General Insurance Co. of America v. Interstate Service Co.

EYLER, Judge. This ease, which is before us for the second time, involves application of the Restatement (Second) of Conflict of Laws § 187(2)(b) (1971). In particular, we must decide whether to enforce contractual limitations provisions that are against Maryland public policy when the contracts at issue provide that the laws of Virginia and the District of Columbia shall govern. Because we cannot say that Maryland has a materially greater interest in the determination of the issue than do Virginia and the District of Columbia, we will apply the laws of Virginia and the District of Columbia, uphold the contractual limitations provisions, and reverse the judgment of the trial court.

Facts Appellee Interstate Service Company, Inc. (“Interstate”) is a mechanical subcontractor who, pursuant to subcontracts with NICO Construction Co. (“NICO”), performed work on five separate construction projects located in the District of Columbia and the Commonwealth of Virginia. Appellant General Insurance Company of America (“General”) issued to NICO a performance and payment bond on the project located at Georgetown University Hospital in the District of Columbia (“Georgetown bond”), while Westchester Fire Insurance Company (“Westchester”) issued to NICO a performance and payment bond on the project located at Alexandria Hospital in Virginia (“Alexandria bond”). Interstate last performed work on the Georgetown University project on July 29, 1991, and NICO certified that the project was 100% complete on January 8, 1992. By letter ¹²⁹ dated April 9, 1992, Interstate sent notice to NICO and General of its claim on the Georgetown payment bond.

Interstate last performed work on the Alexandria Hospital project on February 27, 1991, and NICO certified that the project was 100% complete on December 26, 1991. By letter dated April 20, 1992, Interstate sent notice to NICO and Westchester of its claim on the Alexandria bond. On September 9, 1992, Interstate filed an action in the Circuit Court for Prince George’s County against NICO for nonpayment on the two projects, and on November 19, 1993, Interstate filed an amended complaint adding claims against General and Westchester for breach of the payment bonds. On August 9, 1994, pursuant to a settlement agreement between the two parties, Interstate obtained a judgment against NICO in the amount of $321,742.86.

Although the settlement did not resolve the issue of the respective liabilities of General and Westchester on the bonds, the sureties did agree, at the request of the settling parties, that they would not invoke the forum selection clauses contained in the bonds. 1 Thereafter, General and Westchester filed a motion for summary judgment based upon one year limitations of actions provisions located in each of the payment bonds. Specifically, the Georgetown bond stated in pertinent part: No suit or action shall be commenced by a Claimant under this Bond ... after expiration of one year from the date ... on which the last labor or service was performed by anyone or the last materials or equipment were furnished by anyone under the Construction Contract.... If the provisions of this Paragraph are void or prohibited by law, the minimum period of limitation available to sureties as a defense in the jurisdiction of the suit shall be applicable. The Alexandria bond provided in pertinent part: ¹³⁰ 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 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. In their motion, General and Westchester argued that the trial court should apply Virginia law because the contracts between Interstate and NICO contained choice of law provisions selecting Virginia law, and these contracts were incorporated by reference in the payment bonds. General and Westchester further argued that Virginia law permitted one year contractual limitations provisions. Interstate filed a cross-motion for summary judgment arguing that the trial court should apply Maryland law and that the limitations of actions provisions were void and unenforceable under Maryland law.

Interstate alternatively argued that Virginia law would not enforce the contractual limitations provisions. The trial court granted summary judgment in favor of General and Westchester and denied Interstate’s motion for summary judgment, and Interstate appealed. On appeal, in an unreported opinion, we reversed the judgment based upon Md.Code Ann. (1957, 1994 Repl.Vol.), Art. 48A § 377B, which prohibits the enforcement of any provision in an insurance contract that shortens the applicable period of limitation contained in Maryland statutes. We noted that, in the absence of a contractual provision, the period of limitations generally is an issue of procedural rather than substantive law, and accordingly, the law of the forum applies.

With respect to General’s and Westchester’s arguments that the parties had contractually agreed to limit the period of limitations and had selected Virginia law to govern, we noted that the payment bonds did not incorporate the Interstate-NICO contracts. Instead, the payment bonds incorporated the general contracts between NICO and the project owners. As we did not have those contracts before us, and could not ascertain ¹³¹ whether they included choice of law provisions, we had no choice but to remand the case for further proceedings. On remand, General and Westchester provided the trial court with copies of the general contracts for both the Georgetown and the Alexandria projects.

General Conditions Article 19.1 of both the Georgetown and Alexandria contracts provides that “[t]he Contract shall be governed by the law of the place where the Project is located.” The location of the Georgetown project is described on the first page of the Georgetown contract as follows: “Modular Laboratories Renovation, Ground Floor and Lower Level, Preclinical Sciences Building, Georgetown University Medical Center.” It is undisputed that this location is within the District of Columbia. The location of the Alexandria project is described on the first page of the Alexandria contract as follows: “Renovation to the Third Floor Obstetrical Nursing Unit and Full-term Nursery at the Alexandria Hospital.” It is undisputed that this location is within the Commonwealth of Virginia. Notwithstanding these provisions, the trial court, on remand, held that Maryland law applied to the limitations issue and that Maryland law prohibited the inclusion in an insurance contract of a provision shortening the period of limitations. Consequently, the trial court entered summary judgment in favor of Interstate.

Thereafter, General and Westchester filed this timely appeal. Standard of Review Recently, in Marriott v. Morgan State University, 115 Md.App. 493 , 694 A.2d 123 (1997), we reviewed the principles governing appellate review of a grant of summary judgment as follows: Rule 2-501(e) directs the trial court to grant summary judgment in favor of the movant “if the motion and response show that there is no genuine dispute as to any material fact and that the party in whose favor judgment is entered is entitled to judgment as a matter of law.” Under the summary judgment rule, a trial court does not resolve ¹³² disputed issues of fact, but instead, makes rulings as a matter of law. Southland Corp. v. Griffith, 332 Md. 704, 712 [ 633 A.2d 84 ] (1993); Beatty v. Trailmaster Prods., Inc., 330 Md. 726, 737 [ 625 A.2d 1005 ] (1993). Thus, the standard for appellate review of a grant of summary judgment is whether the trial court was legally correct.

Griffith, 332 Md. at 712 [ 633 A.2d 84 ]; Beatty, 330 Md. at 737 [ 625 A.2d 1005 ]. Marriott, 115 Md.App. at 501-502 , 694 A.2d 123 . Discussion As we noted upon the first appeal of this case, in the absence of contractual provisions that would produce a contrary result, the statute of limitations applicable to the payment bonds is twelve years. See Md.Code Ann. (1974, 1995 Repl.Vol.), Cts. & Jud.

Proc. § 5-102(a)(2). See also Doughty v. Prettyman, 219 Md. 83, 88 , 148 A.2d 438 (1959) (holding that statutes of limitations are matters of procedural law governed by the law of the forum state); Mandru v. Ashby, 108 Md. 693, 695 , 71 A. 312 (1908)(holding that procedural matters are governed by the law of the forum). Further, while both of the payment bonds purport to shorten the limitations period, such a shortening is prohibited by Maryland law. Specifically, Article 48A, § 377B of the Maryland Code provides as follows: All provisions and stipulations contained in any contract of insurance or suretyship, whatsoever, heretofore or hereafter issued, fixing the time in which suits or actions may be instituted under or upon any such contracts at a period of time less than that provided at the time of the issuance or delivery of any such contract by the laws of the statutes of Maryland in respect of limitations are hereby declared to be against State public policy, illegal and void, and no court in this State shall give any effect to any provisions or stipulation in any contract mentioned in this section; nor shall any defense to liability under any such contract be based upon any such shorter limitation period. ¹³³ Md.Code (1957, 1994 Repl.Vol.).

Accordingly, if Maryland law is controlling, the contractual limitations provisions are not valid, and Interstate’s claims on the bonds are not barred by limitations. By contrast, the District of Columbia does not have a statute prohibiting contractual limitations provisions, either generally, or in insurance contracts. 2 Similarly, it has not pronounced in case law any public policy prohibiting enforcement of such agreements. Accordingly, the contractual limitations provision in the Georgetown bond is valid under District of Columbia law. Virginia law provides that parties to a contract, including an insurance contract, “may agree that a claim under the contract must be enforced within a shorter time limit than that fixed by statute if the contractual provision is not against public policy and if the agreed time is not unreasonably short.” Board of Supervisors of Fairfax County v. Sampson, 235 Va. 516 , 369 S.E.2d 178, 180 (1988).

More specifically, § 38.2-314 of the 1950 Code of Virginia (1994 Repl.Vol.) provides as follows: No provision in any insurance policy shall be valid if it limits the time within which an action may be brought to less than one year after the loss occurs or the cause of action accrues. Neither the parties nor the trial court discussed this statute below, and neither discussed the issue of when Interstate’s cause of action under the Alexandria bond accrued. The record before us, however, contains everything that we require to resolve that issue. Interstate last performed work on the Alexandria Hospital project on February 27, 1991, and NICO certified that the project was 100% complete on December 26, 1991.

The contractual limitations provision of the Alexandria bond shortens limitations to one year from NICO’s completion of the ¹³⁴ project, or December 26, 1992. While we cannot be certain whether Interstate’s cause of action accrued prior to or after NICO’s completion of the project, it accrued, at least, by April 20, 1992, the date that Interstate notified NICO and Westchester of its claim, or at the very latest, by September 9, 1992, the date on which Interstate filed suit against NICO. Given that the limitations provision conforms the limitations to Virginia law in the event it is invalid under Virginia law, the time for filing a claim on the bond could have been shortened to April 20, 1993 or, at the very latest, September 2, 1993. Yet, Interstate’s claim against Westchester was not filed until November 19, 1993.

Thus, assuming Virginia law applies and the contractual limitations provision is enforceable against Interstate, a third party beneficiary of the Alexandria bond, Interstate’s action on the bond is barred by the contractual limitations provision. Before we turn to the issue of whether we are bound to apply the laws of the District of Columbia and Virginia, we first must consider whether either District of Columbia or Virginia law would enforce a contractual limitations provision against a third party beneficiary such as Interstate. The trial court did not discuss District of Columbia law on this issue, but relying on Commercial Construction Specialties, Inc. v. ACM Construction Management Corporation, 242 Va. 102 , 405 S.E.2d 852 (1991), the court did hold that Virginia law would not enforce the provision against Interstate. Commercial Construction Specialties involved an action by a subcontractor on a public construction project for enforcement of certain payment bonds between the general contractor and its surety.

The Virginia Public Procurement Act, Virginia Code § 11-60, provides materialmen and subcontractors, who have furnished supplies for or worked on a public construction project, with a right to sue on the payment bonds issued on such projects, provided certain notice requirements have been met. Id. 405 S.E.2d at 853-54. The bonds at issue in Commercial Construction Specialties shortened the § 11-60 notice period from 180 days to 90 days. The Supreme ¹³⁵ Court of Virginia noted that the subcontractor was not a party to the payment bonds, and held that the general contractor and surety could not shorten the notice requirements of § 11-60 without obtaining the subcontractor’s consent.

Id. 405 S.E.2d at 854. In particular, the Court rejected the defendants’ reliance on Sampson, supra. While, at a glance, Commercial Construction Specialties seems to support the trial court’s holding that the Alexandria bond limitations provision is not enforceable against Interstate, Interstate does not, and could not, purport to sue under § 11-60. Instead, Interstate’s action is based upon its status as a third party beneficiary to the payment bonds.

Under Virginia law, an intended third party beneficiary to a contract is entitled to enforce the terms of the contract and is subject to all defenses arising out of the contract. See, e.g., Ashmore v. Herbie Morewitz, Inc., 252 Va. 141 , 475 S.E.2d 271, 275-76 (1996); Levine v. Selective Insurance Co. Of America, 250 Va. 282 , 462 S.E.2d 81, 84 (1995); Sydnor & Hundley, Inc. v. Wilson Tracking Corp., 213 Va.