A recent New York decision has answered this question in the affirmative. Parties can, by contract, shorten the time period found in a statute of limitations for filing suit. The case is Polar Bear Mechanical, Inc. v. Walison Corp., 2017 N.Y Slip Op. 50848(U) (June 22, 2017).
A statute of limitations is a law that sets a particular time limit within which a party must file a suit (or, if applicable, an arbitration). If the suit is not filed within the stated time, it is barred. Each state has statutes of limitation that cover various situations, and the time periods differ in the various states. For instance, in Illinois, the time limit to file an action involving construction, including design and physical work, is currently four years from the date of accrual of the action. The time starts (accrues) when the party knows, or should know, that it has been damaged. Sometimes it takes a while before an action accrues because the party does not even know that something is wrong. For instance, an owner of a newly built home may first discover a roof leak three years after completion of construction. His discovery of the leak triggers the accrual and starts the four-year time limit (in Illinois. Different in other states). Within the next four years he can investigate to determine whether the leak is caused by faulty workmanship or poor design, and then sue the appropriate party.
Polar Bear was a subcontractor that had a contract with the general contractor that contained these provisions:
“4.10 The obligation of Contractor to make any payment under this Agreement, whether a progress or final payment, or for extras or change orders, is subject to the express condition precedent of payment therefor by Owner and Owner’s lender. Owner’s and Owner’s lender’s determination of the percentage complete of Subcontractor’s Work shall be final and binding and Subcontractor agrees that in no event shall Subcontractor receive payment from Contractor for a greater proportionate value of the Work than what is approved by Owner and Owner’s lender.
ARTICLE 24. SEVERABILITY
24.1 In the event that any provision or any part of a provision of this Agreement shall be finally determined to be superseded, invalid, illegal or otherwise unenforceable pursuant to applicable law, such determination shall not impair or otherwise affect the validity, legality, or enforceability of the remaining provisions of this Agreement.
25.4 Limitation of Action
No action or proceeding shall lie or be maintained by Subcontractor against Contractor, Owner or Architect upon any claim, counterclaim or cross-claim arising out of or based upon this Agreement, or by reason of any act or omission or any requirements relating to the giving of notices or information required hereunder, unless such action or proceeding shall be commenced within six (6) months after Contractor receives Subcontractor’s final application for payment or, if this Agreement is earlier terminated, within six (6) months following the date of such earlier termination. This Paragraph 25.4 shall not be deemed or construed to modify any other provision hereof relating to waivers of claims by Subcontractor or to extend any period herein specifically provided for the initiation of an action relating hereto.”
In late 2013, Polar Bear filed a notice of mechanic’s lien against the property for unpaid labor and materials. The general contractor then sent Polar Bear a notice of default and a demand to cure the default. Then, on January 29, 2014, the general contractor terminated the contract with Polar Bear. On October 15, 2014 Polar Bear filed suit for damages and to foreclose its lien. The defendants filed motions to dismiss on the grounds that the action was time-barred for being filed more than six months after the termination, pursuant to paragraph 25.4 of the contract. Polar Bear opposed the motions on the basis that the shortened six-month contactual period of limitations is unenforceable because it conflicts with the pay-when-paid provision that requires the general contractor to be paid by the owner before being required to pay Polar Bear. The trial court dismissed the action.
On appeal, the court reviewed two arguments. The first, that the pay-when-paid provision makes the limitation provision unenforceable, was a non-starter. New York had previously held that a “pay-when-paid” provision is void and unenforceable under its laws. Since Paragraph 24.1 acts to sever such invalid provisions, the pay-when-paid provision does not exist in the contract.
Polar Bear’s second argument was that a contractual provision to shorten the period of limitations is void as against public policy. Citing numerous New York cases, the court held that such a provision is, indeed, enforceable. The dismissal was upheld.
It should be noted that courts in most other states have ruled similarly. In Illinois, for instance, one of the leading cases is Federal Insurance Company v. Konstant Architecture Planning, Inc., 902 N.E.2d 1213 (1st Dist. 2009), involving an allegation that an architecture firm failed to properly design a home.
These holdings are not limited to construction or design contracts. However, many contracts in the construction industry contain some type of limitation on when an action must be filed. Parties should review such provisions with a knowledgeable attorney to assess the risk and reward that any such provision poses.