Summary
In Camelot Excavating Co, Inc v St Paul Fire Marine Ins Co, 410 Mich. 118; 301 N.W.2d 275 (1981), we upheld the enforceability against a subcontractor of a contractual one-year period of limitation on suit in a labor and materials payment bond.
Summary of this case from Armand v. Territorial Const, Inc.Opinion
Docket No. 62978.
Argued January 10, 1980 (Calendar No. 14).
Decided February 3, 1981.
Richard A. Lenter for plaintiff.
Stephen M. Landau, P.C., for defendant.
Plaintiff Camelot Excavating Company (hereafter Camelot) brought action against defendant St. Paul Fire and Marine Insurance Company (hereafter St. Paul) to recover payment on a labor and materials bond. Camelot was a subcontractor of third-party defendant Priestly Contracting, Inc. (hereafter Priestly). Priestly was named as principal on the bond. Defendant St. Paul moved for accelerated judgment on the basis of a one-year period of limitations contained in the bond contract. Plaintiff Camelot brought a motion for summary judgment under GCR 1963, 117.2(3). Camelot's motion was granted; St. Paul's motion was denied.
Provision for accelerated judgment is found in GCR 1963, 116.1:
"In a party's first responsive pleading, or by motion filed not later than his first responsive pleading, a party may demand that service of process be quashed or that judgment be entered dismissing 1 or more claims asserted against him upon any of the following grounds:
* * *
"(5) the claim is barred because of release, payment, prior judgment, statute of limitations, statute of frauds, infancy, or other disability of the moving party, or assignment or other disposition of the claim before commencement of the action."
The provision reads as follows:
"The motion for summary judgment shall state that the moving party is entitled to judgment in his favor because of any 1 of the following grounds:
* * *
"(3) that except as to the amount of damages there is no genuine issue as to any material fact, and the moving party is therefore entitled to judgment as a matter of law."
St. Paul appealed to the Court of Appeals. The Court reversed on grounds that the one-year limitations period did apply so as to preclude Camelot's third-party claim under the bond. 89 Mich. App. 219; 280 N.W.2d 491 (1979). We granted leave to appeal. 406 Mich. 1009 (1979).
We must resolve two questions presented by the parties: (1) whether the bond contract negotiated by the principal, Priestly, and surety, St. Paul, to insure claims against labor and material for the benefit of a third party can subject plaintiff Camelot to a limitation period which is shorter than that created by the Legislature; and (2) whether the form of bond used in this state in this case and in other states throughout the United States which makes reference to statutes of limitations within the particular state where it is used is ambiguous.
We hold that neither public policy nor existing authority prohibit private contracting parties from including in a labor and materials payment bond a provision which reasonably limits claimants to a period within which to bring suit that is shorter than the applicable state statute of limitations. We further find that the form of contract used in this case is clear on its face. The contractual exception clause to the one-year limitation provision is relevant only where state statutes prohibit shorter than statutory limits. Thus, this clause does not apply to preclude the one-year provision in this case. The Court of Appeals is therefore affirmed.
I
On April 8, 1973, defendant Priestly, general plumbing contractor for a private apartment construction project, contracted with defendant St. Paul to obtain a required labor and materials payment bond. The bond provided that St. Paul, as surety, would pay claims made by subcontractors of Priestly, as principal, where the subcontractor had not been paid in full within 90 days of the completion of the subcontractor's work. The bond was primarily intended to protect the owner of the project, Village Homes, Inc., against mechanics' lien claims which might accrue over the course of building construction. Priestly entered into a subcontract with Camelot for certain excavation work. The claims intended to be secured were those of subcontractors such as plaintiff Camelot.
As subcontractor, Camelot completed the excavation work pursuant to its contract with Priestly. The construction proceeded until April, 1974, when defendant Priestly abandoned the project. Priestly gave no notice to Camelot that it was leaving the project. At that time, the balance due for the work Camelot had provided was $18,848.
Camelot brought suit against Priestly and recovered a default judgment for the amount owing. Then, on August 26, 1976, plaintiff separately sued defendant St. Paul on the bond. St. Paul interposed the defense that the contract barred Camelot's suit on the basis of the one-year limitation clause contained in the bond contract.
The learned trial judge held that the qualifying language in regard to prohibition of private limitation periods by the state limitations statute rendered the contract provision ambiguous and therefore rejected the asserted defense against plaintiff's claim. On appeal, the Court of Appeals reversed. It found no ambiguity in that the qualifying provision proscribed a shorter limitation than the statutory period only where prohibited by law. The Court of Appeals determined that Michigan's general statutory limitation provision does not prohibit shorter contractual limitations on suits pertaining to private construction bonds. Consequently, the limitation provision was a valid defense to plaintiff's suit.
II
Absent any statute to the contrary, the general rule followed by most courts has been to uphold provisions in private contracts limiting the time to bring suit where the limitation is reasonable, even though the period specified is less than the applicable statute of limitations. The Tom Thomas Organization, Inc v Reliance Ins Co, 396 Mich. 588, 592; 242 N.W.2d 396 (1976). See also Barza v Metropolitan Life Ins Co, 281 Mich. 532, 538; 275 N.W. 238 (1937); Turner v Fidelity Casualty Co of New York, 112 Mich. 425, 427; 70 N.W. 898 (1897).
This rule has been held to apply in contracts bonding the performance of building or construction projects. See Burlew v Fidelity Casualty Co of New York, 64 F.2d 976, 977 (CA 6, 1933), cert den 290 U.S. 686; 54 S Ct 122; 78 L Ed 591 (1933); Adams v Standard Accident Ins Co, 124 Cal.App. 393; 12 P.2d 464 (1932); Cook v Heinbaugh, 202 Iowa 1002, 1003-1004; 210 N.W. 129 (1926); Lesher v United States Fidelity Guaranty Co, 239 Ill. 502, 511; 88 N.E. 208 (1909); McGarry v Seiz, 129 Ga. 296, 299; 58 S.E. 856 (1907); Ausplund v Aetna Indemnity Co, 47 Or. 10, 22; 81 P. 577 (1905), reh den 47 Or. 23; 82 P. 12 (1905). See also Anno: Validity of contractual time period, shorter than statute of limitations, for bringing action, 6 ALR3d 1197; Anno: Validity of contractual limitation of time for bringing action, 121 ALR 758.
The boundaries of what is reasonable under the general rule require that the claimant have sufficient opportunity to investigate and file an action, that the time not be so short as to work a practical abrogation of the right of action, and that the action not be barred before the loss or damage can be ascertained. See Page County v Fidelity Deposit Co of Maryland, 205 Iowa 798; 216 N.W. 957 (1927); Cook v Northern Pacific R Co, 32 N.D. 340; 155 N.W. 867 (1915); Sheard v United States Fidelity Guaranty Co, 58 Wn. 29; 107 P. 1024 (1910), reh den 58 Wn. 37; 109 P. 276 (1910).
In the instant case, the bond secured claims for labor and materials brought by subcontractors in plaintiff Camelot's position. However, the primary object of the bond contract was to protect the owner, Village Homes, Inc., against such claims:
"The purpose and only purpose of a labor and materials payment bond is to protect the owner against the claims of those who furnish labor and materials to the contractor because, if he fails to pay these bills, mechanics liens can be filed against the owner and payment enforced even though the owner had no direct dealing with the labor and materialmen." Standard Accident Ins Co of Detroit v Rose, 314 Ky. 233, 238; 234 S.W.2d 728 (1950).
Camelot was not a party to the payment bond. Rather, this contract was negotiated between the principal, general contractor Priestly, and the surety, St. Paul. Upon completing the excavation work in accordance with its labor and materials contract with Priestly, and not being fully paid, Camelot became a third-party creditor beneficiary under the bond. See 1 Restatement Contracts, §§ 133, 139, pp 151-152, 165. The parties agreed:
"No suit or action shall be commenced hereunder by any claimant:
* * *
"After the expiration of one (1) year following the date on which principal ceased work on said contract, it being understood, however, that if any limitation embodied in this bond is prohibited by any law controlling the construction hereof such limitation shall be deemed to be amended so as to be equal to the minimum period of limitation permitted by such law."
Normally, where no shorter contractual period of limitation exists, the Michigan statute of limitations specifies a six-year period for bringing suits on contract. MCL 600.5807(8), 600.5813; MSA 27A.5807(8), 27A.5813. Plaintiff Camelot asserts that it should not be restricted by a contractual limitation as it was not a party nor did it have actual knowledge of its contents. Camelot urges that the general statute of limitations should apply to its right of action.
No authority exists in Michigan which speaks directly to the question whether legal principles prohibit the enforcement against plaintiff subcontractor of a one-year limitations provision in a labor and materials payment bond negotiated between a general contractor and surety for the primary benefit of third party owner. However, other jurisdictions have addressed this specific question and we find their views persuasive. The rule adopted by most of these jurisdictions allows the contractual limitations provision to control any third-party subcontractor's action, even though the subcontractor was not a party to the bond and was not aware of its contents until after the limitation period had run.
In California, the Court of Appeals reached this conclusion in relation to a bond provision identical to the one considered in the instant case. Sanders v American Casualty Co of Reading, Pennsylvania, 269 Cal.App.2d 306; 74 Cal.Rptr. 634 (1969). In Sanders, a materials supplier sued on a subcontractor's bond to recover the amount due for materials the subcontractor had furnished the general contractor. It was stipulated by the parties that the subcontractor ceased work on the project involved more than one year prior to plaintiff Sanders' commencement of suit. It was also undisputed that plaintiff first learned of the bond's existence only shortly before action was brought. The question presented to the Court was "whether the one-year limitation contained in a subcontract labor and material payment bond issued on behalf of a subcontractor in favor of a prime contractor bars a claim by a materialman who was not a party to the contract and was not aware of its existence or contents until after the one-year period expired". Id., 308.
The limitation provision in Sanders reads as follows:
"(3) No suit or action shall be commenced hereunder by any claimant,
"(a) After the expiration of one (1) year following the date on which principal ceased work on said subcontract it being understood, however, that if any limitation embodied in this bond is prohibited by any law controlling the construction hereof such limitation shall be deemed to be amended so as to be equal to the minimum period of limitation permitted by such law." Sanders v American Casualty Co of Reading, Pennsylvania, 269 Cal.App.2d 306, 309 fn 2; 74 Cal.Rptr. 634 (1969).
Except for the relative position of the parties, the case is thus the same as the instant case. In resolving the question presented, the Court in Sanders found no controlling significance in the fact that plaintiff had not been a direct party to the contract. The Court found the provision within the boundaries of what was considered a reasonable period of limitation admittedly shorter than the statutory period. Language in the contract which specified that "any claimant" would be barred was found sufficient to apply to plaintiff Sanders.
One minor difference between the cases was that plaintiff Sanders had lodged various suits against several involved parties prior to the case at bar, one of which appears to have been brought in Federal court within one year of the date the subcontractor ceased work on the project. However, this fact would speak more strongly to granting plaintiff relief in Sanders than in the instant case simply because Sanders had demonstrated some degree of diligence in investigating and attempting to pursue his legal remedies against the defendants. See id., 307-308.
Plaintiff Sanders and plaintiff in the instant case rely upon the California decision in Olds v General Accident Fire Life Assurance Corp, 67 Cal.App.2d 812; 155 P.2d 676 (1945). In Olds, defendant insurer issued an automobile liability policy to Helmut Hardt covering an owned vehicle. Hardt subsequently injured third party William Kingston while driving the automobile. Kingston sued Hardt and recovered a substantial judgment. Some time afterward, Kingston died and Hardt fled the country. Plaintiff Olds, as represenative of decedent's estate, then brought the present action. However, the action was commenced over one year after the right accrued, and defendant insurer cited as a bar to suit a provision in the policy limiting to one year the right of action.
The District Court of Appeal rejected this argument and affirmed a judgment for plaintiff obtained below. The Court found that the limitation provision could not foreclose plaintiff or the decedent because neither had been parties to the insurance contract. The Court in Sanders distinguished this holding on the basis that the language in the Olds contract was found crucial to the conclusion reached in that the language clearly limited only actions by the insured, not actions by third parties. Language in both the Sanders contract and that involved in the instant case obviously differ and refer to limitation of actions by any claimant.
In addition, the Olds Court found an express conflict between the private limitations period and the statutory provision. We face no such conflict in the present case. See text, infra.
We also find several other grounds to distinguish the Olds case. The contract there was a personal injury liability insurance policy. Strong interests exist to protect parties in actions to recover such personal injury claims, and the equitable merits of allowing recovery by innocent third-party victims there speak persuasively against permitting possible technical forfeitures.
We would also highlight the status and relationship of the parties in the instant matter. We deal here not with an innocent third-party automobile accident victim, but with a building subcontractor involved in a commercial venture. Furthermore, we are involved with a commercial tradesman whom the state has provided with a primary statutory remedy to insure recovery for lost labor and materials. See MCL 570.5; MSA 26.285.
The Court went on to characterize Sanders as a third-party beneficiary and found his rights coterminous with those of the principal:
"`There can be no donee beneficiary or creditor beneficiary unless a contract has been formed between a promisor and promisee; and if a contract is conditional, voidable, or unenforceable at the time of its formation, * * * the right of a donee beneficiary or creditor beneficiary under the contract is subject to the same limitation.' (Restatement, Contracts, § 140, pp 165-166)." Id., 309.
Any rights Sanders had under the contract were thus found to be limited by the conditions of the contract itself. See also Bogart v George K Porter Co, 193 Cal. 197; 223 P. 959 (1924). Plaintiff's unawareness of the contract could not be interposed to circumvent the provision where a reasonable time was provided under the contract to investigate the kinds of claims which would normally arise in such circumstances.
We find no credible grounds upon which to distinguish the instant case from Sanders. The relative contractual relationship of the parties was the same; the claim of recovery was the same; the limitation provision was identical and the existing principle of allowing reasonable periods of limitation was present. See Rechtsteiner v National Surety Co of New York, 44 Cal.App. 774; 187 P. 34 (1919). See also The Tom Thomas Organization, Inc v Reliance Ins Co, supra, 592.
In Tom Thomas, the Court dealt with a distinct set of facts and legal problem. Plaintiff Thomas sued to recover damages resulting from the loss of films and tapes insured by defendant Reliance. The policy issued by Reliance contained a provision requiring commencement of action within one year of the discovery of the loss. In fact, loss occurred on December 14, 1971. Plaintiff brought suit on March 16, 1973. However, plaintiff reported the loss to Reliance on January 20, 1972, and filed proof of loss on March 7, 1972. Defendant eventually denied liability on June 22, 1972. The Court held that the running of the one-year limitation period was tolled from the date plaintiff gave notice of loss until liability was formally denied by Reliance. Under this ruling, plaintiff's suit was timely commenced.
Thomas did not involve a third-party beneficiary claim. The party claiming loss was the party who had contracted directly with the insurer. The claim asserted was therefore the primary and exclusive remedy for the loss suffered, a remedy which plaintiff had paid Reliance to insure.
In addition, the error asserted in Thomas was not that a one-year limitation period was unreasonable but that the time determined to commence the one-year period was improperly ascertained. Because of the peculiar delays inherent in the claims procedure and the actions of defendant insurer, we found an estoppel which served to toll the running of the limitation period during the time the insurer took to consider plaintiff's claim of loss.
In the instant case, no such question appears in brief or argument and is inapplicable in a situation where defendant St. Paul had no direct dealings with Camelot prior to suit and where suit was not commenced until nearly a year and one half after contractor Priestly ceased work on the construction project. We thus find the specific holding in Thomas inapposite to the case at bar.
In Massachusetts, we find another essentially identical decision. General Electric Co v Lexington Contracting Corp, 363 Mass. 122; 292 N.E.2d 874 (1973). In this case, plaintiff sued on a surety bond executed by defendant New Amsterdam Casualty Co. Lexington was principal on the bond and default judgment had been entered as to its liability on the underlying materials claim. The limitation provision in the bond contract was virtually identical to the one involved in the instant case: "No suit or action shall be commenced hereunder by any claimant * * * [a]fter the expiration of one (1) year following the date on which principal ceased work on * * * [the] contract * * *." Id., 123. It was stipulated by the parties that work on the project for which the bond was executed ceased more than one year prior to suit.
As in Sanders, supra, plaintiff General Electric had commenced suit against defendant New Amsterdam in Federal court well within the year following the date work on the apartment ceased. Again, we find that this fact militates in favor of recovery in the subsequent state action there due to the continued diligence of plaintiff in seeking and pursuing all avenues of possible legal recovery.
The Massachusetts Supreme Court found the provision enforceable against General Electric. Plaintiff's argument that a longer statutory period prevailed in the face of the private contractual limitation was rejected. The Court held that the private contractual provision applied rather than any state statutory limitation. The one-year limitation controlled.
Little appears to distinguish that case from the present action. The parties were in a similar contractual posture; the basis of recovery on the contract was the same; the limitation provision was identical and the underlying authority allowing reasonable contractual limitation of action was the same.
Plaintiff Camelot contends that in any event public policy should bar contractual limitations by private parties which are shorter than the six-year statutory period of limitations. Generally, the weight of authority in Michigan and elsewhere is against this position. See The Tom Thomas Organization, Inc v Reliance Ins Co, supra, 592; Goosen v Indemnity Ins Co of North America, 234 F.2d 463 (CA 6, 1956); Comm'r of Ins v Central West Casualty Co, 301 Mich. 427; 3 N.W.2d 830 (1942); Ladies of the Modern Maccabees v Illinois Surety Co, 196 Mich. 27; 163 N.W. 7 (1917); Forest Twp v American Bonding Co of Baltimore, 187 Mich. 657; 154 N.W. 26 (1915). See also Cook v Heinbaugh, supra, 1003-1004; Lesher v United States Fidelity Guaranty Co, supra, 511; McGarry v Seiz, supra, 299.
More specific recent decisions have issued in other jurisdictions which serve to further undermine plaintiff's public policy argument. In Georgia, for instance, any argument that public policy prohibits such reasonable contractual limitations as contained in the instant case has been soundly rejected. Sam Finley, Inc v Interstate Fire Ins Co, 135 Ga. App. 14; 217 S.E.2d 358 (1975). In Finley, plaintiff subcontractor sued a contractor seeking recovery of amounts due on its contract. Defendant surety was made a party to the action under the labor and materials bond executed on behalf of the principal. The bond contract contained a limitation that "no suit or action shall be commenced thereunder by any claimant after the expiration of one year following the date on which the principal ceased work on such contract". Id., 15.
In deciding against plaintiff, the Court was explicit that public policy simply did not prohibit such a limitation provision in a private labor and materials payment bond:
"Where a labor and material payment bond is given to the owner in which the general contractor is principal, and an insurance company is surety, which bond provides that no suit or action shall be commenced thereunder by any claimant after the expiration of one year following the date on which the principal ceased work on such contract, such limitation upon the bringing of an action by a beneficiary of the contract is not void on the grounds of public policy." Id., 15. Consistent with this holding, see Walton v American Mutual Fire Ins Co of Charleston, South Carolina, 109 Ga. App. 348, 349; 136 S.E.2d 168 (1964); Aiken v Northwestern Mutual Ins Co, 106 Ga. App. 220; 126 S.E.2d 630 (1962); General Ins Co of America v Lee Chocolate Co, 97 Ga. App. 588; 103 S.E.2d 632 (1958).
We find no valid reason not to adopt the position taken in Finley. The contract in the present case was a private contract. No statutory mandate exists that bonds be provided in private subcontracting situations such as this one to protect labor and materials claims. In fact, there is a remedy provided by statute for persons in plaintiff's position which plaintiff failed to invoke. We refer to the provision for obtaining a mechanics' lien. MCL 570.5; MSA 26.285.
We note at this point that contractors involved in most governmental construction projects are required to obtain a performance bond. See MCL 129.201 et seq.; MSA 5.2321(1) et seq. Within the context of such public bonds, the statute provides a one-year limitation period for commencement of actions running from the date on which final payment was made to the principal contractor. MCL 129.209; MSA 5.2321(9). This limitation has been recognized by Michigan courts. Affiliated Bank of Middleton v American Ins Co, 77 Mich. App. 376; 258 N.W.2d 232 (1977).
Such remedy was open to plaintiff and was not barred by the limitation provision in the bond. Apparently, however, plaintiff Camelot may not have complied with the notification provision of the mechanics' lien statute and so lost the primary possible avenue of recovery against defendant Priestly. It might be further noted at this point that the mechanics' lien statute contains a limitation on commencing actions to enforce a lien of one year from recordation, which is similar to the contract provision of the private bond. MCL 570.9; MSA 26.289.
Beyond this possibility, we recognize that plaintiff is a third-party creditor beneficiary of the bond executed by the principal, contractor Priestly, and the surety, St. Paul, for the benefit of the owner, Village Homes. Sanders v American Casualty Co of Reading, Pennsylvania, supra, 310; Finley v Interstate Fire Ins Co, supra, 15; Rumsey Electric Co v University of Delaware, 334 A.2d 226, 229 (Del Super Ct, 1975), aff'd 358 A.2d 712 (Del, 1976). See 1 Restatement Contracts, §§ 133, 139, pp 151- 152, 165. However, we are also of the opinion that plaintiff's status as a third-party beneficiary was subject to the stated conditions of the contract, including the provision that limited the time to bring suit to one year from the date the principal ceased work on the project. See 1 Restatement Contracts, § 140, pp 165-166; 4 Corbin on Contracts, § 820, p 278. See also Votaw Precision Tool Co, Inc v Air Canada, 60 Cal.App.3d 52, 56; 131 Cal.Rptr. 335 (1976); Rumsey Electric Co v University of Delaware, supra, 334 A.2d 226, 230.
We find no violation of public policy or basic unfairness in allowing the enforcement of this private contractual period of limitation, even though shorter than the statutory period normally applicable. The period provided was reasonable. Neither do we find a violation of public policy in the fact that the plaintiff failed to discover the contract prior to its limitation. Plaintiff had a year in which to investigate possible bases of recovery. It failed to initiate any action during the period when recovery for its work was possible.
We might feel different had the limitation provision been constructed in such a way that plaintiff could not have reasonably discovered its loss prior to the point at which the limitation period ran. Cook v Northern Pacific R Co, supra, 350-351; Sheard v United States Fidelity Guaranty Co, supra, 35. However, in this case, the contract provided one year from the time at which the contractor Priestly ceased work on the project. Certainly, with a reasonable amount of diligence, plaintiff could have discovered the existence of the bond contract and the fact that contractor Priestly had abandoned the work.
A cursory investigation of the facts surrounding the progress of the project or lack thereof and some minimal inquiry of legal remedies could have reasonably protected plaintiff's mechanics' lien or contractual third-party rights. Public policy will not intervene to aid plaintiff in this case. We find the contractual provision enforceable.
Authority exists to the effect that defendant insurer may be estopped from asserting, or be held to have waived, the time bar as a defense where the plaintiff has been allowed to rely upon some longer time period. See Burlew v Fidelity Casualty Co of New York, 64 F.2d 976, 977-978 (CA 6, 1933), cert den 290 U.S. 686; 54 S Ct 122; 78 L Ed 591 (1933); Goosen v Indemnity Ins Co of North America, 234 F.2d 463, 465 (CA 6, 1956); Reynolds v Detroit Fidelity Surety Co, 19 F.2d 110, 112-113 (CA 6, 1927).
Under the facts of the instant case, however, nothing appears in the record to indicate any attempt on defendant insurer's part to foster any kind of material reliance by plaintiff Camelot on a period of limitations different than that specified in the bond contract.
III
Plaintiff Camelot argues that the provision in the bond is ambiguous and thus should be construed against St. Paul. We find no ambiguity. The provision bars any claimant from commencing action:
"After the expiration of one (1) year following the date on which principal ceased work on said contract, it being understood, however, that if any limitation embodied in this bond is prohibited by any law controlling the construction hereof such limitation shall be deemed to be amended so as to be equal to the minimum period of limitation permitted by such law." (Emphasis added.)
The point of controversy involves the italicized portion of the quoted provision. It is asserted that Michigan's six-year statutory limitation on contract actions fits within the prohibition language specified in the contract clause. MCL 600.5807(8), 600.5813; MSA 27A.5807(8), 27A.5813. Those two provisions state:
"No person may bring or maintain any action to recover damages or sums due for breach of contract, or to enforce the specific performance of any contract unless, after the claim first accrued to himself or to someone through whom he claims, he commences the action within the periods of time prescribed by this section.
"(8) The period of limitations is 6 years for all other actions to recover damages or sums due for breach of contract."
"All other personal actions shall be commenced within the period of 6 years after the claims accrue and not afterwards unless a different period is stated in the statutes."
No ground exists to alter the one-year limitation on actions contained in the bond contract unless a state statutory provision prohibits the shorter period. The term prohibit has been defined by decisions of this Court:
"Strictly, the word `prohibit' means to forbid or interdict by authority, hinder, debar, prevent." Timm v Common Council of the Village of Caledonia Station, 149 Mich. 323, 324; 112 N.W. 942 (1907).
We fail to see any language contained in either statutory provision for limitation of contract actions which would prohibit a shorter period as to private labor or materials payment bond contracts.
Beyond the possible application of the bond contract language, we can perceive no basis for finding the provision ambiguous. No claims of ambiguity have been raised elsewhere in contracts containing identical terms. See Sanders v American Casualty Co of Reading, Pennsylvania, supra, 309, fn 2; General Electric Co v Lexington Contracting Corp, supra, 123; Finley v Interstate Fire Ins Co, supra, 15.
We have no general policy or statutory enactment in this state which would prohibit private parties from contracting for shorter limitation periods than those specified by general statutes. Some states do and so private contracts for shorter periods are precluded. See, e.g., Hiram Scott College v Ins Co of North America, 187 Neb. 290; 188 N.W.2d 688 (1971). However, where no statute expressly prohibiting a shorter contractual period exists, decisions in other jurisdictions have found no construction problem in upholding these provisions. Rumsey Electric Co v University of Delaware, supra.
In Rumsey, plaintiff electrical equipment supplier sued to recover the cost of materials provided a then-bankrupt subcontractor on the basis of a performance bond executed among the various defendants to a university building project. One clause of the bond contract proscribed any commencement of action after one year after the project's completion.
The Delaware Supreme Court resolved any question of ambiguity by stating that absent any "express statutory provision to the contrary", the shorter period prevailed. Id., 358 A.2d 714. Express prohibitions exist in some states. However, with the absence of such a policy or statute in Michigan, we find no application of the language in the bond contract which would amend the shorter period to the prevailing law and thus no ambiguity in the contract clause.
See also Wesselman v Travelers Indemnity Co, 345 A.2d 423, 424 (Del, 1975); Ottendorfer v Aetna Ins Co, 231 A.2d 263 (Del, 1967); Murray v Lititz Mutual Ins Co, 44 Del (5 Terry) 447; 61 A.2d 409 (1948).
We thus reject plaintiff's assertion and affirm the enforcement of the bond contract bar to suit.
IV
The bond contract upon which plaintiff relies in its suit against defendant St. Paul does not unreasonably limit the time in which plaintiff subcontractor, as third-party beneficiary, may commence legal action. As a third-party beneficiary, plaintiff is limited to reasonable conditions specified by the contract where those conditions reasonably require compliance. We find no violation of public policy and thus affirm enforcement of the limitation provision on the facts existing in this case. We further discern no ambiguity in the language of this provision and therefore perceive no basis to construe its limitation provision against defendant surety. The judgment of the Court of Appeals is affirmed.
COLEMAN, C.J., and KAVANAGH, WILLIAMS, LEVIN, FITZGERALD, and RYAN, JJ., concurred with BLAIR MOODY, JR., J.
I have signed the opinion of the Court, but write separately to emphasize the narrowness of the holding and to express my concern about the development of a rule authorizing contractually shortened periods of limitation.
See cases collected in Anno: Validity of contractual time period, shorter than statute of limitations, for bringing action, 6 ALR3d 1197.
We deal here with one specific form of insurance contract — a labor and materials payment bond — and a type of third-party beneficiary unique to such contracts. I do not understand the Court's opinion as authorizing contractually shortened periods of limitation in other insurance contracts or against other types of third-party beneficiaries.
The rationale of the rule allowing parties to contractually shorten statutory periods of limitation is that the shortened period is a bargained-for term of the contract. Allowing such bargained-for terms may in some cases be a useful and proper means of allowing parties to structure their business dealings.
In the case of an adhesion contract, however, where the party ostensibly agreeing to the shortened period has no real alternative, this rationale is inapplicable. The rationale may similarly be inapposite as to the typical third-party beneficiary who neither participates in the bargaining process nor receives actual notice of the shortened period. In such situations, the public policy expressed in the statutes of limitation should presumptively control.
Without this bargained-for element, what has occurred in practical terms is that one of the contracting parties has supplanted the period of limitation mandated by the Legislature. I question whether the public policy embodied in a statutory limitation period is subject to unilateral preemption.
Three factors serve to distinguish this case. First, Camelot is not a typical third-party beneficiary. Subcontractors such as Camelot are made beneficiaries as a means of better protecting the owner; the purpose is not to benefit subcontractors.
Second, the period here has been shortened to match the actual risk sought to be covered. The bond is designed to protect the owner from mechanics' liens filed by unpaid subcontractors and materialmen. The contractually limited period has been tailored to cover only the period during which such liens may be filed and enforced under state statutes. The shortened period thus limits the bond to the coverage actually needed by the owner, the primary beneficiary. Such congruence between the shortened period and the risk to be covered by the insurance policy would not be present if a comparable term were included in typical homeowners, auto or life insurance contracts.
MCL 570.1 et seq.; MSA 26.281 et seq.
Third, at least as to this type of insurance contract, the Legislature has indicated that the one-year period may be reasonable by so limiting the time for bringing actions on statutorily required labor and materials payment bonds covering public construction. Also, the congruence between the shortened period and the risk being covered would support the reasonableness of this shortened period.
MCL 129.209; MSA 5.2321(9). See also, as to construction and maintenance contracts of the Department of Transportation, MCL 570.104; MSA 26.324; restricted by MCL 129.211; MSA 5.2321(11).
These factors, unique to labor and materials payment bonds and to such an ancillary third-party beneficiary, distinguish this case from situations involving other insurance contracts. An adhesion contract — such as most contracts of insurance — in which the shortened period has not actually been bargained for, or which operates to defeat the claim of an intended beneficiary not involved in the bargaining process, will present a different case.