Analyzing Limitations
May 23, 2023
In this Surety Today blog post we discuss analyzing limitations. When a claims handler gets a new claim against a bond, whether it’s a commercial bond or a construction bond, one of the first things that must be done is to determine if the claim is timely. Similarly, when a claims handler has a potential salvage claim, indemnity action, set off or subrogation right to enforce or pursue, the claims handler must determine what the applicable limitations period is for asserting such claims. In these scenarios and others, the issue of the applicable limitations period can become critical. Correspondingly, understanding the pitfalls, traps and complexities of analyzing and determining the correct limitations period also becomes critical. In many cases determining the limitations period is relatively straight forward, but in other cases it can be quite complicated with many variables and issues to consider. This blog post will address some of the issues that can arise when a claims handler is attempting to determine what the applicable statute of limitations is on a claim.
I. WHAT LIMITATIONS PROVISION APPLIES
When one is trying to determine the applicable limitations period, there are three general places you will need to look. First, review any authorizing statute for the bond or claim at issue to determine if there is a limitations provision unique to that bond or claim. Second, review the language of the bond or contract itself for any contractual limitations provisions. Third, review the general statute of limitations provisions for the jurisdiction if you haven’t found anything in the first two places.
The first place to look for a limitations period on a bond is in the authorizing statute, if there is one. For example, if a state statutory scheme requires the posting of a bond to secure the issuance of a permit, or a contractor’s license or to secure a warranty or other type of service, then that authorizing statute should be reviewed to determine if there is a limitations period applicable to claims against the bond required by the statute. Such specific limitations periods will control over any other more general limitations periods that might exist elsewhere in the law and which might otherwise apply to a bond generally. The general rule of statutory construction is that the more specific statute will control over the more general statute.
Perhaps the best and most well-known example of a limitations provision in an authorizing statute in the surety industry is the Miller Act and the various state Little Miller Acts. The Miller Act requires that bonds be provided and provides a specific limitations period for a claim on such bonds. The Miller Act limitations period will govern and control over any other general limitations period. Of course, in the Miller Act and Little Miller Act situations, the limitations period in the Acts only apply to the bonds issued by the general contractor and its surety to the public owner. Even though the project may be a federal project or a state project, the limitations period for a claim by a supplier or sub-subcontractor against a subcontractor’s payment bond is not governed by the Miller Act or Little Miller Act. In that scenario, the claims handler must look for other limitations provisions.
Many bond forms contain a provision with a limitations period within which a claim on the bond must be made – these are referred to as contractual limitations provisions. For example, the ConsensusDocs 260 performance bond’s contractual limitations period is “two years after default of the Contractor or Substantial Completion of the Work, whichever occurs first.” The AIA A312 (2010) version of the Performance Bond provides that “[a]ny proceeding, legal or equitable, under this Bond . . . shall be instituted within two years after Contractor Default or within two years after the Contractor ceased working or within two years after the Surety refuses or fails to perform its obligations under the Bond, whichever occurs first.”
The vast majority of jurisdictions generally hold that contractual limitations periods are enforceable. See Heimeshoff v. Hartford Life & Acc. Ins. Co., 571 U.S. 99, 108–09 (2013); Nathaniel W. v. United Behavioral Health, No. 17-CV-06341-PJH, 2018 WL 3585180, at *4 (N.D. Cal. July 26, 2018); Sarmiento v. Grange Mut. Cas. Co., 106 Ohio St.3d 403, 835 N.E.2d 692 (2005); Stephan v. Goldinger, 325 F.3d 874, 877 (7th Cir. 2003); Sears Home Appliance Showrooms, LLC v. Charlotte Outlet Store, LLC, No. 17 CV 8478, 2018 WL 3068459, at *4 (N.D. Ill. June 21, 2018); Executive Plaza, LLC v. Peerless Ins. Co., 22 N.Y.3d 511, 518, 982 N.Y.S.2d 826, 828, 5 N.E.3d 989 (2014); Ajdler v. Province of Mendoza, 890 F.3d 95, 99 (2d Cir. 2018. However, there may be a few restrictions on the general rule.
Most states hold that contractual limitations periods will be upheld, but only if they are reasonable and the provision is clearly set forth in the agreement. John J. Kassner & Co. v. City of New York, 46 N.Y.2d 544, 551, 415 N.Y.S.2d 785, 789, 389 N.E.2d 99 (1979) (recognizing written “agreement which modifies the Statute of Limitations by specifying a shorter, but reasonable, period within which to commence an action is enforceable”). Courts addressing the issue of reasonableness consider the provisions of the contract and the circumstances of its performance and enforcement, as well as the statutory period to which the modification is being made.
In some cases, a contractual limitations period may not be enforceable if the court determines that the limitations period violates public policy – such as a contractual limitation on an important statutory right. See e.g. State ex rel. Udall v. Colonial Penn Ins. Co., 112 N.M. 123, 125, 812 P.2d 777, 779 (1991)(“[w]e reaffirm the principle that limitations on actions that violate public policy are unenforceable”). Finally, a contractual limitation period may be prohibited by statute. For example, in Maryland, the Maryland Code prohibits limitations periods in an insurance policy or surety bond if the limitations period is shorter than the statutory limitations period. Md. Code Ann., Ins. § 12-104. Therefore, when dealing with contractual limitations periods it must be determined whether such provisions are valid and enforceable in the applicable jurisdiction and whether such provisions satisfy any applicable restrictions.
If there is no authorizing statutory limitations period or contractual limitations provision, the claims handler must review the general statute of limitations provisions of the jurisdiction. Some states have specific limitations periods for claims against bonds. For example, in Maryland there is a limitations statute that provides that claims against bonds must be filed within 12 years. Md. Code Ann., Cts. & Jud. Proc. § 5-102. If there is no statute applicable specifically to bonds, it must be noted that bonds are generally considered to be a written agreement or written contract, and the states’ limitations period for those types of documents may apply. In some jurisdictions there may be a limitations period for what is known as “specialties” and, at common law, bonds were considered to be specialties. Trustees of Jesse Parker Williams Hosp. v. Nisbet, 189 Ga. 807, 812, 7 S.E.2d 737, 741 (1940); Com., for Use of Fayette Cty., v. Perry, 330 Pa. 355, 358, 199 A. 204, 206 (1938)(“ By long-established definition, a ‘bond’ is a specialty or sealed instrument.”). Thus, if there is a limitations provision in a particular jurisdiction relating to specialties, then that provision might apply to a bond claim.
Determining the “true nature” of the bond may be important in the limitations analysis. For example, we handled a case where a claim was being made by a County against a surety on a permit bond. There was no limitations provision in the authorizing County Code or in the bond itself. In Maryland there is a general statute of limitation applicable to breach of contract actions, which is three years. A bond is considered in Maryland to be a contract, so that provision would apply. However, as noted above, in Maryland there is also a specific statute that provides a limitations period of 12 years on claims against bonds. Thus, the more specific provision would also apply and would take precedence over the general three year limitations statute. But, the permit bond in question, could be considered to be a forfeiture bond, because the County could make demand on the bond even if it had no damages once the permit provisions were violated by the principal. In addition, the County Code referred to the bond as a forfeiture obligation. Maryland has a specific statute of limitation for forfeiture claims, which is one year. Md. Code Ann., Cts. & Jud. Proc. § 5-107. The provision provides that “a prosecution or suit for a fine, penalty, or forfeiture shall be instituted within one year after the offense was committed.” Id. In our case, the County had waited over six years to assert its claim. I argued that the forfeiture limitations period of one year applied to the County’s claim and that the principal’s violations of the grading laws was an offense under the applicable law. Further, because the forfeiture statute is more specific than a general claim against a bond statute, the one-year forfeiture limitations statute applied.
In other jurisdictions you may have the issue of whether a bond is controlled by the limitations for the underlying obligation or as a separate obligation. Some states hold that a guaranty contract such as a bond is a separate contract pursuant to which the guarantor warrants that the principal shall perform rather than agreeing to perform jointly with the principal, and such guaranty contract is separately enforceable and independent of the obligation of the principal debtor. Some states make a distinction between contracts entered into in the state versus outside of the state and apply different limitations period to each. Thus, the analysis of what limitations provision would apply to a run-of-the-mill bond claim can be complicated by the wide variety of limitations periods under various state laws, the nature of the obligation at issue and even the facts and circumstances of how or where the obligation was entered into.
II. DOCUMENTS UNDER SEAL
Another potential issue to consider in the limitations analysis is whether the bond is under seal. When a document is executed “under seal” it establishes that the contract was made for consideration, and by applying a “seal” thereto, the signor is confirming the consideration and further authenticating his or her intent to carry out the contract. In some states, the effect of sealing a document has been abolished, but in other states it is still alive and well. A “seal” can take many forms. It can be in the form of a stamp, impression, a scroll, or even just the word “seal” or “L.S.” after a person’s signature. It should be noted that the presence of a mere corporate seal may not by itself make a document an instrument under seal. See A.I. Trade Fin., Inc. v. Petra Int’l Banking Corp., 314 U.S. App. D.C. 122, 135, 62 F.3d 1454, 1467 (1995). That is the case because corporate seals are routinely employed “for identification and as a mark of genuineness,” a use which does not necessarily evince an intention to create an instrument under seal. Thus, in many jurisdictions, in order for a document to be an instrument under seal, something more than just a corporate seal, such as, for example, a recitation that the document is “signed and sealed” may be required.
One effect of sealing a document is that it may extend the limitations period. For example, in the District of Columbia while the general period of limitations on a written contract is three years (D.C.Code § 12–301(7)), if the contract is under seal, the limitations period becomes 12 years (D.C.Code § 12–301(6)). Under Massachusetts and South Carolina law, for example, the limitations period applicable to a document under seal is 20 years. Mass. G.L. c. 260, § 1; S.C. Code Ann. § 15–3–520.
Therefore, when analyzing the limitations issue, one must determine if there is a seal on the bond or other instrument and then check to see if there is a separate limitations provision for documents under seal in the applicable jurisdiction.
III. WHEN LIMITATIONS DO NOT APPLY
Another issue to be aware of in the limitations analysis is the question of who is making the claim. There are many states that still apply the doctrine of nullum tempus occurrit regi or, in English, time does not run against the king. See In re Diamond Benefits Life Ins. Co., 184 Ariz. 94, 907 P.2d 63, 65 (Ariz.1995)(applying A.R.S. § 12–510); Fennelly v. A-1 Mach. & Tool Co., 728 N.W.2d 163, 168–70 (Iowa 2006)(“[i]n Iowa, it is well recognized that a statute of limitations does not run against the state unless specifically provided by statute.”); State v. LG Elecs., Inc., 186 Wash. 2d 1, 8, 375 P.3d 636, 640 (2016)(“[w]e also find that the State’s action is not subject to the general statutes of limitation because RCW 4.16.160, which codifies the common law nullum tempus doctrine, applies.”); Ross v. Daniel, 53 N.M. 70, 75, 201 P.2d 993, 998 (1949)(“New Mexico follows the common law principle and has held that “[s]tatutes of limitation ordinarily do not run against the state.”). Pursuant to this doctrine, a limitations period will not prevent a governmental body from bringing a claim against the bond after the limitations period has expired. The theory that no time runs against the sovereign is generally followed in regard to ordinary statutes of limitation, unless the state is expressly or by necessary implication included within the operation of the statute.
The historical justification for the doctrine is that the government cannot be expected to be as vigilant as individuals are in preserving their rights. Courts have noted that governments are impersonal and thus are limited to acting through agents such as state officials, who, are generally few in number and fully occupied with the regular routine of official duties. Moreover, the doctrine is thought to further the public policy of preserving the public rights, revenues, and property from injury and loss, by the negligence of public officers.
One interesting result of the application of nullum tempus is that it could transfer to the surety. Maryland’s highest court held that a surety, which paid a judgment owing to the State and thereafter sued a debtor as subrogee of the State, is entitled to stand in the State’s position in reference to its claim against the debtor and enjoy the State’s exemption from the operation of the statute of limitations under nullum tempus. See Baltimore Cty. v. RTKL Assocs. Inc., 380 Md. 670, 686, 846 A.2d 433, 442–43 (2004).
IV. WHEN DOES THE LIMITATIONS PERIOD BEGIN TO RUN – ACCRUAL
Once a determination is made as to what the statutory or contractual limitation period is, the next question becomes, when does the limitation period begin to run? Generally, limitation periods begin to run when the cause of action at issue “accrues.” Typically, a cause of action is said to have accrued when all of the elements of the cause of action exist. Cathedral of Joy Baptist Church v. Village of Hazel Crest, 22 F.3d 713, 717 (7th Cir. 1994)(“Generally, a claim accrues when all its elements have come into existence.”).
For example, it is generally held that a cause of action for breach of contract ordinarily accrues and the limitations period begins to run upon a breach of the contract. CDX Laboratories, Inc. v. Zila, Inc., 162 A.D.3d 972, 80 N.Y.S.3d 382 (2018); Hroch v. Farmland Industries, Inc., 4 Neb.App. 709, 548 N.W.2d 367 (1996); White Const. Co., Inc. v. Jones, 13 So.3d 130 (Fla 1st DCA 2009). Accrual can also be a question of fact, such as when final payment is due from a subcontractor to a supplier such that a claim against a payment bond accrues. Swing Staging, Inc. v. Hartford Fire Ins. Co., 269 A.D.2d 193, 703 N.Y.S.2d 99 (2000).
Accrual can also be defined in the statute or contract itself. Thus, in the example earlier, in the AIA A312 (2010) Performance Bond, the contractual limitations provision provides that “[a]ny proceeding, legal or equitable, under this Bond . . . shall be instituted within two years after Contractor Default or within two years after the Contractor ceased working or within two years after the Surety refuses or fails to perform its obligations under this Bond, whichever occurs first.” Thus, the accrual for the limitations period in the A312 Bond is defined as the first to occur of those various events. In the Miller Act, the limitations provision defines accrual as “one year after the day on which the last of the labor was performed or material was supplied by the person bringing the action.” 40 U.S.C. § 3133(b)(4).
V. DISCOVERY RULE
In some jurisdictions the general rule regarding accrual is modified by what is known as the “discovery rule.” The discovery rule postpones accrual of a cause of action until the plaintiff discovers, or has reason to discover, the cause of action. The rule is generally expressed as a “knew or should have known” standard.
Under the discovery rule, a cause of action accrues, and the limitation period begins to run when a claimant knows, or, in the exercise of ordinary diligence, should have known of the injury. A court applies the discovery rule to determine when a cause of action accrues if an element of the cause of action is not immediately apparent. Under the discovery rule, suspicion of one or more of the elements of a cause of action, coupled with knowledge of any remaining elements, will generally trigger the statute of limitations period. The rule avoids dismissing a suit on grounds of limitation when a plaintiff is blamelessly ignorant of his or her cause of action, but it does not afford protection to a plaintiff who knows about the injury, but has not determined the identity or cause. Thus, the discovery rule requires only that the plaintiff be aware of an injury; it does not require the plaintiff to know the full extent of the injury.
A good example of the application of the discovery rule can be found in the case of Sisters of Mercy of Union in U. S. of America v. Gaudreau, Inc., 47 Md. App. 372, 423 A.2d 585 (Md. App. 1980), involving the construction of a new convent for a religious order. Shortly after moving in, the Sisters noticed that there were some roof leaks. They did not know what the cause was or who was responsible, so they hired an engineer. The engineer conducted an inspection, issued a report and identified who was responsible and what the cause was. The Sisters then filed suit three years from the date the report was issued, but more than three years after the roof leaks began. The case was dismissed as barred by limitations because under the discovery rule once the Sisters became aware of the leaks, they were on notice of the claim and had a duty to investigate and the limitations then began to run. The ultimate determination of the cause and party responsible was not the triggering event.
Determining the applicable limitations period can be tricky and can depend on a variety of factors. If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.[/vc_column_text][/vc_column][/vc_row]
