Commercial Contracts May Shorten The Statutes of Limitations

We often see clauses in contracts that shorten the statutes of limitations. Some have argued that such clauses are illegal but there are statutes and court decisions upholding such clauses in certain circumstances. One prominent case concerning a home inspector and an unsophisticated homeowner resulted in a holding that the clause would not be enforced where the contract shortened the time to sue the inspector to one year from the date of inspection, this being shorter than both the four year statute for known claims and any delayed discovery rules which hold the time to sue runs from the discovery of the improper act or event. One may reconcile these cases as balancing the amount of time that a party has to discover and make a claim with the sophistication of the parties.

The recent Brisbane Lodging LP v. Webcor Builders, Inc. case deals with latent construction defects (simply put, hidden defects not known to exist until they manifested years after completion) and whether claims could be brought where the general conditions of the contract between the parties (the 1997 version of the AIA A201 General Conditions) specified that any claims shall be deemed to have accrued no later than the date of substantial completion.

The events leading up to this case began in 1999. Brisbane Lodging, L.P. ("Brisbane") contracted with Webcor Builders, Inc. ("Webcor") for the design and construction of a large hotel. There were extensive negotiations which saw changes to the contract by both parties and their attorneys prior to it being signed on July 12, 1999. The project was substantially complete July 31, 2000.

In 2005, latent defects with respect to the plumbing were discovered. When these defects were discovered, the subcontractor made the repairs. In 2007, additional problems with respect to the plumbing were discovered. During the original construction, the subcontractor used ABS pipe, not cast iron pipe, for the sewer line. Neither Webcor nor the subcontractor made repairs when the additional problems were discovered.

A lawsuit was filed by Brisbane in 2008. Webcor moved for Summary Judgment - a motion that allows a court to enter judgment where there are no undisputed facts between the parties - arguing that the claims of Brisbane were beyond the statute of limitations provided for in the contract because the claims were deemed to have accrued as of July 31, 2000 (the date of substantial completion). The trial court granted Judgment for Webcor.

The Court of Appeal affirmed the Judgment. It pointed out clear maxims of law: Generally, the statute of limitations "...begins to run upon the occurrence of the last element essential to the cause of action." By statute, a latent construction defect cause of action may be brought upon the discovery of the injury and its negligent cause or when the injury could have been discovered through reasonable diligence. This is referred to as the delayed discovery rule because it protects the injured party since they are "blamelessly ignorant." According to Code of Civil Procedure §337.15, the statute of limitations is 10 years after the substantial completion of the improvement. The Legislature imposed this limitation to balance the rights of property owners with those of contractors who cannot remain standing by for a claim forever.

As for when the claim is known (called "patent"), Code of Civil Procedure §337 states that "An action upon any contract..." must be brought within four years. In this particular case, with the provisions of the General Conditions that applied, since the contract provided that the statute of limitations accrued no later than the date of substantial completion, the delayed discovery rules and statutes did not apply. All claims upon the contract were governed by Section 337 and had to be brought within four years. In several places within the opinion, the Court of Appeal discussed the sophistication of the parties. Indeed, it discussed how the contract was negotiated by lawyers. It is unknown how this clause would be interpreted in a non-commercial setting; clearly a one year statute would not be upheld, but would a four year statute be honored? When representing contractors we insert such clauses in contracts under the assumption and belief that they are valid and will be upheld.