Reprinted with permission, The Lord & Whip Report, Vol.XXII No. I, June 30, 2004

When does the statute of limitations begin to run in a breach of contract case? From the time of the breach? When the breach is discovered by the Plaintiff? Is either acceptable? This was the central question presented in the recent case in the Maryland Court of Special Appeals of Bacon and Associates, Inc. v. Rolly Tasker Sails (Thailand) Co., Ltd. In that case, the Court of Special Appeals expanded the applicability of the “discovery rule” to contract as well as tort cases.

The “discovery rule” has traditionally been applied in civil actions. Owens-Illinois v. Armstrong, 326 Md. 107, 121 n. 3, 604 A.2d 47, 54 n.3, cert. denied 506 U.S. 871, 112 S. Ct. 204, 121 L. Ed. 2d 145 (1992). Under Maryland’s discovery rule, the three-year statute of limitations period begins to toll when the Plaintiff discovers, or should have discovered, the alleged injury. Ver Brycke v. Ver Brycke, 2004 Md. Lexis 44. The discovery rule has regularly been applied in tort cases, but its role in breach of contract cases has been unclear. In Bacon, the Court of Special Appeals has now clearly held that the discovery rule applies to breach of contract cases.

Rolly Tasker Sails, a Thai corporation, began a business relationship with Annapolis-based Bacon and Associates in 1971. Bacon and Associates is a retailer of new and used sails. In 1971, Bacon and Associates and Rolly Tasker Sails entered into a consignment agreement in which Tasker would “ship sails to Bacon with a bill of lading and an invoice stating the net price for each sail.” Bacon, pg.4.

After receiving each shipment, Bacon would inspect and measure the sails and assign a price to each as well as acknowledge receipt of the sails. Once sold, Bacon would issue a check to Tasker for the net invoice price of the sail.

This arrangement continued until approximately July 1998. In its complaint, filed in 2001, Rolly Tasker Sails alleged that Bacon stopped making payments on sales of Rolly Tasker Sails’ consigned merchandise around July 1998. At trial, the Court gave the following instruction:

Bacon, pgs. 16-17.

The jury returned a verdict in favor of Rolly Tasker Sails, finding that its claims against Bacon and Associates were filed within three years of when the breach of contract claim arose. In the appeal that followed, Bacon and associates relied on Bragunier Masonry Contractors, Inc. v. Catholic Univ. of Am., 368 Md. 608, 796 A.2d 744 (2002), to support their core argument that the discovery rule does not apply in contract cases. The Court, however, indicated that Bragunier merely stood for the premise that when the date of the breach and the discovery of the breach are the same, the discovery rule is satisfied. Bacon, pg. 20. In other words, the Court indicated that Bragunier only stood for the proposition that the discovery rule was inapplicable in cases where the breach and the discovery of the breach were simultaneous.

The discovery of the breach in Bacon was not simultaneous with the breach itself. Indeed, Rolly Tasker Sails was wholly dependent upon Bacon and Associates to learn when a sale of their merchandise would take place based upon the consignment arrangement they created and operated under. As the Court indicated, if Bacon sold a consigned sail but did not advise Rolly Tasker Sails of the sale or remit the net invoice price to Rolly Tasker Sails, Rolly Tasker Sails would have no way of knowing that the contract breach had occurred. Therefore, it was only after the discovery of the breach that Rolly Tasker Sails would have a cause of action. Under these circumstances, the Court found, Rolly Tasker Sails’ claims were timely filed and the jury verdict was affirmed.

With the Bacon case, the Court of Appeals made clear that application of the discovery rule in a breach of contract case now falls into a two-part test. The question to be asked is whether the breach of contract and the discovery of the breach are simultaneous. If so, the inquiry ends, and the discovery rule is inapplicable. If not, the discovery rule will apply in cases where the breach of contract is or should have been discovered after the actual breach, and the statue of limitations will begin to run at the time the breach was or should have been discovered.

This decision has expanded the potential liability for defendants. Indeed, potential plaintiffs in corporate litigation have been given a powerful new tool, one that was previously undefined, in applying the discovery rule to breach of contract cases. Corporate defendants and litigators alike will need to remain extra vigilant in breach of contract cases to determine whether or not the discovery rule applies to the tolling of the statute of limitations in a given case.

Steve Thibodeau is an associate attorney at Lord & Whip who specializes in general civil litigation, insurance defense and commercial litigation. You may e-mail Steve at thibodeau@lordwhip.com.
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