CLL Associates Ltd. Partnership v. Arrowhead Pacific Corp.

497 N.W.2d 115, 174 Wis. 2d 604, 33 A.L.R. 5th 771, 1993 Wisc. LEXIS 347

• Court: Wisconsin Supreme Court
• Decided: March 23, 1993
• Docket: 91-1460
• Status: Published

Opinions

STEINMETZ, J.

There is one issue presented in this case. When does a contract cause of action "accrue," as that term is used in sec. 893.43, Stats.,¹ Wisconsin's six-year statute of limitations for contract actions? We hold that under sec. 893.43, a contract cause of action accrues at the moment the contract is breached, regardless of whether the injured party knew or should have known that the breach occurred.

Plaintiff, CLL Associates Limited Partnership ("CLL"), constructed two, six-story apartment buildings in Superior, Wisconsin (hereinafter referred to as "project") in 1977. The Wisconsin Housing Finance Authority, predecessor to plaintiff Wisconsin Housing and Economic Development Authority ("WHEDA"), was the lender for the venture.

In July of 1988, CLL filed suit against several entities connected with the project, including the contractor responsible for constructing the buildings,² and its bonding company, St. Paul Fire & Marine Insurance Company ("St. Paul"). CLL alleged, in part, that the contractor breached the project construction contract by failing to include structural support within the walls of the buildings and installing defective windows.

At the close of discovery, St. Paul moved for summary judgment on the ground that CLL's action against it was time barred. The trial court held that sec. 893.43, Stats., begins to run, i.e. the action "accrues," when the contract breach occurs. It further held that CLL's action against St. Paul was time barred because it was commenced more than six years after the last possible date that the contractor could have breached the construction contract.

CLL appealed the trial court's ruling. It argued that sec. 893.43, Stats., should not begin to run until the contract breach is discovered, or with reasonable diligence should have been discovered, by the injured party, whichever occurs first. CLL further argued that under this rule its action against St. Paul was not time barred because it was commenced less than six years from the time that CLL discovered the alleged breaches.

The court of appeals certified CLL's appeal to this court under the provisions of sec. 809.61, Stats. 1991-92. Although the trial court made no findings as to when CLL discovered or should have discovered the alleged breaches of contract, we assume for purposes of this appeal that CLL commenced this action less than six years after discovery.

In Wisconsin, a 90-year line of precedent holds that " [i]n an action for breach of contract, the cause of action accrues and the statute of limitations begins to run from the moment the breach occurs. This is true whether or not the facts of, the breach are known by the party having the right to the action." State v. Holland Plastics Co., 111 Wis. 2d 497, 506, 331 N.W.2d 320 (1983) (citations omitted); see also Denzer v. Rouse, 48 Wis. 2d 528, 531, 180 N.W.2d 521 (1970); Milwaukee County v. Schmidt, Garden & Erikson, 43 Wis. 2d 445, 455, 168 N.W.2d 559 (1969); Krueger v. V.P. Christianson Silo Co., 206 Wis. 460, 462-63, 240 N.W. 145 (1932); Ott v. Hood, 152 Wis. 97, 100-101, 139 N.W. 762 (1913); Effert v. Heritage Mut. Ins. Co., 160 Wis. 2d 520, 525, 466 N.W.2d 660 (Ct. App. 1990); Segall v. Hurwitz, 114 Wis. 2d 471, 490, 339 N.W.2d 333 (Ct. App. 1983).

In contrast, with respect to tort actions, Wisconsin has adopted what is known as the "discovery rule." Tort claims accrue and the statute of limitations begins to run on the date that the injured party discovers, or with reasonable diligence should have discovered, the tortious injury, whichever occurs first. Hansen v. A.H. Robins, Inc., 113 Wis. 2d 550, 560, 335 N.W.2d 578 (1983); see also Borello v. U.S. Oil Co., 130 Wis. 2d 397, 411, 388 N.W.2d 140 (1986); Spitler v. Dean, 148 Wis. 2d 630, 636, 436 N.W.2d 308 (1989); H. A. Freitag & Son, Inc. v. Bush, 152 Wis. 2d 33, 38, 447 N.W.2d 71 (Ct. App. 1989).

Tort law has generally been viewed as serving three broad social purposes: (1) as a matter of justice, tort law shifts the losses caused by a personal injury to the one at fault; (2) by placing this cost with the one in the position to prevent the injury, tort law seeks to deter unsafe behavior; and (3) to compensate the victim, tort law creates a mechanism to distribute losses widely. See John G. Flemming, The Law of Torts 7-10 (7th ed. 1987). The distribution is effected through liability insurance premiums, consumer prices, etc. Id. at 8-10.

The modern trend has been to relax tort law. Statutes of limitation have been relaxed so that victims of latent torts may receive compensation. Consequently, much significant new case law has developed: for example, lawsuits brought for damages due to asbestos exposure, Daikon Shield use, prescription use of diethylstilbestrol (DES) and workplace exposure to styrene, acrylonitrile, benzene, and other chemicals.

The discovery rule was adopted in Hansen, 113 Wis. 2d at 560. In that case, this court reasoned that statutes of limitation raise two conflicting public policy concerns: (1) protecting potential defendants from stale and fraudulent claims and (2) protecting meritorious claimants by allowing them an opportunity to seek legal redress for their injuries. Id. at 558. We examined each of these policy concerns in the tort context and concluded that "the injustice of barring meritorious claims before the claimant knows of the injury outweighs the threat of stale or fraudulent actions." Id. at 559. Accordingly, we adopted the discovery rule for tort actions.

CLL asserts that this rationale applies with equal force in the contract context. Consequently, this court should apply the discovery rule to sec. 893.43, Stats. We disagree. In the context of general contract law, public policy favors the current rule that the contract statute of limitations begins to run at the time of breach. Here, unlike in tort law, the need to protect defendants from stale or fraudulent claims outweighs any injustice caused by barring rights of action prior to discovery. This is so because of two critical differences between tort claims and contract claims.

The first difference stems from the availability of liability insurance. In tort law, there is a trend toward Toss distribution": the spreading of tortious losses caused by a certain activity among all those who benefit from that activity, regardless of fault. Flemming, supra, at 7-10. Liability insurance is a mechanism for achieving loss distribution. An insured defendant is shielded from damages because the defendant's insurer is primarily liable. The loss is effectively spread to the pool of all insureds via liability insurance premiums. Id. at 10.

In contrast, contract law, which deals primarily with the enforcement of private promises, has nothing comparable to liability insurance. See generally 9 John A. Appleman & Jean Appleman, Insurance Law and Practice, sec. 5201-5256 (1981) (describes the types of commercial insurance). Although bonds and guaranties provide a form of contract performance insurance, the principal generally remains primarily liable. See 11A id. at sec. 6601, 6608. In other words, contract defendants bear their losses alone. See id.

The absence of liability insurance for contract defendants increases the need to protect them from stale or fraudulent claims. An adverse judgment is generally a much more serious matter to a contract defendant, who is primarily liable on the judgment, than it is to an insured tort defendant, who is not primarily liable on the judgment.

The second critical difference between tort and contract law centers around control. Potential tort claimants generally have minimal control over their risk of loss due to tortious injury: for example, a motorist cannot exercise control over other drivers on the road; a consumer is typically unable to judge or investigate the design and manufacture quality of most products offered for purchase; and a patient can make very few informed judgments about the reasonableness of his or her medical care.

In contrast, a contract claimant often has a significant amount of control over its risks of loss. For example, in the instant case, the original owners and financiers had the choice of whether to build inexpensive buildings and whether to use inexpensive materials. They had the choice of whether to use an architect for field inspections and how many field inspections to require. They also had choices about warranties, retainages, and punch lists. Similarly, successor owners usually have choices about pre-purchase inspections, warranties, purchase price adjustments, etc., when negotiating a purchase.

The increased ability of potential contract claimants to protect themselves in the first instance lessens the need to provide them an opportunity for legal redress. Consequently, there is less need for an expansive contract statute of limitations.

In addition to the distinctions between contract and tort law, we are persuaded by the fact that the Wisconsin legislature has expressly rejected the discovery rule when enacting a contract statute of limitation. The widely adopted Uniform Commercial Code creates a statute of limitations for sales contracts which runs from the time of breach, regardless of when discovery occurs. Wisconsin's version of this law, codified in sec. 402.725(2), Stats. 1991-92, contains the recommended language of the uniform act: "A cause of action accrues when the breach occurs, regardless of the aggrieved party's lack of knowledge of the breach." This enactment constitutes a legislative judgment that, at least in the sales context, the policy interests surrounding contract statutes of limitation balance in favor of our holding.

We recognize that a contract breach may sometimes be latent and, in practical terms, undetectable. However, it must be emphasized that sec. 893.43, Stats., applies to contracts in general, as opposed to one distinct type of transaction. Our holding rests on the fact that policy considerations do not favor a broadly applied discovery rule in the contract context. If the general rule that we uphold today creates unjust results in specific situations not now before this court, i.e. in the consumer context where contracting consumers have limited bargaining power, the legislature, with its greater resources for weighing policy, is best equipped to enact specific ameliorative laws. See Hansen, 113 Wis. 2d at 556-57; Peterson v. Roloff, 57 Wis. 2d 1, 5-6, 203 N.W.2d 699 (1973), overruled on other grounds by, Hansen v. A. H. Robins, Inc., 113 Wis. 2d 550, 335 N.W.2d 578 (1983); Reistad v. Manz, 11 Wis. 2d 155, 158-60, 105 N.W.2d 324 (1960), overruled on other grounds by, Hansen v. A. H. Robins, Inc., 113 Wis. 2d 550, 335 N.W.2d 578 (1983).

CLL argues that sec. 893.43, Stats., as herein construed and applied, violates its right to due process guaranteed by the Fourteenth Amendment to the United States Constitution and runs afoul of the access-to-courts provision in Article I, sec. 9,³ of the Wisconsin Constitution. We reject both of these arguments.

CLL's right to due process is not violated merely because sec. 893.43,Stats., extinguished its cause of action before it discovered its claim. Rod v. Farrell, 96 Wis. 2d 349, 356-57, 291 N.W.2d 568 (1980), overruled on other grounds by, Hansen v. A.H. Robins, Inc., 113 Wis. 2d 550, 335 N.W.2d 578 (1983),⁴ see also Halverson v. Tydrich, 156 Wis. 2d 202, 214-16, 456 N.W.2d 852 (Ct. App. 1990); Yotvat v. Roth, 95 Wis. 2d 357, 369-70, 290 N.W.2d 524 (Ct. App. 1980). Determining when a cause of action accrues for statute of limitations purposes is a policy decision, not an issue of constitutional dimension. Farrell, 96 Wis. 2d at 356-57.

Similarly, sec. 893.43, Stats., does not violate Article I, sec. 9, of the Wisconsin Constitution solely because the limitations period expired before CLL discovered its injury. Id. at 355-56; Halverson, 156 Wis. 2d at 216-17; Hartland-Richmond Ins. v. Wudtke, 145 Wis. 2d 682, 690-93, 429 N.W.2d 496 (Ct. App. 1988); Yotvat, 95 Wis. 2d at 369-70.

This court has said that although Art. I, sec. 9, Wisconsin Constitution, guarantees a suitor a day in a court of competent jurisdiction to which he may present his claim, the statute of limitations may bar a plaintiffs action and the defending party may rely on the statutory bar.

Farrell, 96 Wis. 2d at 355-56.

Kohnke v. St. Paul Fire Ins., 140 Wis. 2d 80, 88-89, 410 N.W.2d 585 (Ct. App. 1987) affd on other grounds, 144 Wis. 2d 352, 424 N.W.2d 191 (1988) is inapplicable to this case. In Kohnke, the plaintiff was rendered sterile by a surgical procedure performed in 1961, when the plaintiff was five and one-half months old. He discovered the injury 22 years later when he underwent medical tests for an infertility problem. After concluding that the applicable statute of limitation was sec. 893.55, Stats. 1987-88,⁵ enacted in 1980, rather than the statutes of limitation existing in 1961, the time of injury, the court of appeals held that, as applied to the facts before it, sec. 893.55 violated Article I, sec. 9, of the Wisconsin Constitution. It reasoned as follows:

Under [sec. 893.55], because a medical malpractice action may never be commenced more than five years from the act or omission, [the plaintiffs] claim would have been barred as of October 16,1966. This is nearly fourteen years before the statute was adopted, and more than seventeen years before the injury was discovered. That result is unacceptable because it violates art. I, sec. 9, of the Wisconsin Constitution . ...

Id. at 88-89.

The court of appeals later distinguished Kohnke in Halverson, 156 Wis. 2d at 216-17. In Halverson, the claimant, relying on Kohnke, argued that sec. 893.55, Stats., as applied to him, violated Article I, sec. 9, because it extinguished his cause of action before he discovered his injury. The court rejected this argument. It reasoned that the violation of Article I, sec. 9, in Kohnke stemmed from the fact that sec. 893.55, as applied by the Kohnke court, extinguished the plaintiffs action 14 years before the statute had even been enacted. In the case at bar, the plaintiffs injury occurred after sec. 893.55 had been enacted. Consequently, the Kohnke rationale did not apply. The court went on to state that " [a] limitations period does not violate Wis. Const, art. I, sec. 9, solely because it runs before the discovery of injury." Id. at 216-17.

The reasoning in Halverson applies to the instant case. Consequently, Kohnke is inapplicable, and sec. 893.43, Stats., as applied, does not violate Article I, sec. 9. This is so because the six-year contract statute of limitations was enacted prior to 1977 when the parties entered into the contract at issue. See Wis. Stat. Ann. sec. 893.43 (historical note). As a result, CLL's action was not extinguished by the contract limitations period before said period was adopted.

For the foregoing reasons, we decline to apply the discovery rule to sec. 893.43, Stats. Under that section, a cause of action accrues at the time the contract is breached, regardless of whether the injured party knew or should have known that the breach occurred.

By the Court. — The judgment of the Dane county circuit court is affirmed.

1 Section 893.43, Stats., provides as follows:

Action on contract. An action upon any contract, obligation or liability, express or implied, including an action to recover fees for professional services, except those mentioned in s. 893.40, shall be commenced within 6 years after the cause of action accrues or be barred.

2 The contractor went out of business prior to this litigation and has not answered the complaint or amended complaint.

3 Article I, sec. 9 of the Wisconsin Constitution provides as follows:

Remedy for wrongs. Section 9. Every person is entitled to a certain remedy in the laws for all injuries, or wrongs which he may receive in his person, property, or character; he ought to obtain justice freely, and without being obliged to purchase it, completely and without denial, promptly and without delay, conformably to the laws.

4 Hansen overruled Farrell's refusal to apply the discovery rule to tort actions. However, Hansen did not disturb Farrell's constitutional pronouncements as to due process or Article I, sec. 9. Hansen was based solely on considerations of policy. Hansen, 113 Wis. 2d at 558-60. The court of appeals expressly recognized this fact in Hartland-Richmond Ins. v. Wudtke, 145 Wis. 2d 682, 694, 429 N.W.2d 496 (Ct. App. 1988), overruled on other grounds by, Funk v. Wollin Silo & Equipment, Inc., 148 Wis. 2d 59, 435 N.W.2d 244 (1989).

5 Section 893.55, Stats., provides as follows:

893.55 Medical malpractice; limitation of actions; limitation of damages; itemization of damages. (1) Except as provided by subs. (2) and (3), an action to recover damages for injury arising from any treatment or operation performed by, or from any omission by, a person who is a health care provider, regardless of the theory on which the action is based, shall be commenced within the later of:

(a) Three years from the date of the injury, or

(b) One year from the date the injury was discovered or, in the exercise of reasonable diligence should have been discovered, except that an action may not be commenced under this paragraph more than 5 years from the date of the act or omission.