CONTRACTS PART III: Statute of Limitations. Do you know yours?

As with any action that is brought into court, it's governed by statute of limitations ("SOL"). SOL mandates the time frame in which a party can bring suit for damages. All states have SOLs because although the courts recognize that people should be compensated for their injuries, it also acts as a tool of equity which provides an "ending point" to a matter. Simply put, courts do not think it just to assert a claim 20 years from the time of the injury without any notice to the other party. Therefore, if states did not have SOLs for claims, there would be no end in sight to a potential lawsuit and people would not be able to live their lives freely.

With regards to Contracts, states normally have various SOLs depending on what type of contract you have. Here are a few states:

Florida: For most contracts, the SOLs is 5 years. But what if you had a breach

of contract that involved an improvement to real estate in Florida? The SOL for improvement to real property is 4 years.

Illinois: For written contracts for money, the SOLs is 10 years. For oral contracts it's 5 years.

Georgia: For written contracts, the SOLs is 6 years. For oral contracts, it's 4 years.

Michigan: In this state, the SOLs are 6 years for both written and oral contracts.

California: This state drastically departs from most states by almost cutting the time to bring an action for breach of oral agreement to 2 years. However, an action for breach of a written agreement is 4 years.

Written Contract for Services:

Most businesses enter into written contracts between the owners, vendors and employees. However, most business owners do not understand that depending on what the "nature" of their written contract is, can drastically change the timeline of the SOLs set out by their State.

A. Nature means, how would you categorize your agreement? Is it purely for the sale of services? Or is it for the sale of goods? As you can see above, you will want to ensure you know the difference and truly understand the underlying purpose behind your agreement. You failure to understand and draft the agreement properly, can be a difference of 10 to 6 years (depending on your state) to four years to file an action for damages.

B. Sale of Goods: If your agreement involves the sale of goods, your contract may very well be governed by the Uniform Commercial Code ("UCC"). All states have adopted the UCC and implemented it in their state codes to speak to agreements involving the sale of goods.

When your agreement is purely for the sale of goods, the UCC mandates that you have 4 years to bring an action. For example, In Illinois the SOLs is 10 years for written agreements. However, if the parties to a contract sold and purchased goods, there may be a good argument that the contract can only be brought in 4 years.

Example of Legal Fight over SOLs:

I represent two clients who own a rental property. Over 11 years ago, they hired this company to install 58 windows. The agreement was written, for a total of $17,000.00 and was permitted to be paid in installments. My clients paid $5,000.00 down with the order of the windows, and was permitted to pay another $6,000+ in two additional installments. The first installment was to be paid one year after the signing the contract, and the second one two years thereafter.

My clients eventually tendered another $1,000.00 payment but could not make any further payments as tenants had stopped paying rent. The clients are elderly. One is retired and the other working beyond retirement age to simply make ends meet.

The Owner of the window company filed suit within 10 years prescribed by Illinois SOLs for written agreements and asked for a judgment because my clients admitted that they signed the agreement, had only partially paid them and that they performed the work.

I argued that the contract is not governed by a 10-year SOL, but a 4-year SOLs per the UCC because it involves the sale of goods. The window company argued that the contract was for services only which was to install the windows. I combated that by arguing a few things:

  1. What is the purpose of paying $17,000 for a service that would not be necessary if there was no purchase for goods. Therefore, any service would only be incidental to the sale and purchase of goods.

  2. The contracts explicitly lists the description of goods to be ordered, the quantity, the color of capping etc.

  3. The owner in his contract, delineated and characterized the subject/nature of the contract to remain goods by stating "that the product shall remain goods, no matter how affixed they may become to the real property."

  4. Thus, the Window Company's claims are barred by the UCC's SOLs for the sale of goods.

The Court agreed with my arguments and denied their request for judgement. It's imperative that you not only understand your contract, but retain counsel who can dig through the language before you even sign it to ensure that you understand the nature, responsibilities, and any consequences listed in that contract.

What if I file after my SOLs?

It's important to understand your state's SOLs and the nature of your contract because you may be foreclosed from bringing an action if it's beyond the SOLs mandated by law. There may also be other claims that haven't been barred by SOLs stemming from the contract. You would need to consult with counsel to determine what claims you have.

Do not set yourself and your business up for failure. As your Business Lawyer, we specialize in helping you review, draft and negotiate these stringent rigors of contract law and we’ll assist you in establishing a solid Business foundation for your company. Contact us today to schedule a Business Protection Evaluation Startup Session.

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This article is a service of SL DeBarros Law Firm, LLC. We offer a wide array of business legal services and can help you make the wisest business choices throughout life and in the event of your death. We also offer a Business Protection Start-Up Session or a Business Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.

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