We’ve talked about 2 ways people limit liability in a contract (waiver of consequential damages and limitation of liability provisions). Another way you or someone you’re negotiating against can limit contractual liability is by including a provision that limits the time in which a party can bring a claim under the contract—i.e. shortening the statute of limitations that otherwise would apply.
I know that sounds great, but: “what’s a statute of limitations”?
A statute of limitations is essentially a law which establishes the maximum time after an event has occurred within which a party may commence legal proceedings. That is to say, a statute of limitations is a law that basically tells people how long they have to file suit.
Statutes of limitations can vary depending on the type of claim or issue at hand. For example, in the State of Tennessee, the default statute of limitations for breach of contract claims is 6 years, meaning if 6 years has passed since the other party breached your contract, you probably can’t sue him or her for breach of contract (unless your contract says otherwise).
The Tennessee Code sets forth statutes of limitations for many types of actions, including defamation, injury to personal property, products liability, medical malpractice, and the list goes on.
Not only is it important to know the statute of limitation which may apply to your potential legal claims in any given situation, you should remember that you can often limit these statutory limitations contractually.
It is common for contracts to include a provision that shortens the default statute of limitations to 3 years, 2 years or even 1 year. I’ve even seen a contract that attempted to limit the period to 3 months (!). Statute of limitation provisions are often placed at the back of the contract in a “governing law,” “dispute resolution” or “miscellaneous” section.
A shorter statute of limitations can really take you for surprise if you dilly-dally or delay your decision concerning whether to file a claim. Obviously, if you are providing the good or service, you’d probably want the period to be shorter, and if you’re the one buying the good or service, you’d probably want the period to be longer.
If your contract doesn’t say anything about it, don’t worry: the statutory default of 6 years would kick in. Don’t be afraid of these limitations, though, because, if used correctly, they can really help both parties understand and manage their respective risks under the contract.
While there may be a way to argue around the statute of limitations provision in your contract, this is one reason why you should always read the fine print carefully (*or have an attorney review your contract and advise you concerning liability matters). If possible, you want to avoid having to hire an attorney to argue why your contract provisions should be ignored.