Application of the Discovery Rule to Breach of Contract Claims

Under Texas law, a four-year statute of limitations applies to breach of contract claims.[1]  A cause of action for breach of contract generally accrues when the contract is breached.[2]  However, the discovery rule may serve to delay the commencement of the limitations period.[3]  When applicable, the discovery rule will defer accrual of a cause of action until the plaintiff knew or, by exercising reasonable diligence, should have known of the facts giving rise to a cause of action.[4]

I. If the Facts Giving Rise to the Cause of Action are Inherently Undiscoverable and Any Injury is Objectively Verifiable, Then the Discovery Rule Applies.

The discovery rule applies when the nature of the injury is inherently undiscoverable and the injury itself is objectively verifiable.[5]  Whether the discovery rule applies is a question of law.[6]  While the Texas Supreme Court has yet to uphold the application of the discovery rule in a breach of contract case, the Court has expressly opined these holdings do not mean the rule could “never apply to breach of contract claims.”[7]  Thus, the discovery rule may apply to breach of contract in some cases, “[b]ut those cases should be rare, as diligent contracting parties should generally discover any breach during the relatively long four-year limitations period provided for such claims.”[8]  As such, in breach of contract cases, the injured party’s exercise of diligence in discovering the breach is at the forefront of the court’s analysis.

A. Inherently Undiscoverable Injuries

In general, an injury is considered inherently undiscoverable if it is the kind of injury that is not generally discoverable within the applicable statute of limitations by the exercise of reasonable diligence.[9]  To be “inherently undiscoverable,” an injury need not be absolutely impossible to discover—the injury must be of a nature that is unlikely to be discovered during the limitations period despite due diligence.[10]  The focus is on “whether a type of injury rather than a particular injury was discoverable.”[11]  “Knowledge of facts, conditions, or circumstances that would cause a reasonable person to make inquiry… is equivalent to knowledge of the cause of action for limitation purposes.”[12]  Thus, “the question is not whether [plaintiffs] detected the alleged improper charges… within the limitations period.  Rather, the court must decide whether the plaintiff’s injury is the type of injury that generally is discoverable by the exercise of reasonable diligence.”[13]

B. Due Diligence

The discovery rule imposes a duty on the plaintiff to exercise reasonable diligence to discover the facts giving rise to a cause of action.[14]  Because contracting parties generally are not fiduciaries, due diligence requires that each party protect its own interests.[15]

In a contract situation, due diligence may include asking a contracting partner for information needed to verify contractual performance.[16]  If a contracting party responds to such a request with false information, a claim’s accrual may be delayed for fraudulent concealment, i.e., the discovery rule would apply.[17]  However, failure to even ask for such information shows a lack of due diligence.[18]  Further, reasonable diligence includes monitoring not just publicly available materials, but also materials and information available from private sources.[19]  Thus, Texas cases establish that, at a minimum, due diligence would require requesting information to verify a contracting partner's performance of its contractual duties.[20]

II. If the Discovery Rule Applies, the Breach of Contract Claim Will Begin to Accrue When the Injured Party Knew or Should Have Known of the Facts Giving Rise to the Breach.

If the plaintiff's injury is inherently undiscoverable and objectively verifiable, the discovery rule applies to defer the accrual of a cause of action until the plaintiff discovers or, through the exercise of reasonable care and diligence, should have discovered the facts establishing a cause of action.[21]  As such, the cause of action does not accrue when the initial damage is observed or when the full extent of the damage is known.[22]  Not knowing the cause of, the full extent of, or the chances of avoiding the injury does not toll limitations once the plaintiff learns of a wrongful injury.[23]  However, once knowledge of the injury initiates the accrual of the cause of action, the putative claimant's duty to exercise reasonable diligence to investigate the problem, even if the claimant does not know the specific cause of the injury or the full extent of it, is triggered.[24]

Accordingly, the discovery rule doctrine will cease to operate upon a party's discovery of facts, conditions, or circumstances that would cause a reasonably prudent person to inquire and discover the concealed breach of contract.[25]  Once an injured party has knowledge of the breach, they must exercise reasonable diligence to investigate the breach.

[1] See Tex. Civ. Prac. & Rem. Code § 16.004. 

[2] Cosgrove v. Cade, 468 S.W.3d 32, 39 (Tex. 2015); Stine v. Stewart, 80 S.W.3d 586, 592 (Tex. 2002).

[3] Truman Arnold Cos. v. Hammond & Consultants Enters., Inc., No. 12–09–00099–CV, 2010 WL 2982912, at *1 (Tex. App.—Tyler July 30, 2010, no pet.) (citing Barker v. Eckman, 213 S.W.3d 306, 311-12 (Tex. 2006)); see also Slusser v. Union Bankers Ins. Co., 72 S.W.3d 713, 717 (Tex. App.—Eastland 2002, no pet.) (“A cause of action for breach of contract is generally regarded as accruing when the contract is breached or when the claimant has notice of facts sufficient to place him on notice of the breach.”).

[4] Barker, 213 S.W.3d at 311-12 (citing HECI Exploration Co. v. Neel, 982 S.W.2d 881, 886 (Tex. 1998)).

[5] Id. (citation omitted); see ExxonMobil Corporation v. Lazy R Ranch, LP, 511 S.W.3d 538, 544 (Tex. 2017); see also Schneider Nat. Carriers, Inc. v. Bates, 147 S.W.3d 264, 279 (Tex. 2004).

[6] Via Net v. TIG Ins. Co., 211 S.W.3d 310, 314 (Tex. 2006); Velocity Databank, Inc. v. Shell Offshore, Inc., 456 S.W.3d 605, 609 (Tex. App.—Houston [1st. Dist] 2014, pet. denied).

[7] Via Net, 211 S.W.3d at 314 (Texas Supreme Court has “restricted the discovery rule to exceptional cases to avoid defeating the purposes behind the limitations statutes”).

[8] Clear Lake Ctr., L.P. v. Garden Ridge, L.P., 416 S.W.3d 527, 543 (Tex. App.—Houston [14th Dist.] 2013, no pet.) (quoting Via Net, 211 S.W.3d at 315); see Nat’l Prop. Holdings, L.P. v. Westergren, 453 S.W.3d 419, 425 (Tex. 2015) (per curiam) (holding “the law presumes that [a] party knows and accepts” the terms of a contract the party signs, and “it is not the courts’ role ‘to protect parties from their own agreements’”) (quoting El Paso Field Servs., L.P. v. MasTec N. Am., Inc., 389 S.W.3d 802, 810–11 (Tex. 2012)).

[9] S.V. v. R.V., 933 S.W.2d 1, 7 (Tex. 1996); Sandt v. Energy Maintenance Services Group I, LLC, 534 S.W.3d 626, 638 (Tex. App.—Houston [1st Dist.] 2017, pet. filed).

[10] Sandt, 534 S.W.3d at 638; Wagner & Brown, Ltd. v. Horwood, 58 S.W.3d 732, 736 (Tex. 2001) (“Inherently undiscoverable” does not mean the particular plaintiffs did not discover their injuries within the limitations period.)

[11] Via Net, 211 S.W.3d at 313 (emphasis in original); Sandt, 534 S.W.3d at 638; Cody Texas, L.P. v. BPL Exploration, Ltd., 513 S.W.3d 522, 535 (Tex. App.—San Antonio 2016, pet. denied).

[12] Southwest Olshan Found. Repair Co., LLC v. Gonzales, 345 S.W.3d 431, 438 (Tex. App.—San Antonio 2011, no pet.).

[13] Wagner & Brown, 58 S.W.3d at 736 (emphasis added).

[14] Via Net, 211 S.W.3d at 314; Cody Texas, 513 S.W.3d at 534.

[15] Via Net, 211 S.W.3d at 314; B. Mahler Interests, L.P. v. DMAC Construction, Inc., 503 S.W.3d 43, 50 (Tex. App.—Houston [14th Dist.] 2016, no. pet.).

[16] Via Net, 211 S.W.3d at 313; Clear Lake, 416 S.W.3d at 543.

[17] Id.

[18] Via Net, 211 S.W.3d at 313; Clear Lake, 416 S.W.3d at 543; Cody Texas, 513 S.W.3d at 535.

[19] See Wagner & Brown, 58 S.W.3d at 732 (discovery rule inapplicable because due diligence required royalty owners to verify information or payments from their lessees).

[20] See Beavers v. Metropolitan Life Insurance Co., 566 F.3d 436 (5th Cir. 2009) (applying Texas law).

[21] Cody Texas, 513 S.W.3d at 534; Via Net, 211 S.W.3d at 314.

[22] Id.

[23] PPG Industries, Inc. v. JMB/Houston Centers Partners Ltd. Partnership, 146 S.W.3d 79, 93 (Tex. 2004).

[24] PPG Indus., 146 S.W.3d at 93-94; Exxon Corp. v. Emerald Oil & Gas Co., L.C., 348 S.W.3d 194, 209 (Tex. 2011).

[25] See Ponder v. Brice & Mankoff, 889 S.W.2d 637, 645 (Tex. App.—Houston [14th Dist.] 1994, writ denied).