which the courts
held:

The continued course of treatment rule, however, applies to situations in
which the doctor continues a particular course of treatment over a period of time. The
theory is that “so long as the relationship of surgeon and patient continued, the surgeon
was guilty of malpractice during that entire relationship for not repairing the damage he
had done and, therefore, the cause of action against him arose at the conclusion of his
contractual relationship.”

The courts have been reluctant to apply these doctrines in the construction
context. Where the contractor returns to the structure to make a repair, the statute of
repose does not start running again. In Monson v. Paramount Homes, Inc., 133 N.C. App.
235, 515 S.E.2d 445 (1999), the court said:

To allow the statute of repose to toll or start running anew each time a repair
is made would subject a defendant to potential open-ended liability for an indefinite
period of time, defeating the very purpose of statutes of response such as N.C. Gen.Stat. 1
-50(5).
“A ‘repair’ does not qualify as a ‘last act’ under N.C.G.S. Sec. 1-50(5) unless it is required
under the improvement contract by agreement of the parties.”

In this case, subsequent owners of a synthetic stucco home brought an action
against Paramount Homes, a general contractor, for defective construction. Paramount
filed a third-party complaint against Carolina Builders Corporation (“CBC”) seven years and

two months after the house was completed. CBC had repaired and replaced several of the
windows and doors at the plaintiff’s request four years after the house was completed.
CBC moved to dismiss the third-party complaint on the grounds that Paramount’s claims
were time-barred under the statute of repose.
In another case, addressing the six year limitation but not directly addressing the
“control exception,” the Court of Appeals rejected an argument that the developer-builder
of a condominium had a “continuing duty” toward the unit owners and association due to
continued ownership in units which were not at issue in the suit.
Where there is a re-newing trespass, those claims for damages occurring more
than three years before the filing of the complaint are barred, but the claims for damages
occurring within three years of the filing of the complaint are still actionable.

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