As a business owner, one of the many decisions you make is whether to file a lawsuit now or wait to see if the dispute gets resolved. Lawsuits can be unpleasant, and the potential expense leads many businesses to delay filing their claims. The danger is delay can result in total loss.
The law imposes strict time limits for filing suit, what lawyers call the “statute of limitations.” Once the statute of limitations passes, your claim is barred and the hard lesson learned too late: don’t wait to file suit.
Compounding the problem is that there are several statutes of limitation, depending on the claim. For example, a breach of contract claim has a six-year time limit;[1] a property damage claim has a three-year time limit;[2] and some professional malpractice claims have a one-year time limit.[3] There is even 10-year catchall statute of limitations for claims which have no specific time limitation.[4]
The risk of delay increases when the nature of your claim is uncertain. If you wait four years to file for breach of contract (six-year time limit), but your claim is actually for property damage (three-year time limit), your claim is already barred. This was the very problem faced by the plaintiff in Benz-Elliot v. Barret Enterprises,[5] a problem that almost cost her $850,000.
In Benz-Elliot, the plaintiff owned 91 acres located near I-24. She agreed to sell a portion of her land to the defendant, a firearms manufacturing business. The parties signed a contract which, among other things, reserved a strip of land along I-24 for the plaintiff so she could access her remaining property. Unfortunately, the warranty deed omitted the contractually required reservation.
Three-and-a-half years later, Plaintiff sued for breach of contract. She asked the court to either make the defendant deliver the land he promised or give her money damages for the decreased value of her remaining property. Because the defendant had already developed the land, he could not deliver the portion reserved under the contract. The court, therefore, awarded plaintiff $850,000.
The defendant appealed to the Court of Appeals arguing the plaintiff’s claim was really for property damage and governed by the three-year statute of limitations, rather than breach of contract governed by the six-year statute of limitations. The Court of Appeals agreed and dismissed the plaintiff’s claim because she waited too long to file suit. Fortunately for the plaintiff, the Tennessee Supreme Court disagreed and ruled her claim was for breach of contract and governed by the six-year statute of limitations.[6] Plaintiff finally received her judgment against the defendant for $850,000, but only after litigating for more than six years.
Why did the plaintiff wait three-and-a-half years to file suit when there was a significant risk her claim would be time-barred? Most likely because (1) she believed her claim was for breach of contract and she had six years to file, and (2) she was trying to resolve the dispute before filing suit. As the Court of Appeals decision shows, however, the risk of waiting to sue could be catastrophic. Had the Tennessee Supreme Court agreed plaintiff’s claim was for property damage rather than breach of contract, plaintiff would have lost $850,000.
An effective way to stop the statute of limitations from running is through a “tolling agreement.” A tolling agreement is a contract between the plaintiff and defendant which suspends the statute of limitations for an agreed time while the parties attempt to resolve the dispute. Tolling agreements are voluntary between the parties. If the parties do not agree, you must file suit before the statute of limitations runs and you lose any chance of recovery.
[1] Tenn. Code Ann. § 28-3-109(a)(3).
[2] Tenn. Code Ann. § 28-3-105(1).
[3] Tenn. Code Ann. § 28-3-104(c)(1).
[4] Tenn. Code Ann. § 28-3-110(a)(3).
[5] 2015 WL 294635 (Tenn.Ct.App. Jan. 23, 2015).
[6] The Supreme Court’s ruling focused on the “gravamen of the complaint,” a term which has proven difficult to define over the years. (“Gravamen” means the essence or most serious part of an argument.) Some Tennessee courts held the gravamen was determined by the damages sought, regardless of the different legal theories alleged. See, e.g., Mike v. Pro Group, Inc., 937 S.W.2d 790, 793 (Tenn. 1996); Taylor v. Trans. Aero Corp., 924 S.W.2d 109, 112-13 (Tenn. Ct. App. 1995); and Vance v. Schulder, 547 S.W.2d 927, 931 (Tenn. 1977). This was the test adopted by the Court of Appeals. Other courts have held the “gravamen” refers to the real purpose or the object of the litigation, again, without regard to the different legal theories alleged. See, e.g., Redwing v. Catholic Bishop for the Diocese of Memphis, 363 S.W.3d 436, 457 (Tenn. 2012).
The ruling in Benz-Elliot is significant because it clarifies the test used in Tennessee to determine the “gravamen of the complaint.” The Supreme Court recognized prior decisions did not address the reality of litigation, that often plaintiffs assert several, alternative claims in a single complaint, each with a different statute of limitations. Finding that previous tests were unworkable, the Supreme Court ruled the “gravamen” of each individual claim, not the entire complaint, must be analyzed. The Supreme Court also adopted a two-step test for determining the gravamen of the complaint: (1) the legal basis of the claim, and (2) the type of injuries for which damages are sought.
Using the two-step process, the Benz-Elliot Court found plaintiff’s claim was grounded in the breach of the contract to reserve a strip of land. The injury plaintiff sought resulted from that breach of contract, which was specific performance. Because specific performance could not be accomplished, the plaintiff was awarded money damages. The court held that plaintiff’s injury was financial only, involving no injury to the real property itself. Although diminution in value damages may be recovered for both tort and contract claims, diminution in value damages plaintiff sought to recover flowed directly from her breach of contract claim.
