Using Contract Provisions to Shorten Statute of Limitations and Reduce Risk

In San Diego and elsewhere in California, there are certain statutes that limit the amount of time in which a lawsuit can be filed. These are generally known as statutes of limitation. With respect to contracts, for example, California law states that any lawsuit must be filed within four years. See Cal. Code of Civ. Proc., § 337.

However, under some circumstances, it is possible to shorten a statute of limitations via contractual provisions. This can help reduce the risk to your business of adverse judgments and litigation expenses. A good corporate lawyer can help.

San Diego Corporate Law: Legal Principles

Under California law, parties may agree to a contractual provision that shortens the statute of limitations, provided that the new shortened period is not “unreasonable or is not so unreasonable as to show imposition or undue advantage.” Capehart v. Heady, 206 Cal.App.2d 386 (Cal. App. 1st Dist. 1962). This rule is codified with respect to the Uniform Commercial Code which allows parties to a sales contract related to commercial goods to shorten the four-year statute of limitations to not less than a year. See Cal. Uniform Com. Code, § 2725, subd. (1).

What constitutes a “reasonable” limitation will depend on the facts of the case and often turns on the sophistication of the parties involved. The California Supreme Court has upheld a limitations period as short as six months. See Tebbets v. Fidelity and Casualty Co., 155 Cal. 137 (Cal. Supreme Court 1909). However, “reasonable” is generally defined as an amount of time that is sufficient for the other party to “effectively pursue a judicial remedy.” See Moreno v. Sanchez, 131 Cal. Rptr. 2d 684 (Cal. App. 2nd Dist. 2003). In practice, one to three years is generally deemed reasonable.

One additional caveat is that the contractual provision might not be enforceable if the provision also limits the so-called “discovery rule.” In general, statutes of limitation begin to run only when the injury/damage is discovered (or should have been discovered with the exercise of due diligence). Thus, in Moreno cited above, the Court of Appeals refused to enforce a shortened one-year limitation for alleged breach of contract by a home inspector. The contract provision not only shortened the four-year statute to one-year, but also stated that the limitation applied regardless of when the home buyers discovered the breach of contract. The Moreno court threw out the provision entirely.

However, as between sophisticated parties, more recent California decisions have allowed that a contractual provision can limit even the application of the discovery rule. See Brisbane Lodging, LP v. Webcor Builders, Inc., 216 Cal. App. 4th 1249 (Cal. App. 1st Dist. 2013) (architect contract).

Contact San Diego Corporate Law Today

If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has the experience and skill to draft indemnification clauses that will protect you as a buyer or a seller. Every business needs a good business attorney. Mr. Leonard can be reached at (858) 483-9200 or via email.

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