Fifth Circuit Disallows Equitable Defenses to Limitations Under Texas Performance Bond Statute

Hartford Fire Ins. Co. v. City of Mont Belvieu, Texas, No. 09-40586 (5th Cir. July 13, 2010)

By:  David Coale & Billie Ann Maxwell, K&L Gates, Dallas

This case shows why it is important for governmental entities, their contractors, and performance bond providers to be aware of statements among the parties for limitations purposes, and the application of equitable defenses, in the context of the one-year limitations period under Texas Government Code § 2253.078(a).  The lessons of this case apply fully to similar statutes in other jurisdictions.

Texas Government Code section 2253.021(a) requires prime contractors to execute a performance bond to a governmental entity that makes a public work contract in excess of $100,000 to guarantee the timely completion of the construction project.  Section 2253.078(a) provides for a one year statute of limitations on claims commencing from “the date of final completion, abandonment, or termination of the public work project.”

Hartford Fire Insurance Company (“Hartford”) issued a performance bond to Williams Industries (“Williams”), who ended up not completing a project for the City of Mont Belvieu, Texas (“Mont Belvieu”).  Mont Belvieu sued Hartford to recover on the bond. Hartford and Mont Belvieu disputed when limitations began to run.  The Fifth Circuit held that the statute of limitations under Tex. Gov. Code § 2253.078(a) begins to run even when “substantial performance” occurs because “substantial performance” is one and the same as “final completion” required by the statute.  A change order between the parties clearly provided June 19, 2001 as the date of substantial performance and was confirmed by the signature of Mont Belvieu’s city architect and project manager. Mont Belvieu did not file suit until 2007.  Therefore, the limitations period ran more than five years earlier.

In the alternative, Mont Belvieu argued that promissory estoppel and quasi-estoppel excused its failure to timely file the action, and the jury agreed.  The Fifth Circuit, however, refused to allow such equitable defenses to circumvent the statute of limitations period and reversed and rendered judgment in favor of Hartford.

First, promissory estoppel did not apply because it encompasses a narrow range of promises, which by word or conduct must “amount [ ] to an affirmative inducement to delay bringing action.”  The three representations put forth by Mont Believ did not constitute affirmative inducements to delay bringing action:  the change order’s inclusion of language that all warranties would remain in force; a 2003 letter from Hartford offering to reimburse Mont Belevieu for claims; and a 2004 letter from Hartford stating it needed more information about claims and was ready to proceed with the process.  The language regarding warranties did not alter their enforceability, and such language was too vague to invoke promissory estoppel.  Such vagueness also weakened Mont Believu’s argument that it reasonably relied on such words.  More so, Mont Believu was a sophisticated party that had engaged in such contracting under Texas law.

Notwithstanding the vagueness of the letters, promissory estoppel cannot revive a claim that has already expired at the time of the promise.  Because promissory estoppel could not be found based on the change order, limitations had already run when the 2003 and 2004 letters were sent.

Second, quasi-estoppel did not apply because while it “precludes a party from asserting, to another’s advantage, a right inconsistent with a position previously taken” such statements or conduct must have been made by Hartford prior to the running of limitations.  The only statement presented within the limitations period was the change order, which did not reference the limitations period.  The two letters sent by Hartford were sent following the conclusion of the one-year limitations period.  Thus, Hartford took no inconsistent position before the limitations period ended.