Wednesday, January 15, 2014

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 post 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.

1 comment:

Subbaiah said...

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.