Waiver of the Statute of Limitations in “Survival” Provisions

In this July 2006 post I said that although it’s standard to refer to “survival” of representations, it’s unhelpful to do so. I quoted language that I find much clearer.

Well, it would seem that both the traditional language and my preferred language were found wanting in a 2007 case applying California law that I saw mentioned in the ABA Section of Business Law’s “Annual Survey of Judicial Developments Pertaining to Mergers and Acquisitions.” (It’s in the February 2008 issue of Business Lawyer.)

In Herring v. Teradyne, Inc., 242 F. App’x 469 (9th Cir. 2007), the U.S. Court of the Appeals for the Ninth Circuit reversed a decision of the District Court for the Southern District of California that a “survival” provision in a merger agreement had the effect of reducing from four years to one year the statute of limitations for claims based on alleged misrepresentations in the merger agreement.

This case involved breach of contract and other claims by shareholders who sold two businesses to the defendant. In the merger agreement, the defendant had representated that it hadn’t suffered a material adverse change and that it hadn’t failed to disclose any material matters. The shareholders had claimed that those representations were inaccurate.

The merger agreement provided that those representations were subject to a one-year “survival” period. Here’s the provision in question:

11.01 Survival. The covenants, agreements, representations and warranties of the parties hereto contained in this Agreement … shall survive the Closing until the first anniversary of the Closing Date [except for claims arising from certain enumerated sections, which survive for the period specified]. No claim for indemnity under this Agreement with respect to any breach of any representations, warranties and/or covenants of Company and/or Seller shall be made after the applicable period specified in the preceding sentence and all such claims shall be made in accordance with the applicable provisions of the Escrow Agreement.

The district court held that if an agreement doesn’t provide that representations survive the closing, they are extinguished on the closing date. It concluded that where an agreement provides that representations survive, a party can sue for breaches only during the time period provided in the contract for their survival.

Here’s what the appellate court said in reversing the district court:

We also disagree with the district court’s conclusion that the survival clauses contained in the merger agreement clearly and unambiguously reduced the statute of limitations from four years to one year. Parties may contractually reduce the statute of limitations, but any reduction is construed with strictness against the party seeking to enforce it. … Here, we find no clear and unequivocal language in the survival clauses that permits the conclusion that the parties have unambiguously expressed a desire to reduce the statute of limitations.

I’m aware that California courts construe waivers strictly, but this court seems to be treating ostensibly sophisticated parties as if they were children. If a party agrees to a one-year limit, it’s implicit that without the one-year limit, that party might have had the benefit of a longer period in which to bring claims. It’s illogical to think of that party saying, after the agreement was signed, “What! The statute of limitations is longer! Why didn’t anyone tell me!”

But one can’t wish this opinion away. So how about something like this to accomplish that waiver: The parties hereby waive any right under any statute of limitations to bring any claim after that time.

Should you add such waiver language to contracts that aren’t governed by California law? I’m inclined to say yes—it’s best to keep to a strict minimum the adjustments you have to make from jurisdiction to jurisdiction.

I’m looking at this issue purely from the perspective of U.S. law. If anyone has any observations on how this might play out in non-U.S. jurisdictions, by all means post a comment.