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By: Thomas H. Welby Gregory J. Spaun Published: July 2020

Appellate Court Invalidates Shortened Statute of Limitations Which Effectively Nullified Claim

Construction contracts, like other contracts, are meant to define the relationship between the parties to the contract. In that regard, the parties are generally free to negotiate the terms of that contract. It is only where the contractual language at issue is contrary to statute, against public policy, or is unreasonable, will a court decline to enforce the contract, as negotiated between the parties.

While parties are generally free to negotiate to shorten the contract’s statute of limitations from the otherwise applicable six years, where the contract’s shortened limitations period effectively nullifies the claim before it arises it will be found to be unreasonable. An appellate court reinforced this principle of law again in Greystone Building & Development Corp. v Makro General Contractors, Inc.

Background

In December of 2010, Makro General Contractors entered into a construction contract with the New York City Transit Authority for various construction work. The following month, Makro entered into a subcontract with Greystone Building & Development for a portion of this work. The contract contained a provision requiring that “any claim or action by [Greystone] against [Makro] must be commenced within (1) year after substantial completion of this Subcontract, and in no event after final payment to [Greystone]”.

Greystone substantially completed its work by September 30, 2013, and the entire project was completed by August 30, 2014, with the NYCTA issuing its certificate of substantial completion on October 28, 2014. Greystone commenced a lawsuit against Makro on December 10, 2015, seeking to recover monies owed under a disputed change order, as well as its retainage.

After discovery, Greystone moved for summary judgment on its complaint, and Makro cross-moved for summary judgment dismissing the complaint. On the cross motion, Makro argued that Greystone’s claims were time barred under the contract’s shortened limitations period. Makro claimed that under that shortened limitations period, Greystone’s claims had to have been brought no later than September 14, 2014, one year after substantial completion of its work, and that by not commencing the lawsuit until 2015, Greystone was barred from seeking recovery. In response, Greystone noted that the grand majority of the money sought was related to a change order that was open well into 2015. Accordingly, under the contract, before that change order was settled with the owner, Makro had no claim to that money and, therefore, could not have started the lawsuit any earlier.

Decision

The trial court granted Makro’s motion to dismiss. Although the trial court made note of the negotiations between Makro and the owner relating to the open change order, it held that “nothing prevented [Greystone] from commencing an action or seeking an extension of the one year limitation * * * there was nothing contained in the subcontract, or occurred as a part of the negotiations, that inhibited [Greystone] from pursuing its rights under the subcontract”.

Greystone appealed, and the appellate court reversed, reinstating Greystone’s lawsuit. While acknowledging that Greystone’s work was complete in September of 2013, the appellate court found that the contract provided that Greystone was not entitled to payment until Makro was paid, and that could not occur until the negotiations with the NYCTA concluded in September of 2015. Accordingly, the appellate court held that the contractual limitation period at issue was not reasonable, citing to well settled case law that “A ‘limitation period’ that expires before suit can be brought is not really a limitation period at all, but simply a nullification of the claim”.

Comment

On its face, Makro’s motion to dismiss looked like it would be a winner, based only on the contract language. But as is so often the case, it ain’t necessarily so. These legal issues require some thinking outside of the box.

Normally, you have six years to sue for breach of a contract. Parties to construction contracts frequently shorten this period. However, Greystone is a reminder that the limitations period cannot be so short that it runs before the claim actually accrues. Accordingly, contractors would be well advised to consult with construction counsel in drafting and reviewing contracts so that they can be sure that their shortened limitations period passes the reasonableness test, and does not run before the claim accrues; in other words, so that you get the limitations period you intended in the first place.

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