June 5, 2019

Indemnification: Choose Your Forum With Care!

While most reps & warranties in deal agreements survive for a relatively short period of time following the closing, many of those agreements provide for extended survival periods for so-called “fundamental reps.”  This Torys memo reviews the maximum periods that reps can survive under the laws of jurisdictions including Delaware, New York & Ontario. This excerpt demonstrates that the length of this period can vary quite a bit:

In Ontario, there is a 15-year ultimate limitation period which commences on the day that an act or omission takes place. This means that, no matter what language is used in the contract or when the breach of a representation, warranty or covenant was discovered, a claim cannot be brought after the 15-year limitation period.

In Delaware, there is caselaw to suggest that providing for “indefinite” survival of representations and warranties would have the effect of extending the three-year statute of limitations to twenty years. As New York law does not permit any extension, regardless of contractual language to the contrary, the six-year limit will apply.

Since that’s the case, many lawyers would say that this is another reason to pay close attention to the governing law clause of the agreement.  But the memo says in this case, that’s not always enough:

A carefully negotiated and clearly drafted survival clause may ease a buyer’s worries (at least for agreements governed by Ontario or Delaware law). However, as statutes of limitation are considered procedural, they are generally governed by the law of the forum jurisdiction.

This means that, in order to have the benefit of a longer limitations period under Ontario or Delaware law, buyers should also select Ontario or Delaware as their choice of forum. Otherwise, parties could end up litigating in another jurisdiction, such as New York, that insists on applying its own limitations period despite the governing-law provision.

John Jenkins