In Western Filter Corporation v. Argan, Inc. (see 2008 U.S. App. LEXIS 18147), the 9th Circuit Court of Appeals, in reversing the district court’s grant of summary judgment in favor of the sellers, reached the conclusion under California law that a provision in a stock purchase agreement limiting the survival of representations and warranties to one year after closing did not mean that claims for breaches of representation and warranties must be asserted, if at all, within one year after the closing. This decision is consistent with the 9th Circuit’s decision in Herring v. Teradyne, Inc. (242 F. App’x 469, 9th Cir. 2007).

Recommendation

Because of strict construction rules in other states (including New York) and potential public policy issues in some states (including Florida) with having time claim periods shorter than applicable statue of limitations, we think that – at least for sellers – the acquisition agreement should provide that the reps and warranties survive the closing but that claims under the indemnity may be made only within the specified period, making sure that the indemnity is stated to be the exclusive post-closing remedy. A clearly stated provision that restricts survival to a specified period may be just as effective absent the public policy issues. Finally, sellers may want to add the qualifying phrase “whether or not a longer period would be permitted by applicable law” to avoid any assertion of ambiguity.

Analysis of Decision

Briefly stated, the 9th Circuit held that while California law permits parties to agree to limit indemnification claim periods to ones shorter than the otherwise applicable statute of limitations, under California law (acknowledging that California law is different than at least some other jurisdictions), such limitations are construed strictly. (New York also has a strict construction rule for limitations on contractual limitations on statutes of limitation.) This imposed a felt duty upon the 9th Circuit to search for ambiguity in the survival clause. The court found ambiguity—concluding that a reasonable reading of the clause was “the one-year limitation serves only to specify when a breach of the representations and warranties may occur, but not when the action must be filed.”

The reasonableness of this reading of the clause is questionable: representations and warranties are breached if at all when made at the signing of the acquisition agreement or re-made or “brought down” at the closing. So, unless the sellers were making additional representations after the closing, it is unclear how they could be breached during the one year survival period.