Process & Storage Vessels, Inc. v. Tank Service

• Decision Date: 23 June 1982
• Docket Number: Civ. A. No. 81-467.
• Citation: 541 F. Supp. 725
• Parties: PROCESS AND STORAGE VESSELS, INC., a Delaware corporation, Plaintiff, v. TANK SERVICE, INC., an Oklahoma corporation, and Aetna Casualty and Surety Company, a Connecticut corporation, Defendants.
• Court: U.S. District Court — District of Delaware

541 F. Supp. 725

PROCESS AND STORAGE VESSELS, INC., a Delaware corporation, Plaintiff, v. TANK SERVICE, INC., an Oklahoma corporation, and Aetna Casualty and Surety Company, a Connecticut corporation, Defendants.

Civ. A. No. 81-467.

United States District Court, D. Delaware.

June 23, 1982.

William J. Cattie of Heckler & Cattie and John C. Phillips, Jr., Wilmington, Del., for plaintiff.

David A. Drexler and Donald E. Reid of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., for defendants.

LATCHUM, Chief Judge.

This contractual dispute centers on the terms of a payment bond executed by defendant, Aetna Casualty and Surety Company ("Aetna"), as surety for defendant, Tank Service, Inc. ("Tank"), in connection with the construction of two sewage treatment tanks in Genesee County, New York. Plaintiff, Process and Storage Vessels, Inc. ("Process"), claims to have completed certain subcontract work for Tank, for which it has allegedly not been fully compensated. As part of the complaint filed in this case, Process seeks to recover from Aetna the unpaid balance due from Tank, pursuant to the terms of the payment bond. Presently before the Court is Aetna's motion for summary judgment on the grounds that: (1) Process' suit was filed after the one-year limitation provision contained in the payment bond had expired; and (2) the forum selection clause contained in the bond, which stipulates that suits arising out of the bond must be commenced in New York, bars maintenance of the suit in this Court. Because the Court agrees that suit on the payment bond can only be brought in New York pursuant to the forum selection clause, it will enter summary judgment in favor of Aetna.

I. FACTS

Prior to the Fall of 1978, the village of Oakfield in Genesee County, New York, entered into a contract with Petronio Construction Company for the erection of two sewage treatment facilities. (Docket Item "D.I." 24, ex. D.) The prime contractor thereafter subcontracted a portion of the work to Lyco, a division of Remsco Associates, Inc. ("Lyco"), and Lyco in turn entered into a second tier subcontract with Tank on September 8, 1978, to perform part of the construction. (D.I. 24, ex. A.) As a condition of this subcontract, Tank was required to obtain a performance bond and a labor and material payment bond in favor of Lyco. Both bonds were issued by Aetna on September 22, 1978, naming Tank as principal, Aetna as surety, and Lyco as obligee. (D.I. 24, ex. B & C.)

By a third tier subcontract dated October 26, 1978, Tank delegated to Process all the work it had agreed to perform under its subcontract with Lyco. (D.I. 1.) Process commenced work on the project in November, 1978, and continued until June 19, 1979, when it ceased all work on the uncompleted sewage facilities. (D.I. 9, Rinehart Affidavit.) Subsequently, three different lawsuits, involving various combinations of the participants in the construction project, were filed—two in New York and one in this Court.¹ In the present suit, Process seeks damages against Tank based on breach of contract and quantum meruit. In addition, the complaint further seeks recovery from Aetna of monies owed to Process by Tank, under the labor and material payment bond executed by Aetna. Tank and Aetna have interposed various affirmative defenses which purportedly bar any recovery by Process. In addition, Tank has counterclaimed for approximately $20,000 in damages against Process, on the ground that Process failed without sufficient justification to complete the work it had agreed to perform.

The labor and material payment bond executed by Aetna has a face value of $55,619.00. (D.I. 24, ex. B.) The bond provides that parties having contracts with Tank for labor and/or material in connection with the construction of the sewage facilities in Oakfield may sue on the bond for payment of any monies due to them from Tank which have not been paid within 90 days after the services or materials are furnished. The amount of the bond would be reduced by any payment made in good faith to a claimant. Disbursements under the bond, however, are subject to several conditions. As pertinent, these conditions provide:

(3) No suit or action shall be commenced under the bond by any claimant,

(a) After the expiration of one (1) year following the date on which Principal ceased work on said subcontract, 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.

(b) Other than in a state court of competent jurisdiction in and for the county or other political subdivision of the state in which the project, or any part thereof, is situated, or in the United States District Court for the district in which the project, or any part thereof, is situated, and not elsewhere.

(Id.)

It is undisputed that Tank, the principal, ceased work on the contract prior to July 1, 1979 (D.I. 2, Rinehart Affidavit),² and that the action for recovery under the payment bond was not commenced in this Court until October 21, 1981, some fifteen months after the limitation period specified in the bond had expired. (D.I. 1.) Thus, Aetna argues that the suit on the payment bond is barred and that summary judgment must be entered in its favor. Alternatively, Aetna argues that under the forum selection clause contained in the bond, an action for recovery may be brought only in the state or federal court in which any part of the sewage treatment construction project was situated. Because the project was located in its entirety in Genesee County, New York, Aetna contends that this Court is an improper forum in which to bring this suit, and the suit must be dismissed on this independent ground.

Process does not dispute Aetna's interpretation of the limiting provisions contained in the bond. Instead, Process contends that because the bond was executed in Oklahoma, under choice of law principles, the substantive law of that state must govern the validity and construction of its terms. Because both the contractual limitation period and the forum selection clause purportedly would be void under Oklahoma law,³ Process argues that its complaint was timely filed and that suit properly may be brought in this Court, since the appropriate jurisdictional and venue prerequisites have been met. Alternatively, Process argues that Aetna is estopped from relying upon the one-year limitation period as a bar to this suit because Process refrained from bringing suit within the one-year period at Aetna's request. In addition, Process contends that the forum selection clause cannot be enforced against claimants under a bond, like Process, who were not parties to the bond negotiations and did not freely consent to the restrictive venue provision.

II. CONTRACTUAL LIMITATION PERIOD

Whether or not the contractual limitation period is enforceable as a matter of law will depend on what state's substantive law governs the terms of the bond. If, as Process argues, Oklahoma law controls, then the one-year limitation provision in all likelihood would be void, and Process' suit would be timely under the longer limitations period for contract actions provided by statute.⁴ If, however, the substantive law of Delaware, New Jersey or New York, the only other states having some practical nexus to the events in question, is to be applied, then the limitation period would be valid, since all three states allow private parties to agree contractually to a shorter limitation period to govern potential controversies. See Rumsey Electric Co. v. University of Delaware, 334 A.2d 226, 229 (Del.Super. 1975), aff'd, 358 A.2d 712 (1976); Brandywine One Hundred Corp. v. Hartford Insurance Co., 405 F.Supp. 147, 151 (D.Del.1975); V. Petrillo & Sons, Inc. v. American Construction Co., 148 N.J.Super. 1, 371 A.2d 799, 801 (App.Div.1977), cert. denied, 75 N.J. 4, 379 A.2d 235 (1977); Raymond International Inc. v. City of New York, 511 F.Supp. 773, 776 (S.D.N.Y.1981).

Obviously, the Court must look to Delaware choice of law rules to determine what substantive law to apply. Klaxon Co. v. Stentor Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941). Aetna argues that because the limitation provision is essentially a matter of procedure, affecting the remedy and not the substantive rights guaranteed by the bond, the enforceability of the provision must be determined by the substantive law of the forum, i.e., Delaware law. Process responds that under prevailing conflicts rules, the law of the place where the contract is formed determines the validity and construction of its terms. This argument presupposes that the contractual limitation provision is a substantive, rather than mere procedural, term.

Delaware courts have in the past recognized both principles upon which the parties' respective arguments are based. Procedural matters or issues relating to remedies traditionally have been determined according to the law of the forum. See e.g., Perez v. Shortline Inc. of Pennsylvania, 231 A.2d 642, 643 (Del.Super.1967), aff'd, 238 A.2d 341 (Del.Super.1968); Elect. Research Products v. Vitaphone Corp., 20 Del.Ch. 417, 171 A. 738, 748 (1934). Just as clearly, where substantive issues of interpretation of a contract are involved, the courts have in the past applied the law of the state in which the contract was made. See e.g., Oliver B. Cannon & Son Co., Inc. v. Dorr-Oliver, Inc., 312 A.2d 322, 325 (Del.Super. 1973); Norse Petroleum A/S v. Lvo Intern Inc., 389 A.2d 771, 773 (Del.Super.1978); Unit, Inc. v. Kentucky Fried Chicken Corp., 304 A.2d 320, 327 (Del.Super.1973). As Judge Schwartz of this Court recognized in Sellon v. General Motors Corp., 521 F.Supp. 978 (D.Del.1981), however, the courts of this state more recently have moved away from wooden application of these rules toward the more functional...