Construction Law Insights

Southway Builders v. United States Sur. Co., 2022 Va. Unpub. LEXIS 12, 2022 WL 2978256 (Va. Jul. 28, 2022)

Southway Builders, Inc. (“Southway”) entered into a subcontract with MAAMECH Mid Atlantic, Inc. (“MAAMECH”) for MAAMECH to provide plumbing and HVAC services (the “Subcontract”) for the Laurel Hill Adaptive Reuse Project (the Project), located in Virginia. The Subcontract contained a Maryland choice of law provision. Under the Subcontract, United States Surety Company and U.S. Specialty Insurance Company (the “Sureties”) issued a performance bond (the “Bond”) to MAAMECH, as principal, with Southway as obligee. The Bond incorporated the Subcontract with the Bond governing in the event of a conflict. Under the Bond, Southway had to bring a legal claim within 1 year of the earlier of either (the “Limitation Provision”): (1) when MAAMECH defaulted or was declared in default by Southway, (2) MAAMECH ceased work on the Project, or (3) the Sureties refused to perform pursuant to the Bond. However, the Bond provided that if the Limitation Provision was void or prohibited by law, the minimum period of limitations available to sureties as a defense in the jurisdiction where any proceeding is instituted would apply (the “Savings Provision”).

On March 15, 2017, Southway declared MAAMECH had defaulted on the Subcontract. On May 11, 2017, Southway and the Sureties entered into a Memorandum of Understanding (the “MOU”) that provided that disputes under the MOU, Subcontract, or Bond would be resolved in Virginia in accordance with the Subcontract and Bond as interpreted by Virginia’s laws. On April 30, 2018, the Sureties denied Southway’s claim under the Bond’s Limitation Provision. On November 1, 2019, the Sureties filed a declaratory judgment action, seeking a declaration that Southway was time-barred from suing under the Bond’s Limitation Provision. The Sureties argued that Southway needed to bring suit on the Bond by no later than March 15, 2018, one year from when Southway declared MAAMECH in breach. The Sureties filed for summary judgment. Southway argued that Maryland law applied to the Bond because it was issued in Maryland, the Limitation Provision in the Bond was void ab initio, and that Virginia’s 5-year limitation period applied to the filing of a claim under the Bond.

The Supreme Court of Virginia disagreed with Southway and affirmed the Circuit Court. The Bond is construed as an insurance contract. Unless otherwise specified, actions on written contracts must be brought within 5 years. Va. Code § 8.01-246(2). However, no provision in any insurance policy will be valid if it limits the time within which an action may be brought to less than 1 year after the loss occurs or the cause of action accrues. Va. Code § 38.2-314. If Virginia’s choice-of-law rules required the Circuit Court to apply Maryland law and Maryland law rendered the Limitation Provision void, the Saving Provision in the Bond would apply to the applicable limitation period and Virginia Code § 38.2-314 allows the parties to an insurance contract to reduce the limitation period to 1 year. Construing the Saving Provision according to its plain meaning, the “least possible” limitation period “valid” in an insurance contract in Virginia is 1 year.

PLDR Law Scott Kowalski 1 PLDR Law Mark Burgin 1

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