The Enforceability of Contractual Accrual Dates

Brisbane Lodging, L.P. v. Webcor Builders, Inc.
The Enforceability of Contractual Accrual Dates

A landmark California Court of Appeals decision fundamentally changed the statute of limitations in commercial construction defect cases. Parties relying on a “delayed discovery” rule to prevent a time-bar to their claims now face greater obstacles if their AIA contract provides an agreed-upon accrual date. In a recent trial court ruling, Lorber, Greenfield & Polito successfully argued that Brisbane Lodging, L.P. v. Webcor Builders, Inc. (2013) 216 Cal.App.4th 1249 barred the majority of Plaintiff’s construction defect causes of action. In a bifurcated trial addressing the statute of limitations issue, Bruce W. Lorber persuaded the trial court that Plaintiff’s tort, breach of contract claims and Breach of Fiduciary Duty cause of action were untimely, leaving Breach of Express Warranty and Breach of Implied Warranty as the remaining causes of action. Substantive defenses to the Breach of Warranty claims also exist as to Plaintiff’s damage claims which exceed $100,000,000.

The American Institute of Architects Standard Form of Agreement between Owner and Contractor (AIA201/1997) contains a provision at section 13.7 of its General Conditions entitled “Commencement of Statutory Limitations Period.” Section 13.7 establishes a contractually agreed upon date upon which actions between the owner and the contractor accrue, i.e., when the action accrues for statute of limitations purposes, based upon whether the act or omission that gives rise to any particular cause of action occurred prior to substantial completion, between substantial completion and final payment, or after final payment. In Brisbane Lodging, L.P. v. Webcor Builders, Inc., the California Court of Appeal definitively upheld a trial court’s enforcement of these contractual accrual dates.

In Brisbane, the construction contract between Brisbane Lodging, LP and Webcor Builders, Inc. included a clause which provided that all causes of action relating to the contract work would accrue from the date of substantial completion of the project. This contract provision clearly and unambiguously abrogated the so-called delayed discovery rule, which would otherwise delay accrual of a cause of action for latent construction defects until the defects were, or could have been, discovered. Id. at 1253.

California courts had never previously ruled on the enforceability of the contractual accrual provisions; therefore the Court examined precedent from other jurisdictions. The Brisbane court noted that these out-of-state authorities reflected a broad consensus in favor of “…protecting individuals’ efforts to structure their own affairs through contract … especially where the parties to the agreement are sophisticated actors who sought, by contract, to allocate business risks in advance.” Id. at 1260. In other words, rather than rely on the “discovery rule,” which prolongs the parties’ uncertainty as to whether, or if, a cause of action has accrued, the parties to a contract may agree to limit that period of uncertainty by mutually agreeing to a different, clearly defined accrual date. As the Brisbane Court stated:

By tying the running of the applicable statute of limitations to a date certain, the parties here negotiated to avoid the uncertainty surrounding the discovery rule for the security of knowing the date beyond which they would no longer be exposed to potential liability. Like the out-of-state courts that have considered this provision, we conclude that sophisticated parties should be allowed to strike their own bargains and knowingly and voluntarily contract in a manner in which certain risks are eliminated and, concomitantly, rights are relinquished.

Id. at 1260–61 (emphasis added).

In reaching this decision, the Court considered the argument that abrogation of the “delayed discovery” rule would violate public policy because it would prevent a party from bringing an action for latent construction defects which might not manifest until years after construction was completed. The Court rejected this argument, noting that “the California Legislature itself has expressly recognized that statutory limitations periods are not imbued with any element of non-waivable ‘public policy,’ and that private agreements waiving a defense based on the statutes of limitations are valid and enforceable.” Id. at 1262. Further, California courts have “overwhelmingly” allowed contracting parties to shorten an otherwise applicable statute of limitations, so long as the time allowed is reasonable. Id.

In rejecting Brisbane’s arguments against enforcement of the contractual accrual provision, the court concluded, that where the parties are on equal footing, and where there is considerable give-and-take over the terms of the contract, those parties should be given the ability to enjoy freedom of contract, and to structure risk-shifting as they see fit without judicial intervention. Id. at 1263. The court concluded, “While Brisbane now decries the unfairness of a contract provision that may result in the loss of entitlement to sue for damages it did not discover in a timely fashion, this is precisely the arrangement to which it agreed.” Id. at 1263.

Given the ubiquity of the Standard Form AIA201/1997 contract, the Brisbane decision sets an important precedent regarding freedom of contract and the enforceability of contractually shortened statutes of limitations and accrual provisions. Parties to an AIA 201/1997 contract who continue to rely on the “delayed discovery” rule do so at their peril.