Kevin Schlosser Authors, "Court of Appeals Voids Contractual Extension of Statute of Limitations Arising from Breach of Representations and Warranties"

Parties have the opportunity to structure their respective rights in a contract. With respect to common law fraud claims, there are abundant opportunities to limit and/or prevent claims of fraud that may be attempted to be brought after the contract has been consummated. I have written often about cases addressing contractual disclaimers that can avoid subsequent fraud claims, including representations that a party did not rely on any extra-contractual representations to enter into the contract.

The New York Court of Appeals has just reminded us, however, that parties to a contract do not have unlimited liberty to craft their own remedies. In a blow to the freedom to contract, the Court in Deutsche Bank Natl. Trust Co. v Flagstar Capital Mkts., 2018 NY Slip Op 06851 (NY Decided October 16, 2018), affirmed the First Department’s decision rendering void a contractually-set accrual of the period in which to bring a claim for breach of contractual representations and warranties that would have extended the time to sue. I wrote about the First Department’s decision in this case when it was rendered in August 2016.

Deutsche Facts

In Deutsche, the sophisticated parties set forth certain representations and warranties in their contract, and also provided for the procedural mechanism for how any claim for breach of those representations and warranties would be brought. In relevant part, the contract identified the steps that would have to occur as follows:

Any cause of action against the Seller relating to or arising out of the breach of any representations and warranties made in Subsections 9.01and 9.02 shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the Seller to cure such breach, substitute a Qualified Substitute Mortgage Loan or repurchase such Mortgage Loan as specified above and (iii) demand upon the Seller by the Purchaser for compliance with this Agreement.

Although it was undisputed that the representations and warranties were made effective on the date of the contract, and therefore would have been breached on that date, plaintiff argued that its cause of action for breach of those representations and warranties did not start to run, or accrue, until each of the above contractual items had occurred. Since those items did not occur until after the contract was entered, the cause of action for breach would have been extended past the six-year statute of limitations for breach of contract, which ordinarily accrues from the date of breach of the contract. The Court of Appeals in Deutsche acknowledged: “In New York, the default accrual rule for breach of contract causes of action is that the cause of action accrues when the contract is breached (see ACE, 25 NY3d at 593-594, citing Ely-Cruikshank Co. v Bank of Montreal, 81 NY2d 399, 403-404 [1993]).”

The Court then distinguished the special treatment afforded to common law fraud claims with respect to when the statute of limitations accrues: “’[E]xcept in cases of fraud where the statute expressly provides otherwise, the statutory period of limitations begins to run from the time when liability for wrong has arisen even though the injured party may be ignorant of the existence of the wrong or injury’ (Ely-Cruikshank Co., 81 NY2d at 403 [internal quotation marks omitted]). This Court has ‘repeatedly rejected accrual dates which cannot be ascertained with any degree of certainty, in favor of a bright line approach,’ and for that reason, we do not ‘apply the discovery rule to statutes of limitations in contract actions’ (ACE, 25 NY3d at 593-594 [internal quotation marks omitted]). ‘To extend the highly exceptional discovery notion to general breach of contract actions would effectively eviscerate the Statute of Limitations in this commercial dispute arena’ (Ely-Cruikshank Co., 81 NY2d at 404).”

Court Voids Contractual Accrual Extending Statutory Period

The Court then emphasized the strong public policy underlying statutes of limitations, observing that they are not merely personal defenses. Commenting on its earlier decision in John J. Kassner & Co. v City of New York (46 NY2d 544 [1979]), the Court noted:

The Court observed that the statute of limitations is not only a personal defense but also “expresses a societal interest or public policy of giving repose to human affairs’ ” (id. at 550, quoting Flanagan v Mount Eden Gen. Hosp., 24 NY2d 427, 429 [1969]). Although contracting parties may, therefore, agree to a shorter limitations period, public policy restricts their ability to make an agreement extending the statutory period before a claim accrues (see id. at 550-551). We explained that “[i]f the agreement to waive or extend the Statute of Limitations is made at the inception of liability it is unenforceable because a party cannot in advance, make a valid promise that a statute founded in public policy shall be inoperative” (id. at 551 [internal quotation marks omitted]). Furthermore, if the agreement to extend the statute of limitations “is made after the cause of action has accrued,” it is enforceable only if it complies with the requirements of General Obligations Law § 17-103, which not only mandates that the agreement be made after the cause of action has accrued, but also allows renewal of the statute of limitations only “for the applicable period, unless a shorter period is specified” (Kassner, 46 NY2d at 551).

The Court indicated that it had two principal issues to decide: One, did the above provision create a condition precedent to performance of the contract – that is, apart from the falsity of the representations and warranties, whether defendant’s contractual obligation in connection with those representations and warranties was conditioned upon the above notice to cure received from plaintiff, and the failure to cure, only upon which a breach could occur (and the statute of limitations could have begun to run). Two, even if there was no such condition precedent, were the parties legally permitted to extend the time to sue based upon a defined accrual of the statute of limitations. The Court answered both questions in the negative.

On the issue of whether there was a condition precedent to performance, the Court interpreted the particular contractual language and decided that the parties had not done a sufficient job of clearly indicating that it was the performance of the items provided rather than the breach of the representations and warranties that controlled.

On the accrual question, the parties disputed the meaning of the contractual provision in question. Defendant contended that despite the “shall accrue” language in the accrual clause, the parties did not intend to delay accrual of a breach of contract cause of action arising from a breach of the representations and warranties. Rather, defendant asserted that the parties merely intended to create procedural conditions precedent to suit. Plaintiff, by contrast, contended that the accrual clause manifested the intent of the parties that a cause of action for a breach of the representations and warranties “comes into existence (accrues) — only after the conditions of the Accrual Clause are complete,” meaning that the statute of limitations is not triggered until that time.

The Court stated that it was not necessary to decide which party was right “because assuming for the sake of argument that plaintiff’s alternative interpretation is correct, the accrual clause cannot be enforced in that manner because it conflicts with New York law and public policy.”

Commentary

While the Court voided the specific contractual accrual clause in that case, a fair question is whether any attempt to craft an accrual that effectively extends the statute of limitations may survive. The Court’s comment on the two dissenting opinions may provide some hints:

We respectfully disagree with our dissenting colleagues that a breach of the representations and warranties was only a “technical” breach of the MLPWA and that defendant’s obligation to cure or repurchase non-conforming loans constituted a separate obligation of future performance (see J. Rivera dissenting op at 8-9), or that defendant agreed to a warranty against future default of non-conforming loans, i.e., a guarantee of future performance of defective loans, that persisted for the life of each underlying loan (see J. Wilson dissenting op at 5-11). Plaintiff expressly conceded that it “is not asserting here that the Accrual Clause is a guarantee of the loans’ future performance,” and plaintiff did not argue that we should overturn ACE or that its cure or repurchase obligations constituted a separate obligation of future performance. Rather, plaintiff contended that the accrual clause created a substantive condition precedent and did not violate public policy. “This Court generally refrains from addressing issues not argued by the parties, as we have recognized that, to do otherwise, would be unfair to the litigants, who expect us to decide their appeals on rationales advanced by the parties, not arguments their adversaries never made’ ” (Matter of 381 Search Warrants Directed to Facebook, Inc. [New York County Dist. Attorney’s Off.], 29 NY3d 231, 247 n 7 [2017], quoting Misicki v Caradonna, 12 NY3d 511, 519 [2009]).

In addition, these interpretations of the [contract] are not supported by the plain language of that agreement, or by the accrual clause itself. As we have explained, the [contract] provides that defendant’s cure or repurchase obligations are plaintiff’s “sole remedies . . . respecting a breach of the foregoing representations and warranties,” and the accrual clause applies to “[a]ny cause of action . . . relating to or arising out of the breach of any representations and warranties.” We decide this appeal based solely on the contract language before us and the arguments the parties have made regarding that contract language.

With that understanding, our holding today has no impact on contracts creating true substantive conditions precedent to a party’s performance (see ACE, 25 NY3d at 597-598; Kassner, 46 NY2d at 550) or separate promises of future performance (see ACE, 25 NY3d at 594-596; Bulova Watch Co. v Celotex Corp., 46 NY2d 606, 610-611 [1979]), nor does it affect contractual provisions that comply with General Obligations Law § 17-103 or “specify[] a shorter, but reasonable, period within which to commence an action” (Kassner, 46 NY2d at 551). We simply hold that, to the extent the parties intended, “at the inception of the contract” and before the contract had been breached, to postpone accrual of a breach of contract cause of action to a subsequent uncertain date, the accrual clause “may not serve to extend the Statute of Limitations” in that way (id. at 552).

While the Court did leave open the door to allowing a contractual accrual if contract language was more precise (and specifically argued and relied upon to enforce it), any party who has a potential claim for breach of representations and/or warranties in a contract would be well advised to bring the claim within the standard six-year period from the date the contract was entered into (or shorter contractual period), and avoid trying to extend the time period through crafty contract language. Risking that the Court may ultimately uphold the extended longer period would appear to be dangerous, no matter how precise the language is written.

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