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It is common in sophisticated contractual agreements to list and describe detailed representations and warranties upon which the parties are relying in entering into the contract. This permits the parties to identify precisely what representations are being relied upon and which are not. Including such representations in the contract itself, and providing for specific disclaimers of any other representations or reliance thereon can effectively avoid a subsequent fraud action for fraudulent inducement or otherwise. A very comprehensive and well-reasoned decision addressing these points is the Appellate Division, First Department’s decision in HSH Nordbank A.G. v. UBS A.G., 95 A.D.3d 185, 941 N.Y.S.2d 59 (1st Dep’t 2012).
Sophisticated parties also often include in contractual documents the timing to assert a claim of breach of the contractual representations and warranties. Obviously, to the extent the parties can agree, it would be preferred to set out a consensual procedure for asserting claims for breach of representations and warranties and the timing for doing so. Importantly, however, the parties are not free to chart their own course when it comes to matters that affect the statute of limitations.
The First Department’s decision in Deutsche Bank Natl. Trust Co. v. Flagstar Capital Mkts. Corp., 653048/13, 2016 NY Slip Op 05780 (1st Dep’t Aug. 11, 2016) is an eye-opener. Deutsche involved representations and warranties as to loans underlying residential mortgage-back securities. The Court noted that the statute of limitations for breach of contractual representations and warranties is six years and accrues on the date the allegedly false representations and warranties were made. The sophisticated parties to the contracts specifically provided for a set of conditions that would have delayed the cause of action’s accrual, based upon “discovery” of the material breach of any of the representations and warranties. The cause of action for breach of contract would not accrue until the conditions had been met after the discovery of the breach.
Relying upon Court of Appeals’ decisions, the First Department flatly struck down the contractual provisions for accrual of the statute of limitations, refusing to enforce the parties’ written agreement in this regard. The Court ruled that “the accrual provision is unenforceable as against public policy, because it is tantamount to extending the statute of limitations based on an imprecise ‘discovery’ rule, which the Court of Appeals has consistently rejected in the commercial sphere.”
In summarizing the public policy of statute of limitations, the Court observed: “‘Statutes of limitation not only save litigants from defending stale claims, but also express[ ] a societal interest or public policy of giving repose to human affairs.’” Therefore, the Court observed that because of the private and public interests involved, “individual parties are not entirely free to waive or modify the statutory defense” of the statute of limitations. Parties are free to extend the statute of limitations after a cause of action has accrued, but they are not entitled to extend the statute of limitations at the inception of liability and make a promise in advance to extend the statute.
The Court then made clear: “The accrual provision in the agreement is unenforceable, despite the principle of freedom of contract upon which plaintiff relies.” The parties were not permitted to postpone the time from which the period of limitation is to be computed, and violated the principle that “New York does not apply a discovery rule to statutes of limitations in contract actions.” The Court also cited a Second Circuit decision in a similar case, Deutsche Bank Natl. Trust Co. v. Quicken Loans Inc., 810 F.3d 861, 863 (2d Cir. 2015), to support its conclusion.
These cases show that while it is certainly preferable for parties to chart their own course in sophisticated contractual agreements, they must understand the limitations to “freedom of contract.” When dealing with the statute of limitations, and the assertion of claims for breach of representations and warranties, public policy of the State of New York will void agreements extending the statute of limitations effectively more than six years. Let the parties beware.