By: Thomas S. Tripodianos Published: October 2018

Are contractually shortened limitations periods to commence an action for breach of contract enforceable?

At least in New York’s First and Second Departments; maybe not.  In recent cases on the subject, General Contractor, hired Subcontractor to provide security services at several different construction sites, pursuant to separate subcontracts. Each subcontract involved a public construction project. The subcontracts were identical, and contained the following relevant provision:

“Article 33 - CLAIMS AND DISPUTE RESOLUTION
Paragraph 33.5 Limitation on Suit
“No claim or action by [Subcontractor] arising out of or related to th[e] [contract] shall lie or be maintained against [General Contractor ] unless such action is commenced no later than six (6) months after either: [a] the cause of action accrued, [b] the termination or conclusion of th[e] [contract], or [c] the last day [Subcontractor] performed any physical work at the [project site], whichever of the proceeding [sic] events shall occur first.”

Both the Subcontractor and General Contractor were named as defendants in a class action under New York’s prevailing wage statute commenced by present and former employees of Subcontractor (the Wage Action). In a letter, counsel for Subcontractor informed counsel for General Contractor that it considered the Wage Action to be frivolous, and that Subcontractor intended to move for summary judgment dismissing it. In the same letter, however, Subcontractor asserted that $232,213.13 was due and owing to it for its work under the subcontracts, and demanded payment of same. In a responsive letter, counsel for General Contractor informed counsel for Subcontractor that General Contractor was relying upon an indemnity provision in the subcontracts that entitled it to withhold money due and owing to Subcontractor, pending the outcome of the Wage Action, stating that

“[w]hile it may be ultimately determined that the [Wage Action] Plaintiffs’ claims are frivolous and/or without merit, be advised that General Contractor  will continue to enforce the indemnity provisions contained in the contracts with your client until such determination is made by the Court [in the Wage Action].”

The letter further noted that, in connection with one of the jobs, payment was not yet due, since the public owner had not yet approved a change order. Subcontractor did move for summary judgment in the Wage Action. However, after the summary judgment motion was denied, and the Wage Action became protracted, it decided it could no longer wait to be paid. Accordingly, it commenced an action to collect its alleged balance due.

General Contractor argued that the action was time-barred by the contractual limitations provision, which required Subcontractor to commence suit within six months of the last time it performed physical work under any of the subcontracts. General Contractor asserted that, in accordance with the limitations clause, this was the earliest of the three possible dates for measuring the time to commence suit, the others being the “accrual date,” and termination of the subcontracts.

Subcontractor asserted that General Contractor had been paid in full by the public owner on all four of the projects for which it provided security services, wherefore General Contractor could not rely on certain provisions in the subcontracts making Subcontractor’s right to payment contingent on payment to General Contractor by the owners. Subcontractor argued that the contractual limitations period did not bar the claim because General Contractor, pursuant to General Municipal Law section 106–b(2), (which requires a contractor who receives any payment from a public owner to make prompt payment to its subcontractors for their work), imposed upon it a continuing and ongoing obligation to pay Subcontractor. Subcontractor also relied on the letter from General Contractor’s counsel, claiming that it constituted an acknowledgment of the debt, as contemplated by General Obligations Law section 17–101, thus defeating any statute of limitations claim.

In reply, General Contractor asserted that the public owner was either retaining funds in connection with the Wage Action or that the General Contractor, while acknowledging it had been paid, was holding the money, in case it was later determined that Subcontractor had to indemnify it as the result of an adverse judgment in the Wage Action.

The Subcontractor’s argument in the case that went up on appeal to the First Department was that the contractual limitations provision was unenforceable, because it permitted a scenario in which,  even though a claim had not accrued by the time six months had passed since the last time physical work was performed, it was still time-barred. Subcontractor argued essentially that, in light of General Contractor’s stated position that payment was not due to Subcontractor until such time as the Wage Action was resolved, Subcontractor should not have been subjected to the “catch–22” of having to file a lawsuit to toll the statute of limitations, where the claim was not yet ripe for adjudication.

General Contractor noted that Subcontractor demanded payment from General Contractor in its counsel’s letter, which was still within the six-month limitations period. It characterized this as an acknowledgment by Subcontractor that it had a ripe claim. However, in its counsel’s response, General Contractor explicitly rejected the claim as premature. Accordingly, Subcontractor rightfully saw filing a lawsuit at the time as a futile gesture.

A recent Second Department case further undermines General Contractor ’s position. Similarly in that case the subcontractor was owed money pursuant to a subcontract that contained a one-year contractual limitations period, and a provision making payment by the owner to the general contractor a condition precedent to the general contractor’s obligation to pay the plaintiff. It took nearly two years for the owner to approve payment to the general contractor, and when the plaintiff sued to recover, the general contractor moved to dismiss, relying on the contractual limitations period. The court refused to dismiss on statute of limitations grounds.

In this First Department case, it was not clear that General Contractor was relying on a specific contractual condition precedent, in advising Subcontractor it would not pay until a favorable resolution of the Wage Action had been reached. Nevertheless, General Contractor made clear that it would not release monies to Subcontractor until the Wage Action was resolved. Accordingly, Subcontractor’s argument that the limitations period was rendered ineffectual by General Contractor’s position was correct.

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