On November 21, 2012 the Massachusetts Supreme Judicial Court ("SJC" or "Court") in Creative Playthings Franchising Corp. vs. Reiser et al., 463 Mass. 758 (2012) ruled that a contract clause that shortens the period within which claims may be brought was valid and enforceable, subject to certain conditions.
This case involved a swing manufacturer who sued a franchisee for breach of contract and trademark infringement. The franchisee counterclaimed for, among other things, breach of the implied covenant of good faith and fair dealing and fraudulent inducement. The case was brought before the SJC on a certified question from the United States District Court for the District of Massachusetts, where the case arose.
The SJC began by reviewing older Massachusetts cases and noting that in 1856 it had stated in dicta that "[t]he time within which money shall be paid, land conveyed, a debt released... are all matters of contract" and that a stipulation that a right shall cease if not pursued within a particular time is "a fit subject for contract."
But the Court stated it had not categorically ruled that such a contract clause was generally enforceable. The Court then discussed several contract principles, and stated that "[w]here a claim arises based on a contract, and the contractually shortened limitations period is reasonable and not contrary to other statutory provisions or public policy" we answer the question yes; that is, a party can limit a limitations period by contract.
Creative Playthings had entered into a franchise agreement with James A. Reiser ("Reiser") the franchisee. The agreement provided it would be governed by Massachusetts law. It barred claims brought more than one (1) year after the date of discovery of the facts resulting in a claim or, if earlier, the date such facts should or could have been discovered with reasonable diligence. It also provided an outside limit of eighteen (18) months after the date where the act or omission first arose. Creative terminated the franchise agreement and sued Reiser for violations of the franchise agreement. Reiser counterclaimed. Creative moved for summary judgment on the counterclaim stating it was time barred because of the limitations period in the franchise agreement. Creative argued that limitations periods are enforceable provided they are reasonable. Reiser, the Court stated, offered no reason to depart from that view of contract law. The Court stated that what is reasonable will vary according to the type of contract, the circumstances under which it is given, and the particular provisions of a contract or agreement. The Court cautioned that a limitations period that is unreasonable or not subject to negotiation by the parties, such as a contract of adhesion, will be unenforceable. Also, where public policy so requires, the legislature may prohibit limitations of contract clauses or time periods that are unduly shortened as it has done in certain insurance contracts (see Massachusetts Statute General Laws Chapter 175, 22).
Reiser argued that under the discovery rule, contractually shortened limitations periods are not valid and enforceable if the limitation period ended before the injured party could or should have discovered the facts that resulted in the harm; he claimed that the limitations provisions in Creative's franchise agreement permit such a shortening, and were therefore unenforceable. The Court discussed the Massachusetts discovery rule and stated that it operates to toll a limitations period until a prospective plaintiff learns or should have learned that he or she has been injured, and may arise in a number of circumstances including where a misrepresentation concerned a fact that was "inherently unknowable to the injured party, where a wrongdoer breached some duty of disclosure, or where a wrongdoer concealed the existence of a cause of action through some affirmative act done with the intent to deceive. The Court stated that it agreed that a contractual limitations provision that did not permit operation of the discovery rule would be unreasonable and therefore invalid and unenforceable.
The Court then discussed the limitations period in the Creative Playthings franchise agreement. It stated that the maximum 18-month period after the first act or omission that gave rise to any liability within which a party must bring a claim regardless of whether the act or omission could have been discovered with reasonable diligence appeared to impose a limitation of repose which would be per se invalid. However, it stated other provisions in the agreement appeared to modify that limitation and to make enforcement contingent on numerous factors that would bear on an analysis of reasonableness. Because the certified question to the SJC was narrowly defined and did not concern the specific language in Creative Franchise's agreement, the Court stated it need not reach the question of whether this particular limitations provision is unenforceable because it violates the discovery rule or creates an impermissible repose limitation.
Reiser also argued that the shortening of limitations period in franchise agreements was contrary to Massachusetts public policy and unenforceable. He relied on the four-year statute of limitations for violations of certain statutes intended for the protection of consumers and a four-year statutory limitations period for motor vehicle dealership franchises. The Court found those arguments unavailing as there was nothing in the record to indicate that the Massachusetts legislature intended to treat franchisees who own and operate individual stores, such as Mr. Reiser, as individual consumers. As to the alleged imbalance of bargaining power between a small franchisee and a large corporate franchisor, the same concern could be raised about any provision in a franchise agreement. Thus, if the legislature determines that restrictions on the contract of a franchise agreement in general are necessary as a matter of public policy (a provision for which the Court stated Reiser had not provided any record support), the legislature could enact such limitations; here, however, the legislature had not done so.
The Court concluded by stating any contractual reduction of a limitations period in a franchise agreement that was unreasonable or not subject to negotiation by the parties would be unenforceable.
This case reinforces the longstanding principle that parties can contract to shorten limitations periods in contracts provided that such limitations are not unreasonable and are subject to negotiation by the parties.