Recent decisions in the courts of Delaware and Ontario add to our understanding of how limitations statutes can affect survival clauses in those jurisdictions.
In the past few years, two Delaware Court of Chancery decisions – GRT, Inc. v. Marathon GTF Technology, Ltd. and ENI Holdings, LLC v. KBR Group Holdings, LLC – have focused on the enforceability of so-called “survival clauses” in commercial agreements. Survival clauses are typically created in response to statutes of limitations, which require that claims for breach of representations and warranties in (for example) an agreement for the purchase and sale of a business must be pursued within a specific time-frame. Parties to commercial contracts of this type often try to contract out of the statutory limitation by drafting clauses that stipulate that the representations and warranties (or some subset of them) “survive” for either a shorter or longer period of time.
The court in ENI Holdings confirmed that such survival periods can be valid where they shorten the statutorily mandated 3-year limitation period that applies in Delaware. But what if a survival clause purports to extendDelaware’s limitation period? While both ENI Holdings and GRT dealt with abbreviated limitations, the court in the latter case clearly stated, albeit in dicta, that “a survival clause that states generally that the representations and warranties will survive closing, or one that provides that the representations and warranties will survive indefinitely, is treated as if it expressly provided that the representations and warranties would survive for the applicable statute of limitations.”
This does not mean that representations and warranties can never be enforceable beyond Delaware’s 3-year limitation period. U.S. counsel and commentators generally suggest a range of options, from using a “specialty contract”(i.e. a contract under seal which, under Delaware law, is subject to the 20-year common law limitation period) to amending the choice of law provision and selecting a jurisdiction with a longer statute of limitations period for breach of contract claims (New York, for example, has a 6-year limitation period which cannot be extended by contract, while California has a 4-year limitation period that can be extended or waived by contract). Each alternative will have its pluses and minuses, depending on the individual interests of the parties involved and on the circumstances of the transaction.
Comparison with Ontario
In Ontario, the legal framework is closer to that of California than Delaware. Following amendments to the Limitations Act, 2002 that came into force in 2006, parties to “business agreements” can include survival provisions which shorten, extend, suspend or entirely exclude a statutory limitation period. This includes the 2-year basic limitation period (which begins to run on the day the claim is discovered) as well as the 15-year ultimate limitation period (which commences on the day an act or omission takes place, irrespective of discovery).
Ontario courts have recently issued several rulings relating to survival clauses. The Superior Court’s 2012 decision in Bell Canada v. Plan Group Inc. took what might be described as a hardline approach. The judge in that case held that a survival clause could override a statutory limitation only where the intention of the parties to do so was evidenced by “clear and express language” including an explicit reference to the limitations statute whose limitation the parties wished to avoid as well as clear and explicit language expressing that intention. However, the Ontario Court of Appeal, in its 2013 decision in Boyce v. The Co-Operators General Insurance Co., overturned a Superior Court ruling that had purported to apply Bell Canada. In so doing, the Court of Appeal rejected the Bell Canada analysis and suggested a more lenient standard, i.e. that the agreement (i) describe a limitation period in “clear language”, (ii) set out the scope of that limitation and (iii) make clear that it applies irrespective of other limitation periods. Under this doctrine, there appears to be no general requirement to identify the statutory limitations that the survival clause is intended to avoid. It is interesting to compare this to ENI Holdings, in which the Delaware court held that a survival clause need not be “particularly ‘clear or explicit’” with respect to its intention to shorten the standard limitation period because survival clauses are understood by “convention” to have precisely that purpose.
Prior to the Limitations Act, 2002 (which, despite its name, took effect only in 2004), Ontario’s statutory limitations regime functioned much in the same way as Delaware’s does now. There was a six-year limitation period and a separate 20-year limitation period for “specialty debts” (debts due or acknowledged to be due on account of an instrument under seal) which provided commercial parties the flexibility to get around the statutory constraint. This separate “specialty debts” limitation period became obsolete, however, with the 2004 amendments, and as a result it was abolished. The commercial rationale for using sealed instruments in Ontario is now limited to avoiding the need for consideration and invoking the “sealed contract rule” (which states that where an agent signs a contract for an undisclosed principal, the undisclosed principal is shielded from, and the agent has, liability).
Other Canadian jurisdictions
It should be noted that the analysis of Canadian law in this post applies to Ontario only and that limitations law varies among Canada’s other jurisdictions in much the same way that it does among the various American jurisdictions. In Alberta, for example, the situation is the reverse of Delaware’s: commercial parties are allowed to extend, but not to shorten, that province’s two-year statutory limitation period. Other provinces’ limitations statutes take a range of approaches, including remaining silent on the issue, as is the case with the British Columbia and Nova Scotia statutes. Under article 2884 of the Civil Code of Quebec (CCQ), “No prescriptive period other than that provided by law may be agreed upon.” While parties cannot therefore provide for a limitation (“prescriptive”) period that is longer or shorter than that provided for in the CCQ, it may be possible to achieve what is effectively a similar result by creating rights and remedies that have effect only in the event that certain future conditions are fulfilled (or not fulfilled), rather than attempting to enforce existing representations and warranties beyond the period permitted under the CCQ.
Tomas van der Heijden