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March 21, 2014

The Confusing Status of the Indiana Statute of Limitations for Breach of Written Contracts

iStock_000005882706Small.jpgSuppose that eight years ago, you hired a construction contractor to build an addition to your house in Indiana. Shortly after the construction was finished, you noticed that the roof shingles on the addition weren't quite the same color as those on the rest of the house. You checked the bundle of extra shingles that the contractor left behind and compared the information on the label with the specification in the contract. Sure enough, the contractor used the wrong shingles. Not only were they the wrong color, but they were also a lower quality than the contract specifications required. Even so, you were busy at the time and never got around to calling the contractor to get him to correct the mistake. Now you have a potential buyer for the house who is threatening to back out of the deal unless you replace the shingles. You call the contractor and demand that he correct his mistake. He refuses, saying it is too late for you to complain about the problem, that you should have called him as soon as you noticed it. Are you out of luck or not?

Statutes of Limitations

The key to answering the question is to determine the applicable statute of limitations. A person who has the right to sue someone for breach of contract (or, for that matter, the right to sue for other reasons) cannot wait forever to do it. How long the person can wait is determined by the statute of limitations that applies to the particular type of claim. In Indiana, there are two different statutes that might apply to the situation described above:

Which one applies?

It has been more than six years, but less than ten, since the addition to your house was finished and you noticed the problem with the shingles. Which statute applies?

Certainly your construction contract called for the payment of money, but don't most contracts do that? Is every contract that requires payment of money subject to the six-year statute of limitations, regardless of the rest of the contract? If so, that leaves the ten-year statute of limitations to cover only those contracts that do not involve the payment of money at all. On the other hand, maybe the idea is that the six-year statute of limitation covers contracts that do not involve anything other than the payment of money.

Surprisingly, there are very few published Indiana court decisions that address the question of which written contracts are covered by the six-year statute of limitations and which are covered by the ten-year statute, even though those statutes originated in 1881. However, the Indiana Supreme Court addressed the question with respect to an earlier version of the statutes in 1923.

The Ten-Year Limitation

The case was Yarlott v. Brown (192 Ind. 648, 138 N.E. 17, for those who would like to look it up), and the question was the statute of limitations on a mortgage. (At the time, the two statutes of limitation on written contracts were 10 years and 20 years, rather than 6 years and 10 years. A lawsuit was brought more than ten years, but less than 20 years, after the loan was supposed to be repaid.) Even though people commonly refer to the loans they take out to buy their homes as "mortgages," in reality the mortgage is actually a document that reflects the lender's right to foreclose on the property if the loan is not repaid; the obligation to pay the loan itself is set out in another document, called a note. However, in Yarlott, even though the mortgage was accompanied by a note, the mortgage contained not only the right of the lender to foreclose; it also repeated the obligation to repay the loan. It was clear that the statute of limitations on the note itself -- a written contract for the payment of money -- expired after ten years. But what about the mortgage? If it had not mentioned the repayment of th loan, it would have been subject to the longer statute of limitations. Did the fact that it repeated the obligation to repay the loan move it to the shorter limitation, the one that applied to "promissory notes, bills of exchange, and other contracts for the payment of money"?

The Indiana Supreme Court said no, the 20-year statute of limitations applied to the mortgage, despite the fact that it also provided for the payment of money. The Court reasoned that

. . . a mortgage differs in essential particulars from a promissory note, bill of exchange, or other written contract for the payment of money of the same kind as notes and bills. On the other hand, many actions which may be brought on such a mortgage bear a close resemblance to actions for the collection of judgments of courts of record, which are liens on real estate, or to actions for the recovery of possession of real estate. A familiar rule of statutory construction is that, where words of specific and limited signification in a statute are followed by general words of more comprehensive import, the general words shall be construed to embrace only such things as are of like kind or class with those designated by the specific words, unless a contrary intention is clearly expressed in the statute.

The underlining in the above quotation is ours, not the court's, but those words are the key to understanding the decision. The shorter statute of limitations applies to written contracts that are similar to promissory notes and bills of exchange.

Now what about your construction contract? Even though it involves the payment of money, a construction contract is very different from a promissory note or bill of exchange. Doesn't that mean that the applicable statute of limitations is ten years and that you still have the right to expect the contractor to pay for the cost of replacing your shingles? Well, maybe not.

Or is it the six-year limitation?

In 1991, the Indiana Court of Appeals stated that a teacher's contract -- which is also very different from a promissory note or bill of exchange -- was a contract for the payment of money and therefore subject to the statute of limitations of six years, not ten. Aigner v. Cass School Tp. of Porter County, 577 N.E.2d 983. The decision did not even mention Yarlotte v. Brown or the possibility that the period of limitations might be ten years instead of six. However, the lawsuit regarding the teacher's contract was brought within two years, so it was not barred regardless of which the two statutes of limitations applied.

So where does that leave your claim against your former contractor? If a teacher's contract is subject to a six-year statute of limitations, isn't your construction contract also subject to a six-year limitation? It certainly seems so. But if you sue the contractor, you may be able to persuade the court that the Court of Appeals decision regarding the teacher's contract was simply wrong because it failed to follow the precedent set by the Indiana Supreme Court in Yarlott v. Brown. Alternatively, perhaps you can pesuade the court that the statement in Aigner about the six-year statute of limitations is not binding precedent because that result in that case would have been the same even if the ten-year limitation applied. Unfortunately, you might have to go all the way to the Indiana Supreme Court to get a favorable decision on either rationale.

On the other hand, the decision in Aigner has been around more than 20 years, and it has not been overturned yet. Indiana courts may continue to follow Aigner for most written contracts, narrowly applying Yarlott to those that, even though they involve the payment of money, "bear a close resemblance to actions for the collection of judgments of courts of record, which are liens on real estate, or to actions for the recovery of possession of real estate." All we can say is that anyone with a claim for breach of a written contract that involves any payment of money is far better off to file the lawsuit within six years; to wait longer is, at best, risky.

We invite others who may be able to shed light on this question to send us a message using the contact form on this page.

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June 25, 2013

Anticipatory Breach and Damage Mitigation: A Minefield for Real Estate Sellers?

iStock_000010957775XSmall.jpgA ruling in a recent case, Fischer v. Heymann, illustrates the pitfalls one can encounter when selling real estate. By not changing a light bulb and pushing the little red button on a couple of electrical outlets, the seller lost over $90,000!

The Case
Gayle Fischer entered into a contract to sell a condominium to Michael and Noel Heymann for $315,000. The buyers could inspect the property and, if they found serious defects, cancel the sale unless she agreed to fix the problems. On February 10, 2006 the Heymanns demanded that Fischer fix some minor problems: a couple outlets weren't working and a light bulb needed to be changed. Fischer wrote back on Feb. 13th, saying she'd respond by Feb. 28th. The Heymanns wrote back two days later, demanding a response by Feb. 18th. Fischer did not make any further replies until the 19th, when the Heymanns attempted to cancel the contract, and the lawsuit ensued, with Fischer claiming total damages of more than $94,000, including $75,000 in direct damages (which represented the difference between the agreed price of $315,000 and the best offer Fischer later received, $240,000.)

The Decision
The Court of Appeals applied two standard contract principles but to reach a result that may seem surprising. First, the buyers committed an "anticipatory breach".or "breach by repudiation," which occurs when one party declares its intent to breach the contract. Here, the Heymanns' refused to buy the condo unless Fischer made repairs, which the Court of Appeals held was an anticipatory breach. (The Heymanns would have had the right to cancel the contract if the defects in the condo were serious, but they weren't.) An anticipatory breach is treated the same as an actual breach. Fischer did not need to wait until Heymanns failed to show up at the closing.

Second, once a breach has occurred (anticipatory or otherwise), the other side has an obligation to mitigate damages, or to take reasonable steps to avoid 'piling up' additional damages. One way of mitigating damages when a buyer backs out of a real estate purchase is to attempt to find another buyer. Here, the agreed price was $315,000. If the best price Fischer could get from another buyer was $300,000, the Heymanns would have owed her only $15,000. However, if Fischer passed up the $300,000 offer and later sold it for only $240,000, the Heymanns would still owe only $15,000 because that's what the damages would have been if Fischer had mitigated.

Although the Court of Appeals did not describe its analysis quite this way, it essentially treated the Heymanns demand for repairs as a breach of the original purchase agreement and a new offer to buy the condo for the same price after the repairs were made, repairs which cost only $117 -- the price for an electrician to make a service call to reset the ground fault interruptors and change a light bulb. Certainly, if, immediately after the Heymanns breached, a third person had offered to buy the property for the same price, less $117, mitigation of damages would have required Fischer to accept it. The Court of Appeals held that mitigation of damages required Fischer to make the repairs requested by the Heymanns. Result: The Heymanns owed Fischer $117, not $94,000!

Note that these principles apply to contracts in general, not just to real estate purchase agreements. Does it surprise you that one party can make the other party choose between accepting an amendment to the contract or collecting damages that are worth no more than the amendment? That's effectively what happened in this case, and it surprised the Court of Appeals judge who dissented from the decision. I don't know if Fischer's lawyer has petitioned to transfer the case to the Indiana Supreme Court. If so, it will be interesting to see if the Supreme Court accepts the case. And if the decision stands, it will be interesting to see how later Indiana court decisions apply Fischer to other situations.

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March 10, 2011

Always read agreements before signing them

iStock_000007398822XSmall.jpgMost people understand that signing a contract creates a binding agreement with the other party. Of course, there are some exceptions to this general rule, such as when a court finds that one party was fraudulently induced into signing the agreement. However, Indiana law does not let you recover damages or be released from a contract simply because you did not take the time to read the agreement before signing.

One Indiana physician learned this lesson the hard way. In the case of Krad v. BP Products North America, BP wanted to build a gas station on property owned by Dr. Krad. However, BP need only a portion of Dr. Krad's property, not all of it. With the assistance of a real estate broker, BP approached Dr. Krad with a proposal to lease part of Dr. Krad's property, and the discussions led to a letter of intent that described the approximate size of the parcel that BP would lease. Eventually, BP gave Dr. Krad a proposed lease agreement, and Dr. Krad signed it after a review by his attorney. Although a preliminary survey had been completed, the lease agreement did not contain a legal description of the leased property. Instead, it stated that another survey would be completed within sixty days after the lease agreement was signed, and the final survey report would be attached to it as an exhibit, subject to approval by both BP and Dr. Krad. In other words, the lease agreement would not be complete until Dr. Krad signed the final survey report.

After the lease agreement was signed, BP decided it needed more land than it had anticipated and ordered a final survey of a larger piece of Dr. Krad's property, apparently without discussing it with Dr. Krad. The final survey report, which contained a legal description of the larger piece of property, was delivered by the broker to Dr. Krad at his office. The broker interrupted Dr. Krad while he was with a patient and asked him to sign the survey report so it could be recorded. Dr. Krad signed the report without reading it and without telling his attorney or asking his attorney to review the report, assuming that the report described the piece of property that was originally discussed.

Dr. Krad knew something was amiss when the construction equipment arrived and started site preparation outside the boundaries of the parcel he assumed he had leased to BP. Eventually, Dr. Krad sued BP, asking for additional compensation for the difference between the size of the parcel he thought he had leased and the size of the property actually described in the final survey report.

Dr. Krad lost at both the trial court level and in the Indiana Court of Appeals. As the Court of Appeals wrote,

Under Indiana law, a person is presumed to understand what he signs and cannot be released from a contract due to his failure to read it. . . . Mere neglect will not relieve a party of the terms of an agreement in the absence of some excuse for the neglect, such as fraud, trickery, misrepresentation, or breach of trust or confidence.

Although the court acknowledged that the final survey report was given to Dr. Krad "somewhat abruptly," it found that neither BP nor the broker did anything fraudulent in getting Dr. Krad to sign it. He was free to accept it or to reject it. In addtion, the court pointed out that, without a legal description, the lease agreement was an unenforceable agreement to agree, and, if Dr. Krad had refused to sign the survey report, he could have walked away from the deal or he could have pressed BP for more money.

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