Will your indemnity survive the apocalypse?

You are buying a company and are concerned about hidden liabilities, so the seller has agreed to give certain representations and warranties to address your concerns. You are, however, worried that by the time you discover a breach of these representations and warranties, the seller will no longer be required to indemnify you. Can you negotiate for these representations and warranties to survive beyond statutory limitation periods?

Survival clauses specify how long after the closing of a transaction parties may make a claim for indemnification based on a breach of representations, warranties and covenants. Survival periods often expire before statutory limitation periods, restricting the time available for making a claim. There are circumstances, however, where parties may instead wish to include a longer survival period for certain representations and warranties and to extend the limitation period for making claims when they are breached. Longer survival periods are typically provided for representations and warranties for which a breach may take longer to discover, such as environmental representations and warranties.

In Ontario and Delaware, parties to a contract can agree to extend statutory periods of limitation. Under Ontario law, parties to “business” agreements can include survival provisions which extend or vary the two-year basic limitation period. In Delaware, the state legislature has provided contracting parties the right to extend the statute of limitations for breach of contract from three years to as long as twenty years (for written contracts over US$100,000). In New York, however, the courts have held that parties cannot contractually override or extend the state’s six-year statute of limitations for breach of contract.

Parties sometimes provide that certain fundamental representations and warranties will survive “indefinitely” - but representations and warranties cannot survive forever. In Ontario, there is a 15-year ultimate limitation period which commences on the day that an act or omission takes place. This means that, no matter what language is used in the contract or when the breach of a representation, warranty or covenant was discovered, a claim cannot be brought after the 15-year limitation period. In Delaware, there is caselaw to suggest that providing for “indefinite” survival of representations and warranties would have the effect of extending the three-year statute of limitations to twenty years. As New York law does not permit any extension, regardless of contractual language to the contrary, the six-year limit will apply.

Parties may also try to agree to delay when a breach of a representation, warranty or covenant occurs in order to extend statutory limitation periods. Purchase agreements occasionally provide that any cause of action relating to a breach of any representation, warranty or covenant will “accrue” only upon discovery of the breach and the breaching party’s failure to cure, and therefore that is the time when limitation periods begin to run. As with extending survival periods, New York caselaw indicates that pre-accrual tolling provisions will not typically be upheld whereas Delaware and Ontario courts will show greater deference to the intentions of the parties.

A carefully negotiated and clearly drafted survival clause may ease a buyer’s worries (at least for agreements governed by Ontario or Delaware law). However, as statutes of limitation are considered procedural, they are generally governed by the law of the forum jurisdiction. This means that, in order to have the benefit of a longer limitations period under Ontario or Delaware law, buyers should also select Ontario or Delaware as their choice of forum. Otherwise, parties could end up litigating in another jurisdiction, such as New York, that insists on applying its own limitations period despite the governing-law provision.