The Statute of Limitations for a Breach of Contract Claim Does not Apply to all Contracts Equally
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The statute of limitations refers to the period of time in which a potential plaintiff is allowed to bring a legal claim against a potential defendant. Chapter 95, Florida Statutes, provides the statute of limitations period for all possible causes of action under Florida law. For a breach of contract claim, Section 95.11(2)(b), Florida Statutes, makes clear that the statute of limitations is five years for most contracts (contracts for the improvement of real property have a 4 year statute of limitations). This means that if suit is filed five years and one day after the breached occurred, the defendant could raise a statute of limitations defense and have the suit dismissed. However, not all contracts are the same and, therefore, the statute of limitations does not apply to all contracts equally. This blog post discusses how the statute of limitations for claims involving a breach of contract applies to what is known as installment contracts.
The policy behind the statute of limitations is to prevent unreasonable delay in the enforcement of legal rights and to protect against the risk of injustice. Hawkins v. Barnes, 661 So.2d 1271, 1272 (Fla. 5th DCA 1995). To know whether the statute of limitations period has expired, or how much time remains to bring a cause of action prior to its expiration, a potential plaintiff must first determine when the statute of limitations period began to run on his or her claim against the potential defendant. The general rule is that the statute of limitations period begins to run from the time the cause of action accrues. Fla. Stat. § 95.031. For causes of action on a contract, the action accrues, and therefore the statute of limitations period commences, at the time of the breach. Holiday Furniture Factory Outlet Corp. v. State Dep’t of Corr., 852 So.2d 926, 928 (Fla. 1st DCA 2003).
Contracts requiring a party to make one lump-sum payment, or a one-time delivery of goods, make it easy to ascertain when the date of an alleged breach has occurred and when the statute of limitations period will expire. For example, if payment or the delivery of goods is to occur on a specified date, and the payment or the delivery does not occur on that date, there has been a breach, the action has accrued, and the statute of limitations period began running as of that date. Under Florida law, the party damaged by the breach would then have five years from that date to sue the person or entity responsible for the breach. But not all contracts involve a one-time payment or a one-time delivery, and the statute of limitations period applies differently to installment contracts.
Installment contracts are defined as “a contract requiring or authorizing the delivery of goods in separate lots, or payments in separate increments.” black’s law dictionary (9th ed. 2009). For an installment contract, each individual lot or individual payment is to be separately made and separately accepted. Id. A few examples of installment contracts include agreements where goods are delivered in separate lots over time; insurance policies where payments are made in increments; promissory notes where reoccurring payments are required; franchise agreements where the franchisee makes royalty payments over time; and lease agreements where periodic payments are made to the lessor. See Holiday Furniture Factory Outlet Corp., 852 So.2d at 928. For installment contracts, the statute of limitations period applies individually to each separate delivery and/or payment that is required under the agreement.
Under an installment contract, each failure to make a payment or to make a required delivery constitutes an individual breach. Id. This is good news for potential plaintiffs who have been damaged by another’s breach but never bothered filing suit – the statute of limitations period may not have fully run on the entire claim. Concerning a promissory note, “installments due at different times under the note mature or accrue on the day after each is due to be paid, and the statute of limitations may run on some and not others.” Cent. Home Trust Co. of Elizabeth v. Lippincott, 392 So.2d 931, 933 (Fla. 5th DCA 1980). In regards to a lease agreement, “each failure to pay an installment constitutes an individual breach . . . [the lessor] can sue the lessee as each installment of rent matures, or sue for all of the rents due when the lease expires.” Holiday Furniture Factory Outlet Corp., 852 So.2d at 928. Because each installment payment not made, or each delivery not made, constitutes a separate breach, those breaches that occurred within the five-year limitations period are still actionable and not barred from recovery. Id. Only those unpaid installment payments or missed deliveries that occurred over five years prior to suit being filed would be barred from recovery. Id.
One exception to this application of the statute of limitations to installment contracts is when the underlying contract contains an acceleration clause, and the damaged party invokes that acceleration clause at the occurrence of the initial breach. An acceleration clause is where the contract allows the damaged party to declare all payments immediately due and payable in the event any individual installment payment is not made when due. Cent. Home Trust C. of Elizabeth, 392 So.2d at 932. If the damaged party exercises his or her right to accelerate the total debt remaining because of a single installment payment default, then the statute of limitations period commences at that time for the entire remaining amount owed under the contract. Id. at 933.
To exercise the acceleration clause, the damaged party must take some clear and unequivocal action to indicate its intent to accelerate all remaining payments due under the contract. Id. Examples of actions that invoke an acceleration clause include the creditor sending written notice to the debtor, making an oral demand of the debtor, or alleging acceleration in a pleading filed in a suit on the debt against the debtor. Id. However, it has been held that the creditor’s act of charging off the remaining balance is not an action that accelerates the balance owed because a charge off is merely an internal bookkeeping or accounting procedure and does nothing to provide notice to the debtor that an acceleration was intended. Id.
There is nothing wrong with a creditor exercising an acceleration clause if one exists in the underlying contract. In fact, this would be a beneficial action for the creditor to take as the creditor would not have to wait the entire length of the contract term to determine what payments were breached; rather, the creditor can simply declare that the entire remaining amount is due and bring immediate suit for recovery. What a creditor must keep in mind is that if he or she intentionally accelerates the entire remaining balance due after a default then that creditor better be prepared to file suit against the breaching party prior to the statute of limitations period expiring or else recovery could be barred on the entire debt owed.