By Marcus J. Kocmur, Partner

March 2014

Most parties entering into a business transaction – a sales agreement, an office lease, a construction contract, etc. – understand that there is liability for committing a breach of contract, or acting negligently or fraudulently with respect to consummating the sale or performing under the contract, and many further understand that the legislature has enacted “statutes of limitation” that create deadlines for how long one may wait before filing a lawsuit. California courts, however, have repeatedly held that sophisticated commercial parties may agree in their contracts to make “reasonable” modifications to those limitations periods. For a party selling an asset or a service, shortening a limitations period is another arrow in the risk-management quiver. For a party acquiring an asset or a service, this is another area for caution, so that legal rights are not compromised carelessly.

Generally speaking, the statute of limitations for personal injury and breach of oral contract claims in California is two years, breach of written contract is four years, and property damage is three years. The limitations clock usually starts to tick on these time periods as soon as a party’s right to sue arises, but there are a myriad of exceptions and qualifications. Figuring out the statute of limitations for any given claim is best left to a detailed, fact-specific analysis by a lawyer. One exception worthy of general discussion, however, is the “delayed discovery” exception, which can alter the point at which the clock starts to run.

Real estate development activities, to use one example, are a frequent source of delayed discovery issues. A problem with the bad design or construction might not manifest into a sewage leak or a structural failure until years after performance under the design or construction activities are completed. Not coincidentally, construction and design services are two industries where modified statute of limitations have been popping up in contracts with increasing frequency. Parties drafting agreements for this kind of work frequently start with the American Institute of Architects (AIA) forms. While the standard AIA contract language does not attempt to shorten the limitation period, this author has noticed an increasing number of contracts in which the builder or architect has proposed language either shortening the limitations period, eliminating “delayed discovery,” or both. And recently a California appellate court upheld a superior court’s decision to enforce contract language in a construction contract that limited a hotel owner’s right to sue its builder for late-discovered problems with the builder’s work. That decision added to the body of law affirming that commercial parties are generally free to negotiate contractual limits on their rights to pursue each other in court for failing to perform as promised.

The principal of being free to negotiate limitations to liability has wide-reaching importance to California businesses, not just those engaged in real estate development, and for the California business owner there are several lessons to be gained here. First, if you are a seller of goods or services outside of the consumer arena (where there is less freedom to contract), consider the length of the “tail” on your liability and whether you might be able to shorten it with appropriate contract language. Second, and conversely, if you are on the buying end of a transaction, make sure that you haven’t given away your rights long before the time frame when a problem with the seller’s work might manifest. Third, yet again we see that there is really no such thing as “boilerplate.” Every provision in a contract needs to be considered as to how it affects the parties’ rights and interests. And of course, finally, if you are a prospective buyer or lender on a construction project less than ten years old, you should determine whether the delayed discovery rule has been eliminated or modified for your project.

 Marcus J. Kocmur, Partner

MKocmur@BFASLaw.com

(Direct) 805.966.7715

This Advisor is one of a series of business, real estate, employment and tax advisories prepared by the attorneys at Buynak, Fauver, Archbald & Spray, LLP. This Advisor is not exhaustive, nor is it legal advice. You should discuss your particular situation with us or with your own attorney. Our legal representation is only undertaken through a written engagement letter and not by the distribution of this Advisor.