Statutes of limitation and records retention

This article is intended to provide accurate information in regard to the subject matter covered. The publisher and author are not engaged in rendering legal services. If legal or other professional assistance is required, the services of a competent professional should be sought.

When developing a records retention program, one of the essential activities is the legal research that will form part of the analysis of the records retention schedules which will result from the program. This research will, ideally, collect all, or at least most, of the laws which govern the organization's records. When suitably organized and analyzed, these laws will provide an important part of the guidance that determines the retention periods for many of the organization's records.

The retention analysis for many of these laws is straightforward: the legislature or agency which passed the law simply requires, for example, that a record be retained for six years past the year of its creation. Such a requirement normally brooks no argument; there may be reasons for keeping a record subject to it longer than the stated period, but rarely is there a reason for keeping such records for a shorter period of time-such a practice would be a violation of the law, and would likely expose the organization to penalties, either civil or criminal, as well as the distinct possibility of sanctions should the records be needed by an opponent in a lawsuit.

If every law which had significance for records retention were so straightforward in its requirements, and every one of an organization's records governed by them, developing a records retention program would be a relatively straightforward matter. Unfortunately, the real world situation is somewhat more complicated. Records retention is not simply a matter of complying with records retention statutes and regulations. Many records are not covered by the provisions of any records retention law, complicating the decision of how long to keep records. Business needs for records also intrude into the decision, as do legal considerations aside from straight retention requirements.

Prominent among these considerations is the reality that most large organizations, both governmental and private, are involved in lawsuits with great regularity. An organization's records are usually heavily implicated in these lawsuits. Both as plaintiff and defendant, an organization will undoubtedly be required to produce significant numbers of documents to its opponents, and may be sanctioned for unreasonable failure to do so.

The risks involved in litigation, combined with the need to establish some basis and authority for records retention decisions for records not explicitly covered by a records retention statute or regulation, generally lead in the direction of statutes of limitation. Although these laws do not contain records retention periods or other requirements, they nonetheless serve to define the scope of risk, and its duration, for the organization. In the absence of an explicit requirement, this information may be very useful in determining the appropriate retention period for a document.

WHAT IS A STATUTE OF LIMITATION?

When a person or organization has been injured1 in some way by another, the law provides that they can seek redress in the courts for this injury. This right to seek redress is termed a cause of action. For most injuries, the cause of action does not, however, exist indefinitely. Rather, the law provides for a period of time within which a cause of action may be pursued by means of a lawsuit. These periods are in the form of statutes passed by the state legislature, or in the case of federal law, by Congress. Such statutes are called statutes of limitation.

The principle upon which statutes of limitation work is simple: for some period after the injury complained of occurred, the injured party has a right to sue. Once that period has expired,the injured party cannot bring suit, and the matter is dead. The reasoning behind statutes of limitation is equally simple. Over time, evidence is lost, memories fade, issues become clouded. If the judicial system is to be able to decide the controversy adequately, the situation must be fresh enough to allow a reasonable examination of pertinent evidence.

In practice, however, statutes of limitation work in a somewhat more complicated manner. Consider the following statute:

Sec95.11. Limitations other than for the recovery of real property.

(3) Within four years.

(c) An action founded on the design, planning, or construction of an improvement to real property, with the time running from the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his employer, whichever date is latest; except that, when the action involves a latent defect, the time runs from the time the defect is discovered or should have been discovered with the exercise of due diligence. In any event, the action must be commenced within 15 years after the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his employer, whichever date is latest.2

There are two limitations periods found here: the first is a four year period during which suit is allowed after the discovery of the injury, or after it should have been discovered. The second is a fifteen year period after which suit is not allowed, regardless of whether the injury was or could have been discovered during the time allowed for suit by the first period. The first of these periods is the limitations period. The second is the period of repose.

The precise requirements of each of these periods may have considerable significance. Many injuries occupational diseases, structural defects in property, fraud - may be hidden from easy discovery, or may not manifest themselves for many years after the initial transaction which precipitated them. Consider the situation contemplated by the above statute. If the plaintiff claims that a defective foundation did not become obvious until six years after completion of a building or improvement, and the defendant asserts a statute of limitations defense, the plaintiff must be able to prove certain facts before it may proceed with a lawsuit.

The defendant will assert that the defect was found, or could have been found by the exercise of reasonable diligence, at some time more than four years prior to the time the plaintiff filed suit. If this is true, the plaintiffs suit is barred the plaintiff has only four years after the defect was or could have been discovered within which to file suit. The plaintiff must therefore be able to demonstrate that the defect was sufficiently hidden that the defendant's assertions could not have been the case, and that the plaintiff could only have discovered the defect within the last four years. If it can do so, the lawsuit will proceed.

If, however, the lawsuit was not filed until 16 years after completion of the building, the defendant need not prove that the plaintiff could have discovered the alleged defect earlier, and the plaintiff s ability to prove that it could not have accomplishes nothing. At the end of the period of repose, the lawsuit is simply barred, regardless of the plaintiffs diligence in discovering the injury and pursuing the lawsuit.3

Another common problem is that there may be more than one statute of limitation potentially applicable to a situation. Most states, for example, have several statutes of limitation dealing with contracts: oral contracts, written contracts, open accounts, contracts under seal, contracts governed by the Uniform Commercial Code, and so on. These statutes may have limitations periods which differ considerably, so the plaintiffs ability to pursue the suit may hinge upon which one is applicable. If the stakes are high and the answer to the question which statute governs is not clear, the parties may spend considerable effort litigating this point, since it may be dispositive of the whole suit.

A final complication is that, for various reasons, a statute of limitation's operation may be suspended for a period of time, and only begins to run when some obstacle is removed from the plaintiffs path. For example, if a minor has a cause of action, many states provide that the statute of limitations does not begin to run until the minor reaches the age of majority.

STATUTES OF LIMITATION AND RECORDS RETENTION

Statutes of limitation do not impose any affirmative records retention requirement. Consider this statute of limitations for written contracts:

Sec5/13-206. Ten year limitation. 13-206. Ten year limitation. Except as provided in Section 2-725 of the Uniform Commercial Code, actions on bonds, promissory notes, bills of exchange, written leases, written contracts, or other evidences of indebtedness in writing, shall be commenced within 10 years next after the cause of action accrued; but if any payment or new promise to pay has been made, in writing, on any bond, note, bill, lease, contract, or other written evidence of indebtedness, within or after the period of 10 years, then an action may be commenced thereon at any time within 10 years after the time of such payment or promise to pay.4

For the typical commercial contract contemplated by this provision, there is no requirement that the contract or supporting documentation be retained for any period of time. Nor, in most cases, is there any other provision requiring retention of your contracts and documentation.5 You may, if you wish, destroy them the day after the contract is signed, without incurring either civil or criminal liability.

On the other hand, you can sue or be sued on that contract for some years after the alleged breach, in this case ten years. If you find yourself in or contemplating such a lawsuit, and you don't have a copy of the contract, you may find yourself at a considerable disadvantage. Thus, the statute of limitations, including the period of repose, gives vital information about the length of time during which the contract and its documentation may be of value to you.

The simplest solution to the records retention question in this example might therefore seem to be simply to keep the contract and documentation for the duration of the relevant limitations period, and this is what some organizations do. This may not, however, be the most desirable solution. Consider the fact that in Indiana the limitations period on written contracts requiring the payment of money is 10 years:

Sec34-1-2-2. Limitation of actionsTwo, five, six, ten and twenty years.

The following actions shall be commenced within the periods herein prescribed after the cause of action has accrued, and not afterwards.

Fifth. Upon promissory notes, bills of exchange and other written contracts for the payment of money hereafter executed, within ten [10] years: Provided, That all such contracts as have been heretofore executed may be enforced under this act, within such time only as they have to run, before being barred under the existing law limiting the commencement of actions, and not afterward.

If an organization enters into a large number of contracts in Indiana it may generate an enormous amount of paper associated with them. Retention of all of this material for 10 years in paper form is likely to prove an expensive proposition. Microfilming or imaging the mass may save money, but there are costs for equipment and staff or outside contractors to be considered, and the resulting film or images must still be maintained.

If the contracts are for the construction of a nuclear reactor, and the average dollar value of each contract is $500 million, the cost of retaining these records may well be justified-the resulting structure lasts considerably more than 10 years, there will probably be lawsuits well into the 10 year period, and the potential losses in a lawsuit are large. There may also be an expectation on the part of judges or juries that nuclear reactor construction records be retained for very long periods of time.

If, on the other hand, the contracts are for the sale of collectable coffee mugs, there are 200,000 contracts per year, and the average dollar value of each transaction is $10.00, retention of these contracts for the full 10 years may be a complete waste of time and resources. How long after delivery of the mug is a dispute likely to arise? For items such as this, virtually all disputes will arise within a year or two, most of them probably within a few months. What is the potential liability if such a dispute is resolved unfavorably? Probably about $10.00. If the total cost of retaining 200,000 contracts and their complete documentation (one year's worth, in this case) for 10 years is in excess of $50,000 dollars (2.5 cents per year per contract), it would be cheaper simply to destroy all of the records immediately at the conclusion of each transaction and simply give a mug to as many as 5,000 plaintiffs every year, regardless of the merits of their claim.

If, as is more likely the case, the mug contracts are retained for a short period of years, during which virtually 100% of all disputes will arise, further retention is an obvious waste of money. There will be few, if any, claimants past that time and the dollar value of any dispute is minuscule. Retention of the entire mass for a decade to guard against the remote possibility of a $10.00 dispute in the 10th year is absurd.

Even if such a dispute arose in the 10th year, there would probably be no liability at all for not having the records. Assuming for the sake of argument that a plaintiff would actually file such a suit, and further assuming that they actually made an issue out of the absence of a 10 year old contract for $10.00,6 they would have to overcome formidable obstacles in order to obtain sanctions. Initially, they might still find themselves thrown out of court for unreasonably failing to pursue their case earlier7 - what defect, problem or breach of contract could arise in the 10th year of owning a coffee mug?

They would also face the problem of persuading a court that it is unreasonable not to keep a $10.00 contract for 10 years, a proposition not terribly rational on its face, and with absolutely no support in prior law. Thus, at best, the plaintiff would find themselves going forward with no records available, and not much other evidence, either.

This discussion is not meant to suggest that it is always appropriate to destroy records immediately and simply hope to pay off plaintiffs. Such an assertion would be as simplistic as retaining the records for the longest period of repose, and would, in many cases, be foolhardy. The point instead is that statutes of limitation are part of a mix of information, the entire body of which must be considered in making retention decisions. Blindly using limitations periods as retention numbers, and excluding other equally important considerations, may lead to rather silly conclusions.

THE MIX OF INFORMATION

A number of factors go into the information mix: The statute of repose defines the outermost limit of liability. Any applicable law with an explicit retention period defines the minimum period of retention. Other factors, such as business needs and use, further define the period during which a record is likely to be needed, or for which its absence is likely to impose risk or penalties. The nature of the record, and of the underlying transaction or object must also be considered. As observed above, coffee mugs and nuclear power plants force considerably different conclusions for similar records. The actual timeline within disputes arises must also be analyzed: During what period do most disputes involving the records arise? Are there really any lawsuits or other disputes in the last year of the limitations period? How many? What is the average value of each? Finally, what is the organization's risk tolerance?

In order to arrive at a reasoned decision, each of these factors must be weighed against the others, and a well designed retention schedule takes each of them into account. Like the other factors, statutes of limitation provide some of the information important to that analysis, but the absolute numbers of the periods of limitation and repose do not, by themselves, provide the entire answer. They may bump the retention numbers higher than those arising solely from any legal requirements, but whether they mandate retention until the end of the period of repose is a much more difficult question.

In many cases, it may well be appropriate to consider retention periods shorter than those found in the relevant statutes of limitation. Courts are likely to expect that records of any kind be kept for some reasonable period of time, based upon the nature of the transaction and records, industry practice, and other factors. However, as observed in the example above, once records have been retained for that reasonable period, further retention should not be based upon hypothetical, very low probability risks. There is no support in the law for the proposition that this is a required or appropriate practice.

CONCLUSION

The bottom line is to use statutes of limitation as one factor in a complex analysis of need, risk and utility. So used, they can be very helpful in determining appropriate records retention periods. They define and limit risk, and so provide a valuable frame of reference for records retention purposes. However, other factors may also serve to define risk. As always, careful and thorough analysis is needed to discover just how much weight ought to be given to each.

ENDNOTES

1. Here, injury is meant in a very broad sense. In addition to such obvious injuries as broken bones or lung disease, such things as

breached contracts, antitrust violations, fraud or failure to pay wages may cause a wrong which, for legal purposes, is deemed an "injury."

2. F.S. 95.11 (3)(c), Florida.

3. Some statutes of limitation provide for a short additional period within which to file suit if the defect was discovered in the last year of the period of repose.

4. 735 ILCS 5/13-206, Illinois.

5. This assumption specifically excludes those rather rare situations where there may be a records retention statute governing the contract, such as government contracts, an insurance company's copy of insurance contracts, and the like.

6. Both extremely unlikely assumptions, to say the least.

7. The legal doctrine of laches, which operates independently of any statute of limitations.

Copyright Association of Records Managers and Administrators Inc. Jan 1997
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