Contractors Cannot Use Contractual Limitations Periods to Wholly Preclude Actions

Digesare Mechanical, Inc. v. U.W. Marx, Inc. stands for the principle that while parties are free to contract to to shorten the six-year statute of limitations period for breach of contract they cannot use such a limitation to effectively preclude such a claim in its entirety.  176 A.D.3d 1449, 112 N.Y.S.3d 306 (3d 2019).

The case effectively concerned a dispute between a subcontractor and a contractor in which the subcontractor alleged that the contractor had not fully paid it for work completed on a project. The relevant subcontract contained a limitations period provision stating that the subcontractor was required to bring any claim within six months of its last day of work.

Additionally, the subcontract contained a provision providing that the subcontractor would be paid by the contractor when the contractor was paid by the owner. The court determined that this provision was a permissible pay-when-paid provision rather than an unenforceable pay-if-paid clause.  However, it was the combination of the pay-when-paid provision in conjunction with the shortened contractual limitations period that rendered the limitations clause unenforceable.

The issue arose because the subcontractor did not commence its action against the contractor until well after six months had elapsed. The subcontractor’s reasoning for the apparent delay was that in the interim between the subcontractor’s last day of work and the commencement of the action, the contractor was itself engaged in a lawsuit against the owner based on the contractor’s own claims of nonpayment.

Because of the contractor’s lawsuit against the owner, the contractor did not receive payment (in the form of a settlement) until long after the the subcontract’s six-month limitations period had expired.

While the trial court granted the contractor’s motion for summary judgment dismissing the subcontractor’s claim as untimely, the Appellate Division reversed.

Despite the fact that the contractor argued that six-months has been held to be a reasonable limitations period, the appellate court held that the reasonableness of a contractual limitations period depends upon the circumstances of each individual case.

The court also noted that a limitations period that expires before suit can be brought is not truly a limitations period at all, but simply a nullification of the claim. The enforceability of a contractual limitations period depends upon whether the plaintiff had a reasonable opportunity to commence an action within that period.

In sum, Digesare Mechcanical, Inc. reiterates both that pay-when-paid clauses and contractual limitations provisions are presumptively enforceable in appropriate circumstances. However, the larger takeaway from this holding is that these contractual provisions may not be used in tandem to deprive a potential plaintiff of its right to commence an action to enforce a contract.

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