Sophisticated parties and the delayed discovery rule

On Behalf of | Jul 5, 2013 | Contract Disputes |

As many know, statutes of limitations are deadlines in which one can file a lawsuit. There are situations, however, in which these deadlines can may be extended, and/or even shortened. Generally, in both tort and contract cases, the statute of limitations begin to run upon the occurrence of the last element essential to the cause of action. The cause of action normally accrues when, under the substantive law, the wrongful act is done and the obligation or liability arises. Courts, however, have developed exceptions, one being what is called the “delayed discovery rule.” This rule essentially prevents the statute of limitations from running until: 1) the plaintiff actually discovers his or her injury and its negligent cause, or 2) the plaintiff could have discovered injury and cause through the exercise of reasonable diligence.

The theory behind the delayed discovery rule is that it is unjust to deprive plaintiffs of a cause of action before they are aware that they have been injured. The rule protects a plaintiff who is blamelessly ignorant of his or her cause of action. The rule is one of an equitable doctrine designed to achieve substantial justice in situations where one party has an unfair advantage and it would be inequitable to deprive an otherwise diligent plaintiff in discovering his or her actions.

The California Legislature has expressly recognized that statutory limitations periods may be waived, and that private agreements waiving a defense based on the statutes of limitations are valid and enforceable. Public policy does not support a hard-line rule that the applicable statute of limitations cannot begin to run until the injury is or should have been discovered, notwithstanding a contractual agreement to the contrary.

The most recent case addressing this issue affirms public policy. The California Court of Appeals, 1st District, came down with a decision on June 3, 2013, in the case of Brisbane Lodging v. Webcor Builders, 216 Cal.App.4th 1249, 2013 Cal.App. LEXIS 439 (Cal. App. 1st Dist. 2013), holding that where parties are on equal footing and where there is considerable sophisticated give and take over the terms of the contract, those parties should be given the ability to enjoy the freedom of contract and to structure risk-shifting as they see fit without judicial intervention, such as the ability to abrogate the delayed discovery rule. (Id.)

The Plaintiff in Brisbane Lodging entered into a contract on July 12, 1999, with the Defendant, Webcor Builders (“Webcor”), to construct a hotel. In May 2008, Plaintiff filed a Complaint against Webcor alleging structural defects. The contract in Brisbane Lodging included the 1997 American Institute of Architects “Standard Form of Agreement between Owner and Contractor,” known as Form A201-1997. A201-1997, Section of the agreement regarding the commencement of statutory period of limitations states in pertinent part, “[a]s to acts or failure to act occurring prior to the relevant date of Substantial Completion, any applicable statute of limitations shall commence to run and any alleged cause of action shall be deemed to have accrued in any and all events not later than such date of Substantial Completion.” The court in Brisbane Lodging interpreted this section to abrogate the delayed discovery rule, and held that Plaintiff’s complaint against Webcor was time-barred since the action was brought more than four years after substantial completion of the contracted project.

One of the critical factors influencing the Court’s decision was that the parties were on equal footing during contract negotiations. The Court reasoned that sophisticated business parties should be able to negotiate freely, without court intervention, and abrogate the delayed-discovery rule. The Court found that enforcement of the AIA Provision in this context was fair and reasonable, and did not violate public policy, because the delayed-discovery rule was developed to protect plaintiffs who were “blamelessly ignorant” of their causes of action, not sophisticated commercial construction professionals with equal knowledge and skill.

The Court, however, did distinguish cases in which a purported contractual waiver of the delayed-discovery rule was found to be unenforceable and against public policy because the contracting parties were not on equal footing.

In summary, the Brisbane Lodging decision authorizes sophisticated construction parties to negotiate contracts that include significant limitations on their liability, and to abrogate the delayed discovery rule. This rule likely will be extend beyond construction contracts. It is important, therefore, that contracting parties analyze potential risks and liabilities at the first possible moment during contract negotiations in order to structure and evaluate appropriate risk-shifting mechanisms and clauses found within the contract itself.

Note: This posting is intended only as background materials for informational purposes. It does not constitute legal advice. It may not apply to your specific situation or may be incomplete for your purposes. It is not intended to create an attorney-client relationship.

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