The short answer to the question of whether parties to a contract can legally shorten the statute of limitations is yes. However, three factors must be met before a shortened statute of limitations can be enforced: 1) no controlling statute exists to the contrary; 2) the provision is not the result of fraud, duress, or misrepresentation; and 3) the provision is reasonable.
In its recent opinion, Richard and Daphne Ceccone v. Carroll Home Service, LLC, filed July 28, 2017, the Court of Appeals upheld the Court of Special Appeals’ decision in College of Notre Dame of Maryland, Inc. v. Morabito Consultants, Inc. that summarized Maryland’s approach as to whether, and the extent to which, contractual parties may shorten a limitations period and did so by providing the three requirements noted above. The contract at issue was made between the Ceccones, homeowners, and CHS, a provider of residential furnace maintenance. The Ceccones filed suit against CHS after the contractual one-year statute of limitations period for alleged damage to their residence attributed to CHS.
The third requirement for an enforceable shortened limitations period, the reasonableness standard, has consistently been applied by the Court of Appeals in assessing other contractual provisions that aim to supersede governing law, e.g. liquidated damages, forum selection, and choice of law. In examining reasonableness, the Court examines the contract’s subject matter, the duration of the shortened limitations period compared to the period that would otherwise govern, and the relative bargaining power of the contracting parties.
In its analysis of the Ceccone case and its application of the three requisite factors, the Court of Appeals determined that there was no statute that would categorically bar a shortened limitations period, so the first factor was met. Regarding the second factor, the Ceccones did not assert duress but did make allegations of misrepresentation and fraud against CHS, which were not examined by the Circuit Court. Also not examined by the Circuit Court was the third factor, the reasonableness of the shortened limitations period. The Court of Appeals remanded the case to the Circuit Court to consider the “totality of the circumstances” including the one-year limitations period, its relation to the statutory period, i.e. one-third, the relative bargaining power of the parties, the subject matter of the contract, and whether the shortened limitations period applies only to claims brought by one of the parties or runs both ways. In the Ceccone/CHS contract, the limitations period applicable to CHS’s potential claims was not shortened whereas the Ceccones’ applicable limitations period was.
The principle of freedom of contract is recognized by the Court as serving the public interest by granting individuals the power to control their own affairs by making legally enforceable promises. The Court recognizes, however, that the principle of freedom of contract loses its significance when a contractual provision superseding existing law is effectuated by an exertion of superior bargaining power. The Court cites a list of cases wherein a shortened limitations period was upheld only when the contracting parties to a sophisticated contract had roughly equal bargaining power. While the outcome of the Ceccone case is as yet unknown, what the Court of Appeals makes clear is that parties to a contract must carefully consider the reasonableness of shortening any applicable statutes of limitations.
If you are contemplating entering a contract or have already entered one and are concerned about the limitations period contained therein, our attorneys can assist you in determining the enforceability of a shortened limitations period and how it might affect the parties’ interests.