Contractual Limitations: Why Are You Suing Me When Our Contract Says You Can’t?

I recently made a presentation for fellow business lawyers entitled “Contractual Limitations: Why Are You Suing Me When Our Contract Says You Can’t?” (Here’s a copy of my presentation notes.) The answer is that in Missouri contractual provisions that limit the time within which suit may be brought are unenforceable, although, as with many rules, there are exceptions.

It’s common to see contractual limitations provisions in commercial contracts. For example, a contract might state, “No action on this agreement may be brought more than 12 months after it accrues.” As a commercial attorney, I’ve often pushed back on such clauses, arguing that the statute of limitations provides adequate protection against stale claims and that the contractual limitations provision could unfairly trip up my client even when there’s a legitimate claim. But in many cases, the provision isn’t enforceable anyway.

The general rule

The general rule under the common law is that reasonable contractual limitations provisions will be enforced by courts. The principle governing what is deemed reasonable is that the time allowed should be sufficient to allow the plaintiff to investigate and file a case within the limitation period.

A North Carolina federal district court stated the general rule and the policy behind it in Badgett v. Federal Express Corporation, 378 F. Supp. 2d 613 (M.D.N.C. 2005):

It is a well-settled principle that parties may agree to a limitations period shorter than that provided by state law. The general rule has been stated, in the absence of a controlling statute to the contrary, a provision in a contract may validly limit, between the parties, the time for bringing an action on such contract to a period less than that prescribed in the general statute of limitations, provided that the shorter period itself shall be a reasonable period. This rule reflects two axioms. First, it reflects the importance of the parties’ freedom of contract absent clear policy to the contrary. Second, it reflects the policy underlying statutes of limitations, namely to encourage promptness in bringing actions so as to avoid a loss of evidence from the death or disappearance of witnesses, destruction of documents, or failure of memory. Thus, because statutes of limitations do not open a window to suit, but instead close a door, there is nothing in the policy or language of statutes of limitations “which inhibits parties from stipulating for a shorter period within which to assert their respective claims.” [citations omitted]

Missouri rejected the general rule in 1887

Before 1887, Missouri courts followed the general rule and enforced reasonable contractual limitations provisions. For example, the validity of a fire insurance policy provision requiring that suit be brought within one year after the accrual of the cause of action was upheld in Glass v. Walker, 66 Mo. 32 (Mo. 1887).

But in 1887 Missouri enacted what is now codified as section 431.030 of the Revised Statutes of Missouri, which states, “All parts of any contract or agreement hereafter made or entered into which either directly or indirectly limit or tend to limit the time in which any suit or action may be instituted, shall be null and void.”

Although the enactment was a response to perceived abuses of insurance companies, the language is not limited to insurance policies and courts have applied the statute broadly to many types of contracts.

A few years after enactment, the Missouri Supreme Court stated the policy rationale underlying the statute in Karnes v. American Fire Insurance Company, 144 Mo. 413 (Mo. 1898):

The legislature determined that a sound public policy demands that the courts of the State shall remain open to litigants as long as their claims are not barred by the statute of limitations, and hence passed this act. The statute proceeds upon the theory that rules limiting the time for bringing suits should be uniform and general, and should not be left to private contract.

More recently, the United States Court of Appeals for the Eighth Circuit explained the rationale behind the statute — and also the sweeping breadth of application — in Lumbermen’s Mutual Casualty Company v. Norris Grain Company, 343 F.2d 670 (8th Cir. 1965):

But, almost certainly in consequence of the Riddlesbarger opinion and its progeny, and of the aggression of the insurance enterprise and the ingenuity of its counsel, “the policy of the statute of limitations,” on whose tolerance Mr. Justice Field relied, supra, historically underwent a substantial reformation …. Directly applicable here and of a pattern common to much of the change producing legislation, the legislature of Missouri in 1887 enacted a statute which, unaltered through the intervening revisions and compilations of the state’s statutes, is now Section 431.030, Vernon’s Annotated Missouri Statutes.

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The comprehensive reach of that sentence need not, probably could not, be emphasized. By the words, “any contract,” it repels the supposition that it applies only to policies of insurance, yet manifestly includes them within its ambit. And it “nullifies and avoids,” all parts of any contract or agreement made and entered into after its enactment, i.e. after 1887, which either directly or indirectly limit or tend to limit the time in which any suit or action may be instituted. Its remedial character and entitlement to liberal construction in furtherance of its manifest objective are obvious. And it has been characterized as reflective of “the public policy of Missouri,” in numerous cases.

Exceptions to R.S.Mo. § 431.030

Contracts aficionados are probably one step ahead of me and thinking, “What about section 2-725 of the Uniform Commercial Code?” And they’re right: section 2-725 overrides section 431.030 of the Revised Statutes of Missouri, and states, “By the original agreement the parties may reduce the [four-year] period of limitation to not less than one year but may not extend it.” Thus, contracts governed by Article 2 of the UCC — that is, contracts for the sale of goods — can reduce the period of limitation to as little as one year.

Another possible exception is much more narrow. The United States District Court for the Eastern District of Missouri predicts in Caimi v. DaimlerChrysler Corp., 2008 U.S. Dist. LEXIS 16116 (E.D. Mo. 2008), that the Eighth Circuit would hold that section 431.030 isn’t applicable to contractual limitations periods for ERISA claims. According to the court, “The Seventh and Eleventh Circuits have held that parties may contractually bind themselves to a shorter statute of limitations in an ERISA case even if state law is to the contrary, if the limitations period is reasonable.”

Notice requirements are a possible substitute for a contractual limitations provision

Relying on Frank Powell Lumber Company v. Federal Insurance Company, 817 S.W.2d 648 (Mo. Ct. App. 1991), many Missouri business lawyers believe that notice requirements can provide a substitute for a contractual limitations provision. In Frank Powell Lumber, the Missouri Court of Appeals, Southern District enforced a provision in a surety bond that required notice of a claim to be brought within 90 days of the performance of the last work on the project covered by the bond. The court explicitly held that the notice requirement didn’t run afoul of section 431.030. The court distinguished Lumbermen’s and other Missouri precedent and reasoned,

In this case, the 90-day period of limitation did not affect when suit could be brought on the surety bond. Rather, it determined what notice was required in order for claimants who had no direct contract with Contractor to have coverage under the terms of the surety bond. The 90-day notice provision in the surety bond did not limit, or tend to limit, the time in which a suit or action could be instituted.

Thus, a notice requirement can cut off a party’s claim if not complied with — which has the same effect as shortening the period of limitations.

However, there is risk in relying on Frank Powell Lumber. For one thing, its approach — which is in stark contrast to earlier Missouri cases — hasn’t been reviewed by the Missouri Supreme Court. For another, the case involved a non-party. And finally, Thomas v. A.G. Electric, Inc., 304 S.W.3d 179 (Mo. Ct. App. 2009), another bond case with a 90-day notice provision, refused to enforce the notice provision and noted that it might run afoul of section 431.030.

And then there’s always the possibility that a court will simply disregard section 431.030. That was the case in Ellis v. DaimlerChrysler Corp., 2005 U.S. Dist. LEXIS 46641 (E.D. Mo. 2005). The court in Ellis followed the general rule and enforced a six-month limitation provision in a collective bargaining agreement, citing non-Missouri precedent and completely ignoring section 431.030. I can’t figure out why, unless there’s a federal issue that would override Missouri’s public policy. If that’s the case, the court didn’t explain. I’ve been unable to locate plaintiff’s counsel (which I believe is a solo attorney from out of state), and defense counsel, whose office is a couple of blocks away from mine, haven’t replied to my email, although I haven’t pressed the issue. Maybe they think it’s best to let sleeping dogs lie.