The Construction Counselor

KEY TAKEAWAYS

• Statute of Limitations May Not Start to Run Until Substantial Completion
  The Minnesota Court of Appeals held that the two-year statute of limitations for claims against contractors arising out of “defective and unsafe conditions” does not begin to run until the entire project is substantially complete.
• Contractor Termination or Abandonment Doesn’t Trigger Accrual
  Even if a contractor is removed early due to a dispute, the statute does not begin to run until the project as a whole reaches substantial completion.
• Contractors Face Extended Uncertainty
  Decision could create longer periods of potential liability for contractors who exit projects early.

In construction projects, deadlines are key. Property owners want to know when their project will be completed, and contractors want to know how long they have to get their permits, order materials, deploy subcontractors, and do everything else that goes into satisfying an owner’s deadlines.

However, when something goes wrong on a project, property owners and contractors need to remember another type of deadline: the statute of limitations. The applicable statute of limitations controls how long a party has to file a lawsuit. When a dispute breaks out, owners want to know how long they have to file their lawsuit, and contractors want to know how long they have until they can breathe a sigh of relief that an owner’s time to file has run out.

But calculating when a statute of limitations runs out depends on when the clock starts running. Courts call this figuring out when a claim first “accrues.” However, determining when a claim against a contractor “accrues” can be tricky under Minnesota law.

The Minnesota Court of Appeals recently took up this issue in American Family Insurance Co. v. NB Electric, Inc., et al., Case No. A24-0377 (Minn. App. Jan. 21, 2025). In American Family, the homeowners hired a general contractor to remodel their home beginning in February 2020. In July 2020, a fire damaged the home. The homeowners alleged that an electrical subcontractor caused the fire, and they terminated the contractor and subcontractor by April 2021. The homeowners hired replacement contractors, and the project was substantially completed by July 2021.

The homeowners filed suit against the original contractors in July 2023 — two years after the project was substantially completed in July 2021. The lower court dismissed the case after finding that a two-year Minnesota statute of limitations applicable to the homeowners’ claims had passed in April 2023.

The court’s decision was based on a lengthy statute, Minn. Stat. § 541.051, which states that claims “arising out of the defective and unsafe condition of an improvement to real property” must be brought within “two years after the cause of action accrues.” Under the statute, a cause of action cannot accrue “earlier than substantial completion, termination, or abandonment of the construction or the improvement to real property.” Minn. Stat. § 541.051 subd. 1(c).

The contractor in American Family argued that the homeowner’s claim was untimely because their “termination” from the “construction” project occurred in April 2021, and the homeowners did not file their claim until more than two years later, in July 2023. The homeowners countered that “construction, termination, or abandonment of the construction,” as used in the statute, refers to the “entire construction project, not the individual contractor who is terminated.” Therefore, their claim did not accrue, and the clock did not start running on the two-year statute of limitations, until the project was substantially completed in July 2021. The Court of Appeals agreed with the homeowners and allowed their lawsuit against the contractors to proceed.

The opinion includes a dissent that focuses on the uncertainty this decision creates for contractors who are terminated or abandon their work because of a dispute early on in the project. Depending on when the project reaches substantial completion, the two-year statute of limitations might not begin to run for years after the contractor leaves the project. The Court of Appeals considered this uncertainty but concluded that the statute’s language bound it. The case is now on appeal to the Minnesota Supreme Court.

For further guidance about the legal aspects of your construction project, or for more information about this topic, please contact the author, attorney Christian Hokans.