Expect Careful Scrutiny of Contractually Shortened Statutes of Limitations
November 18, 2020
The statutes of limitations set forth in the CPLR are default rules, and parties generally are free to modify default rules by agreement. But statutes of limitations also further the important public interests, such as avoiding stale claims and giving repose to our affairs. In light of the public interests involved, there are substantial limits on how much parties can agree to lengthen, shorten, or waive the limitations periods applicable to claims arising under New York law.
For example, while parties can agree to a shorter limitations period than prescribed by the CPLR, a recent case by Albany County Commercial Division Justice Richard Platkin serves as a sharp reminder that a contractually shortened limitations period must be reasonable under the circumstances and, in many cases, the reasonableness of such an agreement depends not only on the length of the limitations period itself, but also on the accrual date.
The dispute in State of New York v All Around Excavating, 2020 NY Slip Op 51265(U) (Albany Co. Oct. 26, 2020), centers on an allegedly defective parking lot installed by defendants in connection with New York State’s Taughannock Falls Overlook Restoration Project. In September 2014, New York State awarded a public works contract to All Around, which included the construction of a concrete parking lot. According to the State’s complaint, it paid All Around more than $1.8 million pursuant to their contract, and merely seven months after its completion, the parking lot installed by All Around “was inadequate and defective and failed.”
The State commenced suit against All Around, who in turn filed a third party complaint against Ruston Paving Co. (“Ruston”), the subcontractor who did the paving work on the faulty parking lot. Ruston, in turn, filed a fourth-party action against the suppliers of the materials: Hanson Aggregates (“Hanson”) and Barret Paving Materials (“Barret”). Ruston sought contribution and indemnification from Hanson and Barret, alleging that if there were any defects in the parking lot, they were caused, in whole or in part, by Hanson and Barret’s delivery of defective paving materials.
Hanson and Barret moved to dismiss Ruston’s contribution/indemnification claim as untimely.
Ordinarily, a contribution/indemnity claim is subject to a six-year statute of limitations, McDermott v. City of New York, 428 N.Y.S.2d 643 (1980). Moreover, the claim does not accrue until either judgment is entered against the plaintiff or the plaintiff makes a payment. Bay Ridge Air Rights Inc. v. State, 404 N.Y.S.2d 73 (1978). Under these default rules, therefore, Ruston’s contribution/indemnity claim against Hanson and Barret indisputably was timely. Indeed, because Ruston had not yet been found liable to All Around, the six year statute of limitations on Ruston’s claims against Hanson and Barret had not even started to run when Ruston commenced the fourth-party action against them.
Hanson and Barret argued that notwithstanding the default rules, Ruston’s contribution/indemnity claim against them was untimely because it did not comply with the shorter, one-year statute of limitations set forth in their agreement. Specifically, Hanson and Barret pointed to language in a credit agreement between Hanson and Ruston which stated:
No legal action shall be brought by the Purchaser against the Seller for any claim with respect to goods or services sold by Seller to Purchaser more than one (1) year after delivery of such goods and services to the Purchaser. It is agreed that any cause of action with respect to such goods or services will accrue on the date of delivery of such goods and services.
Accordingly, Hanson and Barret argued, any claim that Ruston had regarding the paving materials accrued on the date the materials were delivered, and it expired one year thereafter–long before Ruston commenced its fourth-party action.
New York law allows parties to contractually agree to shorten the applicable period of limitations. (See CPLR 201; Kassner & Co., Inc. v. City of New York, 46 NY2d 544, 551 . Indeed, under New York law, “Such an agreement . . . ‘more effectively secures the end sought to be attained by the statute of limitations.” Thus, an agreement which modifies the statute of limitations by specifying a shorter, but reasonable, period within which to commence an action is enforceable provided it is in writing. “Absent proof that the contract is one of adhesion or the product of overreaching or that [the] altered period is unreasonably short, the abbreviated period of limitation will be enforced.” Inc. Vil. of Saltaire v Zagata, 280 AD2d 547 [2d Dept 2001].
Because there was no evidence that this agreement between sophisticated construction parties was the product of fraud, misrepresentation, duress, or adhesion, Hanson and Barret argued that Ruston should not be permitted to escape the shorter limitations period to which the parties agreed.
Ruston responded that its agreement with Hanson and Barret was unconscionable. While it purported to shorten the statute of limitations, Ruston argued, the agreement actually eliminated altogether Ruston’s contribution/indemnity claims. By moving the accrual date for any cause of action—including a cause of action for contribution/indemnity—to the date the materials were delivered, the agreement effectively created the possibility that Ruston’s contribution/indemnity claim would be time-barred before the parking lot ever failed, and long before Ruston had any notice of a claim against it.
Justice Platkin sided with Ruston. Although there was nothing per se unreasonable about a one-year limitations period, the Court held that under these circumstances, the parties’ agreement that all causes of action accrued upon delivery of the materials resulted in an unreasonable shortening of the limitations period for Ruston’s contribution/indemnity claims. The Court explained:
The problem with the limitations period here is not its duration, but its accrual date . . . An indemnification/contribution claim does not even accrue until the party seeking such relief has made payment to the injured party . . . . Thus, accepting Hanson and Barrett’s argument would mean that Ruston’s right to pursue indemnification was extinguished before its cause of action even accrued. Indeed, Ruston’s time to sue for indemnity would have expired before the State even learned that the asphalt lot had failed. . . .
2020 NY Slip Op 51265(U) (internal quotation marks and citations omitted).
Accordingly, the Court concluded that applying the one-year contractual limitations period to Ruston’s claims for contribution/indemnity would be unreasonable under the circumstances, and instead applied the default six-year limitations period.
Notably, Justice Platkin did not conclude that the agreement between Ruston and Hanson was unconscionable. Rather, Justice Platkin relied on Exec. Plaza, LLC v Peerless Ins. Co., 22 NY3d 511, 517 , in which the New York Court of Appeals, considering a certified question from the Second Circuit, instructed that “[T]he period of time within which an action must be brought . . . should be fair and reasonable, in view of the circumstances of each particular case. . . . The circumstances, not the time, must be the determining factor.”
This means that agreements between parties shortening the applicable statutes of limitations are subject to greater scrutiny than other, purely private agreements. In other circumstances, a party seeking to invalidate an agreement would need to show mistake, fraud, misrepresentation, or unconscionabiltiy. See Morris v Snappy Car Rental, Inc., 84 NY2d 21, 30 . With respect to agreements shortening the statute of limitations, a party need only show that the time provided in the agreement is unreasonable–a substantially lower burden. Moreover, as demonstrated by All Around, an agreement that changes the accrual date of a cause of action is likely to see careful scrutiny from a court.
So what are the ground rules for agreements modifying the statutes of limitations applicable to claims between the parties?
Before accrual of an action, parties can agree to shorten the statute of limitations applicable to any claims, but—as All Around counsels—such shortened time period must be fair and reasonable under the circumstances. Courts have upheld agreements imposing statutes of limitations as short as six months, 22 NY3d 511, but courts are likely to closely scrutinize agreements that attempt to change the accrual dates of certain actions. Parties cannot agree to lengthen the statute of limitations before any claims accrue. 46 NY2d 544.
After accrual of an action, parties can agree to toll the statute of limitations, but not for an indefinite period, Allenby, LLC v. Credit Suisse, AG, 47 Misc. 3d 1203(A) (Sup. Ct. NY County), aff’d, 134 A.D.3d 577 (1st Dept 2015) (agreement to toll statute of limitations for “thirty (30) calendar days following the date that either [party] provides written notice to the other party” held indefinite and void). And contract-based claims can only be tolled for six years at a time. See N.Y. GOL § 17-103. Presumably, parties can also agree to shorten the applicable statute of limitations after accrual of an action, so long as the shortening provides a window which is commercially reasonable under the circumstances.