When the “Discovery Rule” is Irrelevant

Can the statute of limitations for a claim expire even before a project owner knows that it has a claim? This is a very real possibility if one is not careful in drafting contracts. Courts generally recognize that sophisticated business entities should be permitted to forfeit rights in contracts, so long as the terms do not violate public policy. Parties to a contract can limit the time period for bringing a claim or define when the limitations period begins.

Parties to a contract need to mindful that including these types of limiting provisions also affects third party claims for indemnity and breach of contract. In 15th Place Condominium Assoc. v. South Campus Development Team, LLC (2014 Ill. App. LEXIS 457 (1st Dist. June 26, 2014)), the plaintiff condominium association filed a lawsuit against the project developer for design and construction defects. Id. at ¶8. The developer in turn filed a third-party complaint against its general contractor and architect. Id. at ¶11. However, the developer’s contracts with the general contractor and architect provided that the statute of limitation for claims against the general contractor and architect would begin to run on the date of Substantial Completion. Id. at ¶27.

Various parts of project at issue were substantially completed on May 16, 2003 and October 11, 2004. The Plaintiff condominium association filed its lawsuit on September 4, 2008. The developer entered into tolling agreements with the general contractor and architect on March 9, 2009. The developer filed its third party complaints on June 21, 2011. The general contractor and architect filed Motions to Dismiss arguing that the third-party claims were time-barred based on the contractual provision. In Illinois, claims for contribution or indemnity must be brought within two years (735 ILCS 5/13-204) and claims arising from a construction project must be brought within four year (735 ILCS 5/13-214). The developer argued that the contractual limit could not apply to third party actions because it did not have a claim against either the general contractor or architect until it was sued by the condominium association. 15th Place Condominium Assoc., 2014 Ill. App. LEXIS 457 at ¶26.

The trial court ruled, and the Illinois Appellate Court affirmed, that the developer’s breach of contract and statutory indemnity claims were time-barred, because the developer’s claims had expired by the time it entered into the tolling agreements. Id. at ¶42. The Illinois Appellate Court held that the parties “were sophisticated parties enter[ed] into contracts involving more than $34 million in construction work, clearly intended to create an accrual date for all statutes of limitations in an effort to limit liability and eliminate the effect of the discovery rule.” Id. at ¶30. Sophisticated parties may include these limiting provisions, but they must understand that they may forfeit certain rights. Likewise, through careful drafting, the developer could have excluded third party claims from the limiting provision.

Adam Gill (312-499-6728; ALGill@duanemorris.com) and Jeffrey L. Hamera (312-499-6782; JLHamera@duanemorris.com)

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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