ARCHITECHTONICS CONSTRUCTION v. Khorram

• Decision Date: 13 May 2002
• Docket Number: No. 48181-9-I.,48181-9-I.
• Citation: 111 Wash. App. 725,111 Wn. App. 725,45 P.3d 1142
• Court: Washington Court of Appeals
• Parties: ARCHITECHTONICS CONSTRUCTION MANAGEMENT, INC., a Washington corporation, Plaintiff, v. Parviz KHORRAM and Ladan Khorram, husband and wife, and the marital community composed thereof; Keybank National Association, a foreign banking institute; and Chris Sketchely, d/b/a Jet City Painting and John Does 1-5, Defendants. Parviz Khorram and Ladan Khorram, husband and wife, Appellants, v. Mohammad R. Pezeshk and Jane Doe Pezeshk, husband and wife and the marital community composed thereof, Defendants, and Kensington Homes, Inc., a Washington corporation, Respondent.

45 P.3d 1142

111 Wn. App. 725

111 Wash. App. 725

ARCHITECHTONICS CONSTRUCTION MANAGEMENT, INC., a Washington corporation, Plaintiff, v. Parviz KHORRAM and Ladan Khorram, husband and wife, and the marital community composed thereof; Keybank National Association, a foreign banking institute; and Chris Sketchely, d/b/a Jet City Painting and John Does 1-5, Defendants.

Parviz Khorram and Ladan Khorram, husband and wife, Appellants, v. Mohammad R. Pezeshk and Jane Doe Pezeshk, husband and wife and the marital community composed thereof, Defendants, and Kensington Homes, Inc., a Washington corporation, Respondent.

No. 48181-9-I.

Court of Appeals of Washington, Division 1.

May 13, 2002.

James Scott Fitzgerald, Kevin Blair Hansen, Livengood Carter Tjossem Fitzgerald and Alskop LLP, Kirkland, for Appellants.

John Patrick Hayes, Devon P. Groves, Forsberg & Umlauf PS, Seattle, for Respondent.

Vernon Jerry Seather, Riach Gese Seather & Watts, Lynnwood, for Defendants Key Bank National Association and Chris Sketchely.

David Nold, Inslee Best Doezie & Ryder, Bellevue, for plaintiff Architectronics Construction Mgmt.

ELLINGTON, J.

We must decide whether the discovery rule applies in contract cases. We hold it does, and that the statute of limitation for an action for breach of contract begins to run when a party knows or, in the exercise of due diligence should know, of the breach. Here, Parviz and Ladan Khorram filed suit within two years of the first signs of a breach. The statute of limitation does not bar their claim, and we reverse summary judgment.

FACTS

Parviz and Ladan Khorram contracted with Kensington Homes, Inc. (Kensington) to construct their home. Kensington built the home according to the design and plans of architect Mohammad Pezeshk, owner of Architectonics Construction Management, Inc. (ACM). Kensington substantially completed the work in June of 1993.

In late 1998, the Khorrams noticed paint bubbling and peeling on the side of their house and garage, and found a piece of molding that had rotted and fallen from the eaves.¹ In May 1999, the Khorrams' homeowners' association sent a letter advising them that the association's covenants and rules required them to repair the damage.

The Khorrams contracted with ACM to make the repairs. ACM discovered dry rot in the walls of the house. In April of 2000, investigators for Safeco Insurance concluded that the dry rot "had been on-going for an extended period of time, most likely since the residence was constructed in 1992."²

In June of 2000, ACM recorded a lien against the Khorrams' home and filed an action for foreclosure. The Khorrams brought a third-party action against Kensington, alleging that Kensington breached the construction contract and "failed to satisfy warranties and guarantees made to the Khorrams whether express or implied."³ Kensington moved for summary judgment, arguing that the Khorrams' claims were barred by the statute of limitation and by the construction statute of repose. The trial court granted Kensington's motion, and the Khorrams appeal.

DISCUSSION

Statute of Limitation and the Construction Statute of Repose

The liability of contractors and design professionals for faulty construction is limited by a three-year statute of limitation for actions based in tort or oral contract,⁴ and a six-year limitation for actions based on a written contract.⁵ The statute of limitation for most tort claims begins to run when the plaintiff suffers injury; however, the claim may in some circumstances be subject to a "discovery" rule.⁶ Under the discovery rule, the cause of action accrues and the statute of limitation begins to run when the plaintiff discovers, or in the exercise of reasonable diligence should have discovered, the facts that give rise to the claim.⁷

The construction statute of repose further limits liability by barring claims that do not accrue within six years of substantial completion of construction:

All claims or causes of action as set forth in RCW 4.16.300⁸ shall accrue, and the applicable statute of limitation shall begin to run only during the period within six years after substantial completion of construction, or during the period within six years after the termination of the services enumerated in RCW 4.16.300, whichever is later.... Any cause of action which has not accrued within six years after such substantial completion of construction, or within six years after such termination of services, whichever is later, shall be barred....⁹

The statute of repose has the same purpose as an ordinary statute of limitation—it is intended to "prevent stale claims and place a reasonable limitation on the personal liability exposure of construction industry defendants."¹⁰ By requiring that the cause of actions accrue and the statute of limitation begin to run within the six-year window following substantial completion, the repose statute "restricts the judicially created discovery rule with a 6-year overall bar."¹¹ Therefore, "[t]he discovery rule, if applicable for accrual of actions is limited to the 6 year period."¹²

The statute of limitation and the statute of repose together thus create a two-step analysis for computing the limitation period for a tort action arising from improvements on real property. First, the cause of action must accrue within six years of substantial completion of construction. Second, suit must be filed within the applicable statute of limitation.¹³

Applicability of the Discovery Rule in Contract Actions

The Khorrams argue that the discovery rule applies in contract actions, and that the six-year statute of limitation on their contract claim did not begin to run until they discovered Kensington's alleged faulty construction in 1998. Kensington contends the discovery rule applies only in tort cases, and that in contract cases, the statute of limitation begins to run when the breach occurs—here, when construction was completed in June of 1993. Under the Khorrams' interpretation, the limitation period does not expire until 2004; according to Kensington, the limitation period expired in 1999. The Khorrams filed their claim in July of 2000.

While our Supreme Court has stated that the statute of limitation in contract actions begins to run at the time of breach,¹⁴ the court has never considered when the statute begins to run where reasonable diligence would not reveal the breach. The court therefore has not addressed the issue before us.

The court first adopted the discovery rule in Ruth v. Dight,¹⁵ a medical malpractice case in which a doctor inadvertently left a sponge in the plaintiff's abdomen. The plaintiff did not discover the cause of her recurring pain until she underwent exploratory surgery 23 years later. The court acknowledged the practical considerations underlying statutes of limitation: "[C]ompelling one to answer stale claims in the courts is in itself a substantial wrong. After all, when an adult person has a justiciable grievance, he usually knows it and the law affords him ample opportunity to assert it in the courts."¹⁶ But the court noted that "accrual" of a cause of action is a term susceptible of several meanings, and "could as readily be said to commence with the reasonable discovery of the injury as with the occurrence of the event or omission which produced the alleged injury."¹⁷ The court held that in a malpractice action where a party "would not in the usual course of events know he had been injured until long after the statute of limitations had cut off his legal remedies," a balancing of harms required that accrual not occur until the patient discovers or, in the exercise of reasonable diligence should have discovered, the foreign article in his body.¹⁸

Over the past 30 years, our Supreme Court has extended the discovery rule to other kinds of tort cases. In Ohler v. Tacoma Gen. Hospital,¹⁹ the court applied the discovery rule in a products liability action. In White v. Johns-Manville Corp.,²⁰ the court applied the rule where a product made of asbestos injured the plaintiff, holding the latent nature of occupational diseases such as asbestosis justified the use of the discovery rule.²¹ In Del Guzzi Construction Company, Inc. v. Global Northwest, Ltd., Inc.,²² the court held that the statute of limitation was not triggered until the plaintiff knew of the defendant's alleged failure to design accurate engineering plans for construction of a sewer plant.²³

In U.S. Oil & Refining Co. v. Dep't of Ecology,²⁴ the court applied the discovery rule in an action involving penalties for illegal discharge of pollutants. The Department of Ecology alleged U.S. Oil submitted inaccurate reports and exceeded its effluent limits. U.S. Oil contested some of the penalties as barred by the statute of limitations. Rejecting U.S. Oil's arguments, the court reasoned that the self-reporting regulatory system "mandates application of a discovery rule," because the Department of Ecology must rely on industry reporting to discover violations: "Without a discovery rule, industries can discharge pollutants and by failing to report the violation, can escape penalties."²⁵ The U.S. Oil court crystallized the analysis of the discovery rule:

In determining whether to apply the discovery rule, the possibility of stale claims must be balanced against the unfairness of precluding justified causes of action. That balancing test has dictated the application of the rule where the plaintiff lacks the means or ability to ascertain that a wrong has been committed. Thus, the rule has been applied, for example, to cases involving professional services and products liability. Likewise, courts have held that a defendant's unlawful failure to report an automobile accident will suspend a statute of limitation while, as a result of such failure, there is inability to prosecute the cause of action.

In each of these instances, had the discovery rule not been applied, the plaintiff would have been denied a meaningful

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