United States: The Tennessee Supreme Court Finally Weighs In On Whether And How The Discovery Rule Applies In Breach-Of-Contract Claims

Last Updated: March 11 2019
Article by Michael B. Schwegler

A. Background.

For the last couple of years, Tennessee practitioners have been waiting for the Tennessee Supreme Court to resolve the debate as to whether the Discovery Rule applies to toll the six-year statute of limitations in breach-of-contract cases. In fact, I wrote a blog post about it in 2018. That post is archived here.

B. Individual Healthcare Specialists, Inc.

On January 18, 2019, the Tennessee Supreme Court addressed the issue in a case that primarily seeks to clarify, once and for all, when extrinsic evidence is admissible in breach-of-contract cases, Individual Healthcare Specialists, Inc. v. BlueCross BlueShield of Tennessee, Inc., 2019 Tenn. LEXIS 7 (Tenn. Jan. 18, 2019). (The Court's opinion on admissibility of extrinsic and parol evidence in breach-of-contract cases is very important in itself, will control an entire area of evidence jurisprudence, and will be addressed in a future legal update.) But for now, I want to focus on the words "inherently undiscoverable," and what the Court's analysis of those words means for future breach-of-contract cases where the statute of limitations is at issue. In short, the Court's strict reading of this phrase is a welcome development for those of us who value the public policy of statutes of limitation, are concerned about the notion of open-ended contractual liability, and who worry about the expensive litigation of stale, or even ancient, claims.

The accrual statute for breach-of-contract claims is found at Tennessee Code Annotated § 28-1-102 and reads:

28-1-102. Commencement at time of right to make demand.

When a right exists, but a demand is necessary to entitle the party to an action, the limitation commences from the time the plaintiff's right to make the demand was completed, and not from the date of the demand.

(Emphasis added.)

The threshold timeliness issue in breach-of-contract cases is, therefore, the date that plaintiff's right to make demand was completed; that is, the accrual date in breach-of-contract cases typically occurs upon the breach(es) that gives rise to the claim. Usually, a plaintiff will know it is injured because it has not been paid or some other performance obligation under the contract has not been completed. The Discovery Rule is a creature of common law that identifies the accrual date for a claim and requires that "the statute of limitations begins to run when the plaintiff knows or has reason to know of the injury which is the basis for its action," but is traditionally applied in tort cases where the existence of an injury or a breach of a standard of care may not be immediately apparent.

Until Individual Healthcare Specialists, the only guidance we had as to the application of the Discovery Rule to breach-of-contract cases was in a group of Tennessee Court of Appeals and federal court opinions, starting with Goot v. Metropolitan Government of Nashville and Davidson County, Tennessee, 2005 Tenn. App. LEXIS 708 (Tenn. Ct. App. Nov. 9, 2005). This line of cases applied the Discovery Rule to toll the accrual date for the six year breach-of-contract statute of limitations—as set forth at Tennessee Code Annotated § 28-3-109(a)(3)—when the breach is "inherently undiscoverable" by the plaintiff. Cases interpreting the "inherently undiscoverable" element then construed contractual due diligence waivers to find that a breach is inherently undiscoverable when the plaintiff had no obligation to perform the diligence that would have revealed the existence of the breach.

Although the Individual Healthcare Specialists Court expressly refused to approve the application of the Discovery Rule to breach-of-contract cases, 2019 Tenn. LEXIS 7, at *89, it nevertheless clarified that the phrase "inherently undiscoverable" means what it says and creates a very high burden for a breach-of-contract plaintiff to avail itself of the Discovery Rule. Id. at *93. In that case, defendant BlueCross argued that damages for which it could be liable should be limited to the six-year period falling within the statute of limitations. Id. at *80-*81. The plaintiff, Individual Healthcare Specialists ("IHS"), countered that the Discovery Rule tolled the accrual of its claim against BlueCross such that plaintiff could recover damages stretching back for a 13-year period. Id. at *80-*83. The plaintiff argued that the defendant's breach—in the form of systemic underpayments—was "inherently undiscoverable" because:

(1) BlueCross made "non-routine" errors spanning hundreds of thousands of commission transactions; (2) the information BlueCross provided to IHS was faulty and unreliable; and (3) BlueCross had exclusive possession of systems and information necessary to determine the underpayment amounts. IHS contends that BlueCross was aware that its own accounting system, called Facets, was faulty and unreliable, but it nevertheless withheld this information from IHS. Consequently, despite having exercised extreme diligence throughout the contractual relationship, IHS could not have discovered the information needed to verify the commission payments due.

Id. at *81-*82

The trial and intermediate appellate courts agreed and adopted IHS's arguments. Id. at *89-*92. But the Supreme Court disagreed. Id. at *93. Instead, the Supreme Court explained that while the facts shown in the record created "numerous obstacles" to IHS's efforts to identify the breach and showed that identifying the breach(es) was "not easy" and a "difficult task," those same facts did not rise to the level of being "inherently undiscoverable." Id. at *93, *95. Accordingly, Tennessee's high court reversed the lower courts on the application of the Discovery Rule and held that plaintiff's claim for damages resulting from systemic underpayments more than six years earlier were untimely. Id.

C. What Individual Healthcare Specialists Means Moving Forward.

In mortgage putback cases, courts—especially the courts making up the Middle District of Tennessee—have held that the parties' diligence waiver made discovery of offending breaches "undiscoverable" because the plaintiff had no reason to conduct a due diligence examination and therefore never did so; in the absence of due diligence, the offending breach cannot be discovered. But the Individual Healthcare Specialists opinion should make it more difficult for mortgage putback and other breach-of-contract plaintiffs to avail themselves of the Discovery Rule to avoid an untimeliness defense. In short, just because a contract between the parties excuses the plaintiff from doing any due diligence as a performance requirement under the contract, that circumstance does not mean it is impossible for the plaintiff to conduct due diligence and discover the underlying breach, especially when (as in the mortgage putback cases) the plaintiff contends that the breach—had diligence been performed—is so relatively easy to detect that the defendant should have noticed it in the first place.

There may be one caveat, however, that is certain to be argued by those advancing the application of the Discovery Rule: namely, the Supreme Court's use of the word "expected" when it stated in Individual Healthcare Specialists that, "[when t]he breach at issue arises from a commercial contract between two sophisticated business entities, each [is] expected to use due diligence to protect its own interests." Id. at *93 (emphasis added). "Expected" could be read to imply that the converse controls the issue: that in the absence of an expectation of due diligence, the failure to conduct diligence is appropriate and the Discovery Rule may apply. Id. I think this (admittedly speculative) reading may be a bridge too far, as the remainder of the Supreme Court's carefully worded sentence explains that diligence is used "to protect its own interests," so that regardless of whatever contractual duty or non-duty the plaintiff may have, it should nonetheless be expected to perform diligence under the basic principles of self-interest. Id.

For those readers more interested in seeing if I can shoehorn in a reference of Thanos's acts in Avengers: Infinity War, as I did in my 2018 blog post, I would note that Individual Healthcare Specialists clarifies that the legal world's time travel rules—the statutes of limitations—are hard to overcome in breach-of-contract cases, even if the Discovery Rule applies to them. Similarly, Avengers: Endgame is likely to involve some kind of time travel plot device—probably starting with Ant-Man's discovery and use of the Quantum Realm's time travel rules—so that the remaining Avengers can rewind history and stop The Snap—almost certainly utilizing Captain Marvel's immense cosmic powers. We will have to wait until March and April to know for sure.

If you are a lender or mortgage originator facing one or more mortgage putback claims, or if you are a business facing timeliness issues in your breach-of-contract case, call or email us to discuss how we can help you manage the Discovery Rule.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Michael B. Schwegler
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Country
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions