United States Court of Appeals for the Fourth Circuit enforces provision of A.I.A. Form Agreement that defeats the discovery rule concerning when a claim accrues for purposes of statute of limitations; holding that the provision does not violate either Maryland or Nebraska law.

Harbor Court Assoc. v. Leo A. Daly Co.,
179 F.3d 147 (4th Cir. 1999)

The plaintiffs, Harbor Court Associates and Murdock Development Company (“HCA/Murdock”) were the developers of Harbor Court Complex, located in the Inner Harbor area of Baltimore, Maryland. On April 28, 1983, HCA/Murdock hired Leo Daly (“Daly”), an architect with a principal place of business is in Nebraska, to design and construct the project. The parties used an A.I.A. document, which stated that, for disputes arising out of the contract: “any applicable statute of limitations shall commence to run and any alleged cause of action shall be deemed to have accrued in any and all events not later than the relevant Date of Substantial Completion of the Work, and [as to any failures occurring after substantial completion] not later than the date of issuance of the Final Certificate of Payment.”

Construction began in mid-1984, and the project received a final certificate of completion on September 11, 1987. For the next eight years, the Complex operated without any major design or construction problems. In April, 1996, a fifteen-square-foot area of brick exploded off the face of the Complex. Structural engineers later determined that the brick veneer of the Complex suffered from fundamental and latent defects in design and construction.

HCA/Murdock subsequently sued Daly for negligence and breach of contract, including a count for indemnification. Daly moved for summary judgment against HCA/Murdock, arguing that the actions were time barred as more than three years had elapsed since final payment. Exercising its diversity jurisdiction, the Federal District Court held that a Maryland court would enforce the agreed-upon accrual date and thus the claims were time-barred. As a result, the District Court granted Daly’s motion for summary judgment.

On appeal to the United States Court of Appeals for the Fourth Circuit, HCA/Murdock alleged that Nebraska law governed the dispute and under Nebraska law, such a provision is unenforceable. Appellants also argued that, even if the trial court properly chose to apply Maryland substantive law, the provision was unenforceable because it violated public policy. The Court of Appeals found that such a provision was enforceable under either Maryland or Nebraska law, and thus the choice-of-law issue was irrelevant to its analysis.

The Court first addressed Maryland law. Maryland follows the “discovery rule,” which provides that for the purposes of the statute of limitations, a claim may not accrue until the person knew or should have known the operative facts giving rise to the claim. Thus, under a traditional discovery rule approach, HCA/Murdock would argue that the claim did not accrue until the brick “exploded” off the face of the Complex and its claim was not time-barred. However, the Fourth Circuit noted that the Maryland Court of Appeals had never addressed whether parties’ attempts to contract around the discovery rule would be unenforceable as against public policy of the state, and thus the Court treated the issue as one of first impression.

The Court first recited Maryland’s reluctance to strike down voluntary bargains on public policy grounds. Absent a finding that the challenged agreement is “patently offensive to the public good,” the Maryland courts will uphold the agreed-upon contractual terms. Given Maryland’s commitment to contract, the Court of Appeals for the Fourth Circuit would not conclude that Maryland courts would decline to allow parties to contract around the discovery rule. In its analysis, the Court focused on the fact that there were sophisticated parties who added certainty to their allocation of risk by disposing of the discovery rule. Thus, the Court held that such a clause would not be deemed “patently offensive” so as to render it unenforceable under Maryland law.

Turning to Nebraska law, the court addressed HCA/Murdock’s claim that an unbroken line of state precedent precluded enforcement of the accrual date provision at issue. The Court found that Nebraska courts, while imposing a blanket prohibition against altering the statute of limitations period itself, had never addressed a contractual provision that modified only the accrual date of the statutory period. Stated alternatively, Nebraska courts had only addressed the time for bringing an accrued action, not the test for fixing the actual date of accrual. In this context, the Court found that a Nebraska court, like that of Maryland, would allow sophisticated business actors to eliminate this uncertainty from their business affairs.

The Court concluded that, under either Maryland or Nebraska law, the contractual provisions modifying the parties standard AIA contract were enforceable and that HCA/Murdock’s action was barred by the three-year statute of limitation. Accordingly, the Court affirmed the judgment of the lower court.

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