January 16, 2023 | By Kevin Mehi and Troy Baril
A common feature in many share or asset purchase agreements is a contractual survival period for representations and warranties. However, these contractual survival periods are often shorter than the limitation periods set out in applicable provincial legislation.[1] This blog post explores whether a contractual survival period which is shorter than a statutory limitation period is valid, or whether it violates such limitation period in Ontario, Manitoba, Saskatchewan, Alberta and British Columbia.
(This blog post is the second in a series of three blog posts discussing how parties can agree to modify applicable time limits for bringing lawsuits against one another. For further reading, please visit the “Blogs and Insights” page on our website.)
CONTEXT
In M&A transactions, vendors are commonly asked to provide a number of representations and warranties about the shares or assets being sold. Often, vendors will seek to limit the time period during which those representations and warranties are given, and/or in which a claim relating to those representations and warranties can be made. Accordingly, it is not uncommon for commercial purchase contracts to contain “survival” clauses, which typically provide that some (or all) of a vendor’s representations and warranties are given only for a finite period of time following the closing of the transaction.
Parties to a transaction can negotiate the length of this survival period (including negotiating different survival periods for different types of claims, such as longer periods for breaches of representations and warranties which are deemed to be fundamental), with parties often agreeing on survival periods which are shorter than applicable statutory limitation periods. For example, it is not uncommon for a vendor to provide a representation and warranty for a period of one year following closing, or to require a purchaser to bring a claim within one year following closing, despite a basic two-year limitation period.
APPLICABLE CASE LAW
As a preliminary comment, we note that the law regarding the validity of these shorter contractual survival periods has not been expressly addressed by Courts in each of the five provinces noted above. However, courts in each of Alberta and Ontario have provided some useful commentary on this issue.
Alberta and Ontario
In NOV Enerflow ULC v. Enerflow Industries Inc., 2015 ABQB 759 (“NOV Enerflow”), the Court of Queen’s Bench of Alberta stated: “[e]nforcing expiry dates on representations and warranties does not offend the Limitations Act (Alberta).” Citing its earlier decision in Edmonton (City) v TransAlta Energy Marketing Corp, 2008 ABQB 426, the Court continued by stating: “imposing expiry dates on representations and warranties in a contract does not violate the Limitations Act (Alberta), s. 7(2), so long as the expiry date applies to specific representations and warranties, and not to any or all claims that may arise.”
In its subsequent decision in Jones v. Temple, 2018 ABQB 606 (“Jones”), the Court of Queen’s Bench of Alberta further distinguished two possible scenarios relating to the imposition of expiry dates on representations and warranties. The first scenario occurs where a purchase agreement requires a claim to be made within the applicable survival period (as was the case in NOV Enerflow). In this first scenario, a claim may be barred if not brought within the contractual survival period, regardless of any applicable statutory limitation period. The second scenario occurs where a purchase agreement only requires the claim to arise during the survival period. In this second scenario, the statutory limitation period begins to run upon discovery of the claim. As a result, a plaintiff does not necessarily need to bring a claim within the contractual survival period (as long as the claim arose within that contractual survival period). Whether the first or second scenario applies to any given purchase agreement depends on the specific wording of the relevant agreement.
Both the NOV Enerflow and Jones decisions were subsequently cited and applied by the Superior Court of Justice for Ontario in 2250898 Ontario Inc. v. Mukelova et al, 2022 ONSC 3075 (“2250898”). Accordingly, it appears these principles will apply with some certainty in Ontario.
Saskatchewan and British Columbia
Courts in Saskatchewan and British Columbia do not appear to have definitively decided this issue. However, the decisions in NOV Enerflow, Jones, and more recently, 2250898, may be persuasive in those provinces.
Manitoba
Meanwhile, in Virden Mainline Motor Products Limited v. Murray et al, 2018 MBCA 82 (“Virden Mainline”), the Manitoba Court of Appeal found a warranty claim to be barred based on the survival period set out in the relevant contract. In its reasoning, the Court stated: “[i]t is a question of contractual interpretation as to whether the parties have included in the contract a provision meant to limit the right to sue in tort or contract.”
While this case appears to align with the jurisprudence in Alberta and Ontario, readers should be cautioned the Virden Mainline case was decided under Manitoba’s previous limitation of actions regime, which was silent on whether statutory limitation periods could be shortened in Manitoba. Notably (and as discussed in the first part of this blog series), section 24(1) of The Limitations Act, C.C.S.M. c. L150, which came into force on September 30, 2022 (i.e. after the Virden Mainline decision), states that the basic limitation period in Manitoba cannot be shortened by agreement. Nonetheless, the Virden Mainline decision, as well as the decisions in NOV Enerflow, Jones, and 2250898, may possibly be persuasive in Manitoba.
Other Considerations
Commercial parties should be aware that the enforceability of any contractual survival period for representations and warranties will depend on several factors, including the nature of the representations and warranties, the conduct of the parties, the wording of the particular clause, the relative sophistication of the contracting parties, and the applicability of any specific legal doctrines which may affect enforceability (such as capacity, duress, undue influence, and so on).
We recommend obtaining legal advice before entering into any contract containing a contractual survival period for representations and warranties. Should you have any questions about varying limitation periods in a commercial contract, please do not hesitate to contact our firm.
Disclaimer
This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice.
[1] As highlighted in the first part of this blog series, applicable legislation provides for a basic limitation period of two years in each of Ontario, Manitoba, Saskatchewan, Alberta, and British Columbia. To read more about varying or modifying these basic limitation periods, click here.