Opinion ID: 1201841
Heading Depth: 3
Heading Rank: 1

Heading: the two-year time limitation in the performance bond.

Text: The performance bond includes the following clause: Any suit under this bond shall be instituted before the expiration of two years from the date on which final payment under the [c]ontract falls due. The superior court found the final payment on the contract was paid on November 10, 1987. No law suit was filed on the bond before November 10, 1989. As AEA failed to sue within two years of the final payment, the superior court ruled AEA's suit on the bond was time barred. AEA asserts that the time limitation did not begin to run until Fairmont denied liability on the claim. [2] In Fireman's Fund Ins. Co. v. Sand Lake Lounge, Inc., 514 P.2d 223, 227 (Alaska 1973), this court concluded that insurance clauses requiring suit to be filed within twelve months of the inception of the loss mean that suit must be filed within a year after notification of the decision to deny coverage. In Fireman's, the court drew upon the Uniform Commercial Code (UCC) for its analysis. Under the UCC, parties may reduce the period of limitation to not less than one year from the time the cause of action accrues. Id. at 227, quoting AS 45.05.042(a) (renumbered as AS 45.02.725(a)). The court reasoned that the cause of action does not accrue until the claim is denied, and the contract may not limit the right to bring suit to less than a year from that time. Id. AEA points out that its claim was not denied until February 1990. AEA filed its counterclaim to the declaratory judgment action in July 1990, only six months after the claim arose. AEA argues that the contractual time limit may not limit the ability to bring suit to less than one year from the date the claim is denied. Fairmont argues that the two-year limitation clause is clear and unambiguous. The bond does not create a limit from the date a claim arises, but from the date of the final payment on the contract. Fairmont argues that as this is a performance bond, the bond's liability is limited by the date the contract is completed. Fairmont claims there is no dispute that final payment occurred November 1987. Fairmont asserts AEA did not institute suit within two years of the final payment, and therefore its exposure had ended. We agree with Fairmont that the time limitation to bring suit on the bond began running on the day of the final payment. The time limitation provides for two years after the final payment on the contract to file suit if any problems are discovered with the project. However, our prior decisions have held contractual time limitations to bring suit will not be enforced without some showing of prejudice. Estes v. Alaska Ins. Guar. Ass'n, 774 P.2d 1315 (Alaska 1989). In Estes a music store was destroyed by fire. Soon after the fire, Estes submitted proof of loss. Ten months later the insurance company denied Estes' claim after an investigation. Estes then waited one year and seven days to file a law suit. Id. at 1316. The insurance company moved for summary judgment based upon the failure to comply with a policy provision requiring any suit on the policy to be commenced within one year after the loss occurs. The trial court granted the motion. Id. In Estes we held that the time limit on commencement of suit clauses, ... should [] be reviewed on the basis of whether [its] application in a particular case advances the purpose for which [it was] included in the policy. Id. at 1318. We concluded that the purpose of the clause was to protect the insurance company from prejudice due to delay. Id. Since the insurance company had not shown it was prejudiced by the delay in filing the suit, we reversed the grant of summary judgment. Id. at 1320. In this case AEA claims the purpose of the clause is to 1) give AEA time to file suit, and 2) give notice to the surety that there is a problem with the contract. AEA argues that Fairmont was notified of the potential claim as early as December 21, 1988, when Wyman was notified that AEA assumed the anchors were defective. In July 1989 Wyman and Fairmont were notified that tests confirmed AEA's belief that the anchors were improperly installed. In August, after Wyman failed to respond to AEA's request to repair the pipeline, AEA declared Wyman in default and called upon Fairmont to remedy the default. Fairmont requested that more testing be done, and AEA complied. Fairmont finally denied the claim only after two years had passed from the final payment. Fairmont was put on notice and was investigating the claim prior to expiration of the two year limit. The purpose of the clause was satisfied. Fairmont was not prejudiced by a delay in filing suit. AEA substantially performed by notifying Fairmont in a timely fashion. Fairmont was not harmed by AEA's attempt to comply with Fairmont's requests for further testing prior to filing a law suit. Fairmont argues that the general rule of contracts, upholding the validity of time limitations, should be applied. If held invalid, it must be on the ground that the terms are unconscionable and that unfair advantage has been taken of a claimant whose bargaining position was inferior. Fireman's, 514 P.2d at 226, quoting Arthur L. Corbin, Contracts § 218 at 312 (1963). The reason not to follow the general rule in Estes was that the insurance contract was dictated primarily by the insurance company. Estes, 774 P.2d at 1317. [W]hen the element of bargain is not present, the authority of the `stipulated' provision becomes problematic. Id. at 1318. Fairmont argues that the rationale of Estes is inapplicable to this case because AEA, not Fairmont, drafted the bond and the time limitation. AEA had time to file a suit prior to the expiration of the two-year limit and failed to do so. Fairmont argues that there is no reason for the court to give AEA additional time to sue on the bond. Fairmont's argument distinguishing Estes is unpersuasive. The language of this bond is practically identical to the American Institute of Architects standard performance bond form A 311, which has been used by the performance bond industry for over twenty years. Adoption of the industry norm in the bond does not make Estes distinguishable. A limitation on a commencement of suit clause should be enforced only when it serves the purpose for which it was included in the contract. Estes, 774 P.2d at 1320. A formalistic application of a contractual time limitation will not bar the right to sue absent some showing of prejudice. [3] In this case Fairmont was well aware of the claim before the time limitation had expired. Fairmont was engaged in the process of investigating the claim as early as February 1989. A requirement that suit be filed while the process of investigation is proceeding will not be enforced without a showing of prejudice. [4] The superior court thus erred in granting summary judgment. [5]