Post-Construction Contract Claims: Statutes of Limitations and the "Discovery Rule"

By Steven C. Bennett*
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Breach of contract; Construction claims; Limitations; United States

Because injuries are not always recognisable when they occur, courts often apply the "discovery rule", tolling applicable statutes of limitations until the plaintiff knows, or should know. of a breach of duty. This rule, often applied in the tort context, is typically not applied with respect to contract cases. Instead, in contract cases, generally, the "cause of action accrues at the moment the contract is breached, regardless of whether the injured party knew or should have known that the breach occurred."' Although some courts have extended the discovery rule to construction cases, "sometimes analogiz[ing] the hidden defect in the house to the hidden nature of the tort in medical malpractice case^",^ the discovery rule generally does not apply to construction lawsuits arising from breach of contract. Instead, the statute of limitations begins to run upon completion of c o n s t r ~ c t i o n . ~
'The author is a partner in the New York City office of Jones Day and a member of the firm's Construction Practice Team. The views expressed are solely those of the author, and should not be attributed to the author's firm, or its clients. Marissa J. Cohen, an associate, and Thomas J. Bassolino, a summer associate at Jones Day, assisted in the preparation of this article. This article was first published in the September 2008 issue of Consrrucrion Litigation Reporter and is reproduced here with the kind permission of the publishers, Thomson Reuters. CLL Associates LP v Arrowhead Pacific Corp, 174 Wis. 2d 604, 607, 497 N.W.2d 115, 116 (1993). Sonja Larsen, "Annotation, Modem Status of the Application of 'Discovery Rule' to Postpone Running of Limitations Against Actions relating to Breach of Building and Construction Contracts" (2006) 33 A.l.r.5th I $?[a]. L e w i s v h i n n . 100 A.D.?d 617, 618, 473 N.Y.S.2d 575, 576 (1984); see also Jaworsky v Frolich 850 p.2d 1052, 1054 (Okla. 1993) ("We recently addressed when the statute of limitations starts to run for breach of a construction contract. . . . adopt[ing] the rule that 'the limitations period begins to run when the contract is completed."' (citing Samuel Roberts Noble Found Inc Vick 840 p.2d 619, 622-23 (Okla. 1992))); see also State v Lundin, 91 A.D.2d 343, 345, 459 N.Y.S.?d 904, 906 (1983) ("[lln construction contract cases . . . the owner's causes of action 'however verbally classified, accrue for purposes of all Statutes of limitations on completion of construction"' (quoting Sears, Roebuck & Co v Enco Assocs Inc 43 N.Y.2d 389, 393, 401 N.Y.S.2d 767, 770, 372 N.e.2d 555. 557 (1977)).

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By way of example, the plaintiffs in CLL Associates LP v Arrowhead Pacific Corp, a Wisconsin case, contracted to have two apartment buildings c o n ~ t r u c t e dMore than a decade after construction, they filed a suit against the .~ contractor, claiming that the buildings lacked structural support and had defective windows. The plaintiffs relied on the discovery rule in bringing the action, but the Wisconsin Supreme Court held that the discovery rule was limited to tort claims. In Regatta Condominium Association \i Village of Mamaroneck, a New York appellate court similarly dismissed a claim for negligent design and construction on statute of limitations ground^.^ The Court held that: "[t]he cause of action alleging faulty construction or design, whether characterized as negligence, malpractice, or breach of contract, accrued upon the date of completion of construction, not when the injury occurred or the defective condition [was] dis~overed."~ Courts have applied various rationales in rejecting application of the discovery rule to construction contract cases. The Court in CLL Associates grounded its decision in public policy. The lack of liability insurance available to contract defendants, combined with the fact that contracting parties have more control over risks than does an innocent tort victim, led the Court to conclude that "the need to protect defendants from stale or fraudulent claims outweighs any injustice caused by barring rights of a ~ t i o n . " ~ The Court's holding in Bangor Water District v Malcolm Pirnie Engineers, which barred the plaintiff's claim, arose from the differences between contract and malpractice cases.8 In Bangor, the plaintiff contracted to have pipes installed underground. Twenty-one years later, after realising that the pipes were not installed to the specified depth, the plaintiff initiated an action. The Court noted that the existence of a confidential relationship between the parties and the presence of an undiscoverable tort might make application of the discovery rule proper in the malpractice context. However, the absence of these two characteristics in the construction context led to the Court's holding that the discovery rule did not apply. The Court in Corporation of Mercer University v National Gypsum Co. based its holding on the different types of injuries suffered by tort plaintiffs versus contract plaintiffs? The Court held that the discovery rule only applied to

CLL Associates 174 Wis. 2d at 6 0 7 4 8 , 497 N.W.2d at 1 16. Regatta Condominium Association v Village ofMamamneck 303 A.D.2d 737, 738, 758 N.Y.S.2d 348, 349 (2003). Regatta Condominium 303 A.D.2d 737, 738, 758 N.Y.S.2d 348, 349 (2003). For another example of a New York court refusing to apply the discovery rule in the construction context. see Mastropieri v Solmar Construction Co 159 A.D.2d 698, 699, 553 N.Y.S.2d 187, 188 (1990) (plaintiff attributed water damage in basement to defective foundation constructed by defendant construction company, but Court barred cause of action. holding that, "in construction contract cases, the completion of construction is the accrual date for an owner's claims against a general contractor arising from defective construction"). CLL Associates 174 Wis. 2d at 61 1, 497 N.W.2d at 1 18. Bangor Water District v Malcolm Pirriie Erigirieers 534 A.2d 1326, 1328-29 (Me. 1988). Corporation of Mercer University v Natiorial G?psum Co 258 Ga. 365, 365, 368 S.E.2d 732, 733 (1988).

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cases involving personal injury. Property damage alone, in the context of a construction project, would not suffice. The unwillingness of courts to apply the discovery rule to construction contract cases generally shields contractors from liability after a defined period of time, no matter when the injured party actually learns of a potential breach of duty. As a result, contractors (and owners) can determine with precision when the statute of limitations for construction-related claims will run. Such a rule saves contractors from worrying about surprise lawsuits years after completion of a project, and reminds owners of when they must assert claims. Although the discovery rule generally does not apply to contract claims, courts may invoke the rule for other causes of action. For example, in Jordun v Employee Transfer Corp., a realtor's failure to disclose information regarding flooding allegedly involved bad faith.'' As a result, the Court held that the statute of limitations did not begin to run until the plaintiffs "discovered the vice".

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Variations of the discovery rule may also apply to third party claims brought against contractors. In Travis Pruitt & Associates, PC v Bowling, an owner hired a contractor to complete a construction project, which included a drainage system.I2 A neighbour's property subsequently flooded, and the neighbouring property owner brought a lawsuit alleging that the drainage system caused the damage. The contractor moved for summary judgment, claiming that the statute of limitations barred the suit. The Court disagreed. holding that: "[tlhe true test to determine when a cause of action accrues is to ascertain the time when the plaintiff could first have maintained her action to a successful result."I3 Because the neighbouring property owner could not have maintained the cause of action until the damage actually occurred, her cause of action, as a third party, did not accrue until her property was damaged. A minority of courts apply the discovery rule to situations where an owner brings an action based upon tort and contract claims arising out of deficient design and construction. The case of Ehrenhafi v Malcolm Price, hic.. for example, involved a contract providing that "all work 'will be of good quality, free from defects and in conformity with the Contract D o c u m e n t s " ' . ' ~ f t e r plaintiffs discovered problems with the plumbing, window panes, and heater, they brought claims for breach of contract, warranty and negligence. The Court accepted the basic premise that in the contractual context, the statute of limitations began to run from the breach. However, the Court indicated that "American courts have extended the tort liability for misfeasance to virtually every type of contract where defective performance may injure the promisee."'5 As a result, the Court applied the discovery rule to the plaintiffs' claims. In so doing, it
1987). 1987) at 422. 225, 225, 518 S.E.2d 453, 454 (1999). '"ravis Pruitt 238 Ga. A p p . 225, 225. 518 S.e.2d 453, 454 (1999). Ehrenhaft v Malcolm Price, Znc 483 A.2d 1192, 1195 (D.C. 1984). Ehrenhaft 483 A.2d 1 192, 1 195 (D.C. 1984) at 1200 (quoting William L. Prosser, Law of Torts. 4th edn (West, 1971) 9 92. p.617).
'O Jordan v Employee Transfer Corp 509 So. 2d 420 (La. " Jordan v Employee Transfer Corp 509 So. 2d 420 (La. " Travis Pruitt & Associates, PC v Bowling 238 Ga. App.

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adopted the opposite rationale of that expressed in CLL Associates, holding that "the plaintiff's interest in having the protection afforded by the discovery rule [outweighed the] potential prejudice to the defendant."16 Legislators have passed statutes that, in essence, attempt to limit the common law discovery rule or variations thereof. For example, plaintiffs in Louisiana may bring a claim after demonstrating that the defect was not obvious to a reasonably prudent purchaser at the time of sale'' and that they would not have purchased the product had they known of the defect.'' However, a plaintiff in Louisiana has only a year from the date of purchase to bring such cause of action'" (called a claim in "redhibition") and, prior to doing so, must afford the seller a chance to solve the problem.20 Additionally, in Rhode Island, the Contractors' Registration Act allows for an administrative body to hear homeowners' claims against contractors within one year of either the sale of the home or the issuance of the certificate of occupancy.2' Providing buyers with this small window of time to pursue an action protects the contractor, who, in essence, becomes freed from potential liability under these circumstances after one year. Various states have also implemented "notice and opportunity to repair or builder's right to cure laws", which provide another form of protection to contractor^.^^ Like the Louisiana redhibition action described above, such statutes require buyers to inform contractors of defects before initiating any legal action. These statutes assume that providing the contractor with notice of a potential defect may afford an opportunity for the parties to resolve the problem without the need for litigation. Further, judges often apply statutes of this kind in rejecting application of the discovery rule to construction cases. For example, in Federal Insurance Co v Southwest Florida Retirement Center, Inc.. the Court reviewed a section of the Florida statutes dealing with construction claims and indicated that it "ma[de] no reference to a discovery rule for latent defect^."^' As such, the Court held, the plaintiff's claim regarding defects in construction was time barred. Contractors in many states also benefit from application of statutes of repose. A statute of repose "sets an outside limit on the plaintiff 's ability to bring a cause of action."24 Unlike statutes of limitation, which:
l 6 Ehrenhqft 483 A.2d 1192, 1195 (D.C. 1984) at 1202. "Louisiana Civil Code Ann. art.252l (West 1952). "Louisiana Civil Code Ann. art.2520 (West 1952). It is worth noting that the Louisiana statute has been found to apply equally to manufacturers of houses, as well as sellers of personal property. See Drewes v Giczr~grosso429 So.2d 198 (La. App. 1983). "Louisiana Civil Code Ann. art.2534 (West 1952). 20Louisiana Civil Code Ann. art.2531 (West Supp. 1985). 2' Rhodes Island General Laws $5 5-65-1 to 5-65-12 (1989). For a Court's application of the Contractor's Registration Act, see Ruginis v Rho& Island Contracturs' Regi~trarionBd 2000 WL 146520, at *5-6 (R.1. Super. Ct. 2000). 22 Matthew T. Boyer, "Modem Legislation Creates Ambiguities in Determining Deadlines for Asserting Residential Construction Defect Claims" (2006) 26 Corlstruction Lau,ver 28. 2' Federal Inslrrance Co v Southwest Florida Retirement Cer~ter Inc- 707 So.2d 1 1 19. 1122 (Fla. 1998). 24 See Steven G.M. Stein, (2006) Construction Law 3-507 ("Almost all statez and the District of Columbia have adopted special statutes of repose . . . [t]he exceptions are Kansas. . . . New York and Vermont. In Connecticut and Maine, the statute of repose applies only to actions against architects and engineers.").

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". . . simply limit[] the time within which an action may be brought after
it is has accrued, a statute of repose operates to bar a cause of action from coming into being after a specified period of time".25 Thus, a statute of repose "preempts the cause of action, barring it before any injury has been suffered . . . [leaving] the plaintiff. . . with an injury for which the law provides no remedy."26 A statute of repose constricts a cause of action within distinct temporal boundaries. Injuries discovered outside of these defined boundaries are barred. Statutes of repose thus guarantee that a contractor cannot be held liable for breach of contract after a prescribed period of time. The discovery rule works as an extension of ordinary statutes of limitation. For example, assume that the statute of limitations on a particular cause of action is 10 years. Assume further that the plaintiff does not discover his or her injury for five years. If the discovery rule applies, the plaintiff will have 10 years to bring the claim from the time of discovery, even if this period exceeds the original 10-year statute of limitation term. Now, assume instead that there is a 10-year statute of repose in place. If the plaintiff discovers his or her injury 15 years after the breach, the claim would be barred because it extends beyond the 10-year statute of repose, even though the claim might be timely under an ordinary statute of limitations. By refusing to extend the discovery rule to lawsuits based on construction contracts, courts provide certainty to parties who enter into construction contracts. Generally, statutes of limitations on construction contract claims begin to run at the time of completion of a project, leaving parties with a known timeframe during which lawsuits may arise. Applications of the discovery rule, for third party or tort claims, are relatively rare exceptions to this general rule.

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Stein, (2006) Construclion Law 3-507. Stein, (2006) Construction Law 3-507.

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