The Washington State Court of Appeals recently broke with tradition and applied the "discovery rule" to a breach of construction contract instead of the traditional application to tort cases only. The discovery rule provides that the statute of limitations to a claim does not begin to run until the harmed party discovers, or in the exercise of reasonable diligence should have discovered, that a cause of action exists. Accordingly, latent defects in construction that do not become readily apparent will probably be subject to the discovery rule, exposing contractors to many more years of potential liability.
In Architechtonics Constr. Management, Inc. v. Khorram, the court expressly held that the discovery rule applies to a breach of contract action. Prior to this case, Washington had adopted the position that the 6 year written contract (3 years oral contract) statute of limitations begins to run when the breach occurs. In the context of construction contracts, the breach would occur at completion of construction. Now, with the adoption of the discovery rule, a claim premised on a breach of a written construction contract may be filed almost 12 years after completion of construction provided that the six-year statute of repose does not bar the claim.
The six-year statute of repose would bar construction related claims that do not accrue within six years following substantial completion of construction. In light of the court's recent holding, the time period for bringing a construction related claim can be determined using a 2-step analysis. First, the cause of action must accrue within six years of substantial completion of construction. Second, the lawsuit must be filed within the applicable statute of limitation, after discovery.
In light of the number of construction defect and toxic mold claims in recent years, the amount of the claims, and the recent insurance problems facing contractors, contractors must be very wary of their potential exposure. In an effort to limit potential exposure contractors should consider incorporating limitation of action provisions in their written contracts. A limitation of action provision that provides a limited warranty and limits any legal action related to or arising out of the contract to one year from the date of substantial completion, should limit potential exposure for breach of construction contracts to, at most, seven years (six-year statute of repose plus one year limitation of action provision).