Parties to a contract are generally free to negotiate and decide on the terms of their agreement. Even where a contract provision is not ideal, or even advisable, courts will often respect and enforce the provisions. However, one area where courts take a more restrictive view on the parties’ freedom of contract is when they attempt to contract for either a shorter or longer statute of limitations period to bring claims for contractual breaches. Several recent decisions by New York courts illustrate when such clauses are not enforceable.
Attempts to shorten the statute of limitations
Earlier this year, the New York Appellate Division, 1stDepartment, decided a case between a construction company and security company where the parties had attempted to shorten the normal statute of limitations that would apply in a breach of contract case. In AWI Security and Investigators, Inc. v. Whitestone Constr. Corp., the contract by which plaintiff provided security at construction site contained a provision that claims under the contract had to be brought within 6 months after either the accrual of a claim, termination of the contract, or the last day AWI provided security under the contract, whichever came first.
AWI sued Whitestone for $232,000 it claimed it was still owed under their contract. Whitestone claimed that it was withholding that money because both parties were sued by another party for underpaid wages. The AWI/Whitestone contract had an indemnity provision, which would allow Whitestone to get indemnified for the wage claim that was still pending. When AWI sued, Whitestone moved to dismiss the lawsuit on the grounds that the statute of limitations had expired because more than six months had passed since the last time AWI provided security work under the contract. The Trial Court agreed with Whitestone and dismissed the claim because it was barred by the statute of limitations provision.
However, the Appellate Division disagreed and held that the contractual provision was unenforceable because it created a scenario where a claim could be time barred before it could be brought. In this case, Whitestone had a defense to non-payment of the money owed under the contract with AWI because of the pending wage action. However, that action would not be resolved within 6 months of when AWI last provided security services. As a result, the Court held that the shortening of the statute of limitations provision was unenforceable because it turned the statute of limitations period into a “nullification of the claim.”
Attempts to extend the statute of limitations
The New York Court of Appeals recently decided a case involving a contract provision which lengthened the normal statute of limitations. In Deutsche Bank National Trust Co. v. Flagstar Capital Markets Corp., a mortgage loan trust company sued the mortgage loan originator for false representations and warranties. The contract between the parties contained a provision stating that a breach of warranty claim would not accrue until the breach was discovered or disclosed and the breaching party failed to cure after a demand by the Seller. Absent that clause, the statute of limitations on a breach of warranty claim would start running on the closing date of the loans.
The Court decided that the statute of limitations provision in the contract was unenforceable. The reason was that the public policy in favor of having a defined and predictable statute of limitations period prevailed over the public policy in favor of freedom of contract.
The important takeaway for contracting parties as it relates to the statute of limitations and otherwise is that while freedom of contract is broad, it is not unlimited. Parties cannot agree to a provision that is inconsistent with public policy.
If you are considering entering into a contract or anticipate a breach of contract matter, contact usfor a consultation.
Learn more about our small businesspractice.