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Mockeries and Latent Breaches: Reflections on Oregon’s Discovery Rule

Mockeries and Latent Breaches: Reflections on Oregon’s Discovery Rule

Statutes of limitation cut off rights to bring a lawsuit after a designated time period, regardless of the strength of your case or how much you’ve been injured. The length of these time periods can vary by the type of claim being brought, and the starting date can vary also. The “discovery rule” – which delays the starting point for periods of limitation until the injured party discovers the cause of action – has the greatest potential impact on this starting date. Oregon law has been unstable regarding the application of the discovery rule to claims for breach of contract. Although we appear to be reaching a point of greater certainty on this issue, more refinement may yet be required.

Oregon’s Discovery Rule Generally

Discovery rules in Oregon arise both from statutes and case law. Some statutes of limitation contain express discovery rule language, starting the relevant timeline “from the discovery of the fraud” or “from the date when the injury is first discovered.” However, many other statues are silent as to discovery, starting timelines based upon the general catch-all phrase “after the cause of action shall have accrued.” In 1966, the Oregon Supreme Court analyzed that catch-all phrase and wrote the following strong language adopting a discovery rule:

To say that a cause of action accrues to a person when she may maintain an action thereon and, at the same time, that it accrues before she has or can reasonably be expected to have knowledge of any wrong inflicted upon her is patently inconsistent and unrealistic. She cannot maintain an action before she knows she has one. To say to one who has been wronged, “You had a remedy, but before the wrong was ascertainable to you, the law stripped you of your remedy,” makes a mockery of the law. In the absence of an expressed statutory direction to that effect, to ascribe to the legislature any such intention by their use of the word “accrue” seems to us unreasonable.

The Oregon Supreme Court wrote that language in Berry v. Branner, which was a medical practice action. Courts have quoted that language several times since then, confirming a discovery rule in many types of tort actions.

Discovery Rule for Breach of Contract?

Nearly 50 years after Berry v. Branner, a question still lingers: does it apply to claims for breach of contract? Only one reported opinion addressed this question, Waxman v. Waxman in 2008, in which the Court of Appeals held there is no discovery rule for breach of contract cases. However, as mentioned in prior blog posts, the recent Supreme Court case of Rice v. Rabb has thrown into doubt the continued validity of Waxman v. Waxman; meaning Oregon may yet formally adopt a discovery rule in breach of contract cases based upon Berry v. Branner.

At least one recent trial court opinion discussed this issue and added a comment on the logical underpinnings: “Moreover, the same unfair circumstance that convinced the Oregon Supreme Court to adopt a discovery rule in the tort context in Berry also exists in the context of a breach of contract. That is, it makes no sense to inform a contracting party that they have lost their breach claim before they had any notice of the breach.”

When the Oregon Supreme Court originally wrote that strong language in Berry, it was addressing medical malpractice actions. Such cases have commonly given rise to a discovery rule in states across the nation. This has not historically been true for contract cases, which arise from one or more parties failing to deliver on promises made. Most states do not allow application of a discovery rule to claims for breach of a contract.

The pervasive assumption has been that contracting parties do not need the protections of a discovery rule because they have other means of protecting themselves. One commentator – Sonja Larsen – summarized as follows: “a contract claimant often has a significant amount of control over its risk of loss and an increased ability to protect itself through negotiation, inspections, and informed choices, lessening the need for an expansive contract statute of limitations and the discovery rule.”

This is generally true in the context of construction. Contracting parties can bargain for certain protections in the contract itself, and have the opportunity to observe construction or verify payment from the owner. Moreover, parties to a contract should be motivated to verify contract compliance through visual inspections. This formed part of the reasoning in the Waxman opinion, which included a reference to the law being “well settled that a contract claim accrues on breach.”

Obvious Breach vs. Latent Breach

Unfortunately, all breach of contract cases predating Waxman dealt only with obvious breach, i.e., the injured party knew immediately there had been a breach of the contract. Examples of obvious breach might include an unfinished project, undelivered property, non-payment, or performance delay. More recent cases have done nothing to shed light on whether the obviousness affected the timing analysis. No reported opinion in Oregon has yet to acknowledge the potential problems with breaches that are not capable of easy detection: so-called “latent” breaches. Such breaches may evade detection because they are hidden beneath the finish surface or because the untrained eye would not naturally identify a problem that exists on the surface.

Latent breaches can have the effect of protecting the breaching party, and could provide additional incentive to cover a breach. Oregon already provides protection against intentional fraudulent concealment, but the fraud standard is quite high, and can be difficult to prove years after the fact.

Latent breaches are especially troubling for homeowners who purchase newly-constructed homes without a separate construction contract, therefore lacking most if not all of the contract protections described above. Even with traditional contract protections, many lay owners lack the expertise to detect construction problems. Such problems may not manifest themselves until they result in a leak or other change in condition.

Evolution of Oregon’s Approach

Following Rice v. Rabb, Oregon’s statutory framework may now incorporate a discovery rule for breach of contract actions regardless of latency, meaning all contract cases would get the benefit of the discovery rule. This rule may be too broad in application; only time will tell.

A better result might be a discovery rule for latent breaches only, where latent would be defined as incapable of ready detection by an untrained observer. That would maintain the current incentive towards protection “through negotiation, inspections, and informed choices,” while avoiding making a mockery of the law by telling parties injured by latent breaches “You had a remedy, but before the wrong was ascertainable to you, the law stripped you of your remedy.”

A well-reasoned discovery rule based upon latent breaches would help not only residential consumers but also large commercial contractors and experts. The litigation landscape is littered by complex and highly supervised projects such as bridges and commercial buildings. Despite comprehensive design and diligent oversight, latent issues persist. A discovery rule tailored for such situations would be an appropriate method of risk allocation. Moreover, because general contracts are forced to rely on subcontractors, a discovery rule would allow general contractors the opportunity to shift the burden to subcontractors, suppliers, and manufacturers.

Unfortunately, narrowing the scope of a contract discovery rule to allow the punishment to fit the crime is a task for the legislature rather than the courts. For now, we wait. In the meantime, contractors and owners alike are well advised to be diligent about ensuring they receive what’s promised under the contract, and hire competent counsel to discuss options should something go wrong.

Note: I authored this post for while I was employed at Ball Janik.

Daniel T. Goldstein

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