• Sword and Shield: How Contractors Can Both Use and Protect Themselves from Contractual Time Limits for Bringing Suit



    Published: Common Sense Law Newsletter, November 14, 2023

    Contractors often include time limits to bring claims in their contracts to prevent themselves from being dragged into litigation over projects that were completed years earlier. However, if the contract time limit is shorter than the state’s limitations for bringing the same claims, that clause may not be enforceable. States set time limits, called statutes of limitations, for bringing different kinds of claims. Statutes of limitations, however, can often be shortened by contract. If you have a time limit for claims in your contract, you need to know whether your state will enforce your time limit or the state statute of limitations. Many states, including Texas, Missouri, and Indiana, have enforced contract time limits of 1-2 years to bring claims, even when the state statute of limitations is longer. However, a recent Washington case is a cautionary tale for contractors on how these clauses may be interpreted.

    In 2022, the Washington State Supreme Court decided Tadych v. Noble Ridge Construction, Inc. In that case, a contractor and a homeowner signed a contract with a clause that required the parties to bring all claims within a year of the discovery of the claim or the completion of work, whichever was earlier. The homeowner discovered defects in the work after the one-year limit for claims had passed, but before the six-year state statute of limitations had expired. The homeowner challenged the one-year contractual time limit, alleging that it was unconscionable and was buried in paragraphs of text in the 14-page contract. The court of appeals held that the contract could not limit the time to bring a claim to one year when the state statute of limitations allowed six years for the same claims. The court decided that such a severe limitation on when the parties could bring claims was “unduly harsh” and “shocking.” In that case, the homeowner was allowed to proceed with its claim against the contractor even though the contractual time limit to bring claims had expired.

    If contractors want to incorporate a time limit for claims into their contracts that is shorter than the state statute of limitations and have it be enforced, there are a few ways to improve their chances. The contractor should consider the following principles when deciding if a contractually shortened time limit should be included in its contract:

    • Transparency. Any limitations should be clearly stated within their own section and not buried in multiple paragraphs discussing other topics. Bold font, underlining, or other tools to make the limitation stand out are also helpful.
    • Bargaining. Courts prefer to enforce contracts where the parties “bargained for” the terms. This means that the parties have actually negotiated the provisions and had power to change them – compare this to “Terms and Conditions” on a website, where most people sign it without reading and there is no way for the parties to actually negotiate on any points. Two ways to build a strong case on this point are to (1) make sure that the other party had plenty of time to review the contract and object to any terms; and (2) have a space for the parties to specifically initial to show their agreement to the time limitation.
    • Timing. Many courts, including Washington, are friendlier to limitations clauses when the time begins to count when a party finds out (or should have found out) about a claim, instead of at the completion of work. This approach is more consistent with the intent of the statute of limitations to protect homeowners when defects arise after work is completed.
    • Reasonableness. Courts are less likely to enforce a contractual limitations period if it is drastically shorter than the state statute (for example, a limitation period of one year when the state statute of limitations is six years).

    In a contract between a contractor and a homeowner or party not in the construction industry, the contractor is presumed to have more knowledge of the industry and an advantage in drafting the contract. One court has held that even if a contractual time limit is unconscionable and not aligned with the above factors, it is still enforceable against the contractor because the contractor has more power in the contract drafting process. If contractors have claims against the owner or another party on a project, it is especially important that they bring those claims within the time provided by the contract.

    Contractors also need to read their contracts carefully to see if there is a time-limiting provision for bringing claims. In a contract between two contractors or other professionals in the industry, the time limit on claims may be enforced regardless of the above factors. If you are a subcontractor and have claims against a general contractor or owner on a project, it is essential that you know how much time you have to bring your claim. Additionally, insurance contracts generally have a time limiting clause requiring parties to bring claims within one year, and actions by a lien claimant often must be filed within a short duration after a lien is recorded. In these areas, contractors are not protected by the state statute of limitations and must act affirmatively to avoid waiving their claims.

    Tadych is a cautionary example of what can happen if contractors do not carefully draft contractual time limitation provisions. If contractors want to include these clauses and protect themselves against claims brought after a certain period of time, they must draft contracts carefully to ensure that the language and restrictions are reasonable and that the other party is informed of the time limit.

    For help drafting contract terms and navigating contractual time limits and statutes of limitations, please reach out to a member of the Smith Currie Oles team.

     

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