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Alaska Energy Authority v. Fairmont Insurance Co. (1/22/93), 845 P 2d 420
Notice: This is subject to formal correction
before publication in the Pacific Reporter.
Readers are requested to bring typographical
or other formal errors to the attention of
the Clerk of the Appellate Courts, 303 K
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that corrections may be made prior to
THE SUPREME COURT OF THE STATE OF ALASKA
ALASKA ENERGY AUTHORITY, f/k/a )
ALASKA POWER AUTHORITY, ) Supreme Court File
) No. S-4862
Appellant, ) Superior Court File No.
) 3AN-90-3546 Civil
FAIRMONT INSURANCE COMPANY, ) O P I N I O N
a California Corporation, )
Appellee. ) [No. 3920 - January 22, 1992]
Appeal from the Superior Court of the
State of Alaska, Third Judicial District,
Dana Fabe, Judge.
Appearances: James F. Klasen, Assistant
Attorney General, Anchorage, and Charles E.
Cole, Attorney General, Juneau, for
Appellant. David R. Trachtenberg and Traeger
Machetanz, Oles, Morrison & Rinker, Seattle,
Washington, for Appellee.
Before: Moore, Chief Justice,
Rabinowitz, Burke, Matthews and Compton,
This case arises out of a claim by the Alaska Energy
Authority (AEA), formerly the Alaska Power Authority,
against a contractor's performance bond issued by
Fairmont Insurance Company (Fairmont). AEA appeals a
summary judgment holding that the time limitation in
the performance bond barred AEA from bringing suit. We
I. FACTUAL AND PROCEDURAL BACKGROUND
AEA entered into a contract with Wyman Construction
Company (Wyman) for the repair and reconstruction of
the Chester Lake Dam. The contract was for the sum of
$1,527,000. Fairmont executed performance and payment
bonds in the amount of $1,527,000. In June
1986 the repair to the dam was substantially complete
at considerably lower cost than the engineer's
estimate. Wyman and AEA then reached an agreement for
the design and construction of a new water line to
transport water from the dam to the community of
Metlakatla. The change order was for $1,119,000. It
gave Wyman an extension of time to November 1, 1986 to
complete the entire project.
Wyman completed the work. In November 1986 the
pipeline was pressure tested and accepted by AEA. On
November 10, 1987 final payment on the contract was
made to Wyman by AEA.
In the interim Fairmont wrote the president of Wyman,
noting that the amount of the bond was $1,527,000, but
that the final contract price was $2,676,051. Fairmont
stated that with the increase in the contract price the
bonding company was entitled to an additional premium
to cover the overrun. Fairmont later collected the
In August 1988 a penstock support installed into the
underlying rock failed. AEA claimed the failure was
due to improper grouting of anchors. At the request of
AEA, Wyman repaired the support.
In December 1988 AEA notified Wyman and Fairmont that
lab results on the failed support indicated the grout
material used to install the rock anchors was not mixed
as required. AEA feared all of the anchors might be
deficient for the same reason. In July 1989 further
testing by AEA confirmed that the process used for the
installation of the failed anchors was not acceptable.
AEA concluded that all similarly installed anchors were
Wyman failed to respond to AEA's request to repair the
anchors. In August AEA declared Wyman in default of
its contract and called upon Fairmont to remedy the
default. In October Fairmont wrote AEA stating that
tests had been conducted only on the failed support,
and that no tests showed deficiencies actually existed
in any other supports. Fairmont suggested that AEA was
premature in finding Wyman in default.
In February 1990 Fairmont concluded that it was not
liable on the bond because of the time limitations in
the bond.3 Fairmont filed a complaint against AEA for
declaratory relief. AEA filed a counterclaim based on
Fairmont's refusal to honor its bond. In due course
Superior Court Judge Dana Fabe granted Fairmont's
motion for summary judgment.
AEA moved for reconsideration of the summary judgment.
Also it filed a First Amended Answer and a counterclaim
for breach of the duty of good faith and fair dealing.
Judge Fabe denied AEA's motion for reconsideration,
entered final judgment in favor of Fairmont, and
awarded Fairmont $15,000 for attorney's fees. This
II. STANDARD OF REVIEW
The superior court granted summary judgment to Fairmont
based on the two-year limitation period in the bond.
This is a matter of contract interpretation.
Interpretation of a contract is a question of law for
which the reviewing court uses independent judgment.
Jackson v. Barbero, 776 P.2d 786, 788 (Alaska 1989).
"On questions of law, this court is not bound by the
lower court's decision; . . . Our duty is to adopt the
rule of law that is most persuasive in light of
precedent, reason, and policy." Guin v. Ha, 591 P.2d
1281, 1284 n.6 (Alaska 1979).
A. THE TWO-YEAR TIME LIMITATION IN
THE PERFORMANCE BOND.
The performance bond includes the following clause:
Any suit under this bond shall be
instituted before the expiration of two years
from the date on which final payment under
the [c]ontract falls due.
The superior court found the final payment on the
contract was paid on November 10, 1987. No law suit
was filed on the bond before November 10, 1989. As AEA
failed to sue within two years of the final payment,
the superior court ruled AEA's suit on the bond was
AEA asserts that the time limitation did not begin to
run until Fairmont denied liability on the claim.4 In
Fireman's Fund Ins. Co. v. Sand Lake Lounge, Inc., 514
P.2d 223, 227 (Alaska 1973), this court concluded that
insurance clauses requiring suit to be filed within
twelve months of "the inception of the loss"mean that
suit must be filed within a year after notification of
the decision to deny coverage.
In Fireman's, the court drew upon the Uniform
Commercial Code (UCC)for its analysis. Under the UCC,
"parties may reduce the period of limitation to not
less than one year"from the time the cause of action
accrues. Id. at 227, quoting AS 45.05.042(a)
(renumbered as AS 45.02.725(a)). The court reasoned
that the cause of action does not accrue until the
claim is denied, and the contract may not limit the
right to bring suit to less than a year from that time.
AEA points out that its claim was not denied until
February 1990. AEA filed its counterclaim to the
declaratory judgment action in July 1990, only six
months after the "claim arose." AEA argues that the
contractual time limit may not limit the ability to
bring suit to less than one year from the date the
claim is denied.
Fairmont argues that the two-year limitation clause is
clear and unambiguous. The bond does not create a
limit from the date a claim arises, but from the date
of the final payment on the contract. Fairmont argues
that as this is a performance bond, the bond's
liability is limited by the date the contract is
completed. Fairmont claims there is no dispute that
"final payment occurred November 1987." Fairmont
asserts AEA did not institute suit within two years of
the final payment, and therefore its exposure had
We agree with Fairmont that the time limitation to
bring suit on the bond began running on the day of the
final payment. The time limitation provides for two
years after the final payment on the contract to file
suit if any problems are discovered with the project.
However, our prior decisions have held contractual time
limitations to bring suit will not be enforced without
some showing of prejudice. Estes v. Alaska Ins. Guar.
Ass'n, 774 P.2d 1315 (Alaska 1989). In Estes a music
store was destroyed by fire. Soon after the fire,
Estes submitted proof of loss. Ten months later the
insurance company denied Estes' claim after an
investigation. Estes then waited one year and seven
days to file a law suit. Id. at 1316. The insurance
company moved for summary judgment based upon the
failure to comply with a policy provision requiring any
suit on the policy to be commenced "within one year
after the loss occurs." The trial court granted the
In Estes we held that the "time limit on commencement
of suit clauses, . . . should  be reviewed on the
basis of whether [its] application in a particular case
advances the purpose for which [it was] included in the
policy." Id. at 1318. We concluded that the purpose
of the clause was to protect the insurance company from
prejudice due to delay. Id. Since the insurance
company had not shown it was prejudiced by the delay in
filing the suit, we reversed the grant of summary
judgment. Id. at 1320.
In this case AEA claims the purpose of the clause is to
1) give AEA time to file suit, and 2) give notice to
the surety that there is a problem with the contract.
AEA argues that Fairmont was notified of the potential
claim as early as December 21, 1988, when Wyman was
notified that AEA assumed the anchors were defective.
In July 1989 Wyman and Fairmont were notified that
tests confirmed AEA's belief that the anchors were
improperly installed. In August, after Wyman failed to
respond to AEA's request to repair the pipeline, AEA
declared Wyman in default and called upon Fairmont to
remedy the default. Fairmont requested that more
testing be done, and AEA complied. Fairmont finally
denied the claim only after two years had passed from
the final payment.
Fairmont was put on notice and was investigating the
claim prior to expiration of the two year limit. The
purpose of the clause was satisfied. Fairmont was not
prejudiced by a delay in filing suit. AEA
substantially performed by notifying Fairmont in a
timely fashion. Fairmont was not harmed by AEA's
attempt to comply with Fairmont's requests for further
testing prior to filing a law suit.
Fairmont argues that the general rule of contracts,
upholding the validity of time limitations, should be
applied. "If held invalid, it must be on the ground
that the terms are unconscionable and that unfair
advantage has been taken of a claimant whose bargaining
position was inferior." Fireman's, 514 P.2d at 226,
quoting Arthur L. Corbin, Contracts 218 at 312
(1963). The reason not to follow the general rule in
Estes was that the insurance contract was dictated
primarily by the insurance company. Estes, 774 P.2d at
1317. "[W]hen the element of bargain is not present,
the authority of the `stipulated' provision becomes
problematic." Id. at 1318.
Fairmont argues that the rationale of Estes is
inapplicable to this case because AEA, not Fairmont,
drafted the bond and the time limitation. AEA had time
to file a suit prior to the expiration of the two-year
limit and failed to do so. Fairmont argues that there
is no reason for the court to give AEA additional time
to sue on the bond.
Fairmont's argument distinguishing Estes is
unpersuasive. The language of this bond is practically
identical to the American Institute of Architects
standard performance bond form A311, which has been
used by the performance bond industry for over twenty
years. Adoption of the industry norm in the bond does
not make Estes distinguishable. A limitation on a
commencement of suit clause should be enforced only
when it serves the purpose for which it was included in
the contract. Estes, 774 P.2d at 1320. A formalistic
application of a contractual time limitation will not
bar the right to sue absent some showing of prejudice.5
In this case Fairmont was well aware of the claim
before the time limitation had expired. Fairmont was
engaged in the process of investigating the claim as
early as February 1989. A requirement that suit be
filed while the process of investigation is proceeding
will not be enforced without a showing of prejudice.6
The superior court thus erred in granting summary
The failure to file suit within the time limitation of
the contract does not bar the claims of AEA without a
showing of prejudice by Fairmont. The grant of summary
judgment barring AEA's claim pursuant to the
performance bond is REVERSED. As Fairmont is no longer
the prevailing party, the grant of attorney's fees is
3. Fairmont also claims the change in the contract to
build the pipeline was outside the scope of the bond.
AEA claims Fairmont accepted the change by accepting
additional premiums. Fairmont also claims it is
relieved of liability because AEA failed to follow
state procurement regulations. AEA claims it did not
violate state procurement regulations and even if it
did, Fairmont would not be relieved of liability.
Because the superior court did not reach these issues,
they are not properly before the court.
4. AEA also argues that "final payment"should be
interpreted to include payments made by Wyman. Under
the contract Wyman was to pay for support services,
utilities, tools and materials. Thus when Wyman
returned to make repairs in September 1988 it made
payments and AEA complied with the limitation by filing
suit within two years. But this contract called for
Wyman to complete a pipeline and for AEA to pay money.
It is not reasonable to interpret payment to include
AEA argues that the clause "final payment falls due"
means amounts due when all work required by the
contract is completed. Because AEA found Wyman had not
completed the grouting pursuant to the contract, final
payment has not yet fallen due. This interpretation
would allow a suit at any time in the future if AEA
discovered a defect. This would defeat the purpose of
a limitation. Because we interpret contracts to give
effect to all terms, we reject AEA's argument.
5. Although not argued by AEA, we note that this holding
is consistent with common law of contracts. While the
failure to bring suit within two years is a breach of
the contract, the breach is not material and is called
a partial breach. A breach by non-performance gives
rise to a claim for total breach only if it
substantially impairs the value of the contract to the
injured party. Restatement (Second) of Contracts
243(4) (1981). "For a partial breach the injured party
can maintain action at once; but he is not permitted to
stop further performance." Arthur L. Corbin,
Contracts, 946 at 811 (1951). "Although every breach
gives rise to a claim for damages, . . . [t]he injured
party's remaining duties under the contract are not
necessarily discharged." Restatement (Second) of
Contracts 236 cmt. b (1981).
The time limitation in the bond creates a mutual duty,
requiring AEA to notify Fairmont, and requiring
Fairmont to guarantee the performance bond for two
years after the final payment. The time limitation in
the performance bond is valid. However, AEA's breach
of this duty has not harmed Fairmont. As the value of
the contract was not impaired, this is only a partial
breach. Fairmont is not relieved of the responsibility
it contracted to undertake.
6. AEA argues that Fairmont waived its right to rely upon
the time limit by suggesting AEA was premature in
finding Wyman in default. AEA also claims Fairmont
should be estopped from relying on the time limitation
after requesting AEA to investigate further before it
responded to AEA's claim. Fairmont claims it notified
AEA it was reserving all rights during the
investigation. Fairmont argues there is no evidence of
waiver or right to estoppel. Because we conclude the
time limit does not bar AEA's claim, we do not reach
the question whether Fairmont's general statement
reserving rights in a letter requesting further
testing, sent just eleven days before the expiration of
the time limitation, precludes a finding of waiver or
7. AEA also appeals the dismissal of its amended
counterclaim. A trial court's disposition of a motion
to amend a complaint is reviewed for abuse of
discretion. United States Fire Ins. Co. v. Schnabel,
504 P.2d 847, 854 (Alaska 1972). On remand the
superior court is free to exercise discretion and
decide whether to accept the amended counterclaim. We
note that AEA was not entitled to amend its complaint
without leave of the court after Fairmont had moved for
summary judgment. The superior court was within its
discretion to refuse a new counterclaim a full month
after the court granted summary judgment. "It is a
long established maxim of equity jurisprudence that
parties may not sleep upon their rights." Shooshanian
v. Wagner, 672 P.2d 455, 458 (Alaska 1983).