Representations & Warranties: Limitation Period

The documentation package containing representations and
warranties, covenants and indemnities are quite common in corporate transactions
involving Indian companies, particularly those pertaining to acquisitions,
investments and corporate finance. However, despite their popularity, they have
not been the subject matter of judicial consideration so as to provide some guidance
as to how they may be interpreted by the Indian courts.
Some specific questions, however, have arisen in other
jurisdictions. The Harvard Law School Forum on Corporate Governance and
Financial Regulation carries a recent
discussing a court decision on the question as to when the
representations and warranties in an agreement are said to have been made so as
to compute the limitation period. The details are provided therein:
In an important decision last week, a New York appellate court ruled that
claims for breach of representations and warranties made in connection with
residential mortgage-backed securities (RMBS) accrue when the representations
and warranties are made, which typically occurs when the securitization closes.
ACE Securities Corp. v. DB Structured Products, Inc.,
No.650980/12 (N.Y. App. Div. 1st Dep’t Dec. 19, 2013)
. The court
held that the six-year contract statute of limitations begins to run at that
time, instead of when a defendant refuses to comply with a plaintiff’s demand
for a contractual remedy.
The defendant in ACE had sold
mortgage loans to an RMBS trust, and had made contractual representations and
warranties about the loans when the securitization closed. The trustee for the
trust asserted that the representations and warranties as to certain of the
loans were false, and that the defendant accordingly was required to repurchase
those loans—the sole remedy under the contract. The plaintiff trustee did not
bring suit until more than six years after the securitization, however, and as
a result, the Appellate Division held that the claims were time-barred under
New York’s six-year statute of limitations for contract claims. The court
rejected the trustee’s argument that the claims “did not accrue until defendant
either failed to timely cure or repurchase a defective mortgage loan” under the
remedy provisions of the contract. It concluded instead that the claims accrued
when the securitization closed, as that was “when any breach of the
representations and warranties contained therein occurred.”
This decision may have been driven by the fact that the sole
remedy under the contract was a repurchase of the loans.
In the Indian context, the question of when the breach of
representations occurred may be relevant. If, as in the above case, they
occurred when they were made, i.e. as of the closing date, then the limitation
period will run from that point in time. Even through the Limitation Act, 1963
makes references to the deferral of the starting point in the limitation period
in the case of continuing breaches, this may not be a case of continuing breach
as it occurs at the closing date and does not really continue thereafter.

Matters may be somewhat different in case the
remedy for breach of representations and warranties is through a specific set
of indemnity provisions, which is quite common. In that case, the remedy is
really for the enforcement of the indemnity, wherein the cause of action occurs
when the breach of representations and warranties is discovered. Again, while
the indemnity clause may help in preserving the remedy for a longer period of
time, it remains untested before the Indian courts.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • In the context of 'ACE Securities Corp.', it might be relevant to note that the Indian Supreme Court in the case of Lala Shanti Swarup v. Munshi Singh and Ors. [(1967)2SCR312] held that "the cause of action in such a case (where there is a specific set of indemnity provisions in addition to a another contractual breach) arises when the plaintiff-vendors are actually damnified…the statute runs not when the event happens which causes the loss but on the actual damnification".

    The Supreme Court treated the case as having two Causes of Action, one under the actual breach of the contract, and another under the Indemnity clause(s). The Limitation period was therefore effectively extended, as separate (but yet, practically equivalent) claims were made as per the Indemnity clause(s).

    This case was reaffirmed in the 2008 case of Kailash Kumar Kanoria v. Shiv Shankar Pasari and Ors. [(2009)3CompLJ528(Cal).

    Hope this positively answers the question of whether such a line of reasoning has been tested before Indian Courts.

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