Canada: Are Contractual Survival Periods Invalid Under The Alberta Limitations Act? Maybe…

In NOV Enerflow ULC v Enerflow Industries Inc., 2015 ABQB 759 ("NOV v Enerflow") the Alberta Court of Queen's Bench considered the interplay between the Alberta Limitations Act and a contractual survival period in a purchase and sale agreement. It is common in purchase and sale agreements to include a clause specifying that no claim based on a breach of a representation or warranty can be brought after a specified length of time, often between 9 months to 2 years. However, the Limitations Act provides that an agreement reducing any limitation period under the Act is not valid. In NOV v Enerflow, the Court clarified the impact of the Limitations Act on such clauses in part, holding that the survival period in question was not invalid notwithstanding that it purported to limit the ability of a party to bring a claim to a period of less than the two year discoverability period under the Limitations Act. However, the decision seems to imply that the interaction between a survival period and the Limitations Act will depend on the specific wording of the clause in question, leaving open the possibility that certain language (including, possibly, the language of the CAPL Property Transfer Procedure) would render such a clause invalid. This decision has widespread implications due to the frequency of contractual survival periods in purchase and sale agreements and parties should take care to ensure that the wording used in their agreements appropriately allocates the risk of future liability in accordance with their intentions.

Facts

In NOV v Enerflow, NOV Enerflow ULC ("NOV") and Enerflow Industries Inc. ("Enerflow") were parties to a purchase and sale agreement entered into on March 4, 2012 (the "PSA"). The PSA included a number of representations and warranties with respect to the business of Enerflow. The PSA also included a survival period for those representations and warranties which read:

The representations and warranties of Enerflow Canada and the Shareholders contained in this Agreement...shall survive the Closing and shall continue in full force and effect for the benefit of the Purchasers provided, however, that Enerflow Canada and any Shareholder shall not have any liability hereunder in respect of any representation and warranty unless a claim in respect thereof is made within the following time periods:

[...]

(c) in the case of a claim in respect of a representation or warranty other than Sections 8.2, 8.3, 8.4, 8.17, 8.32, 8.35, 8.36 and 8.46, within a period of two (2) years from the Closing Date;

provided, however that no claim in respect thereof after the Closing shall be valid unless made in accordance with the provisions set forth in Article 18 (for greater clarity, the Parties acknowledge and agree that any claim made in accordance with the provisions set forth in Article 18 prior to the applicable expiration date of such representation or warranty shall survive such expiration date until such claim is finally resolved and all payments have been made with respect thereto). [emphasis added]

After the transaction was closed, NOV commenced a claim against Enerflow for misrepresentation and breach of contract based on alleged breaches of representations and warranties under the PSA. The initial claim was commenced within the time period stipulated under the PSA. However, subsequent to the commencement of the claim, NOV discovered further issues with respect to the sale and sought to amend its statement of claim to include further breaches of representations and warranties. Enerflow resisted these amendments, arguing that the representations and warranties under the PSA had expired.

Decision

On the issue of whether the representations and warranties under the PSA had expired, Justice McCarthy noted two previous decisions that considered this issue. In Edmonton (City) v Transalta Energy Marketing Corp, 2008 ABQB 426 ("Edmonton (City)"), the Court held that imposing expiry dates on representations and warranties in a contract did not violate the Limitations Act so long as the expiry date applied to specific representations and warranties, and not to any or all claims that may arise.

Justice McCarthy also noted the Court of Appeal decision in Shaver v Co-operators General Insurance Company, 2011 ABCA 367 ("Shaver"). There the Court considered the limitation period applicable in a motor vehicle accident claim where the SEF44 endorsement on the plaintiff's insurance policy provided for a one-year limitation period which began to run on discovery. Justice Coté stated "the only way that I can see to reconcile all this is to interpret s 7(1)(2) the way that a plaintiff or a practicing lawyer would. What is the last day that the Act allows the plaintiff to sue? Does the contract choose a date earlier or later than that? If earlier, that contract is invalid; if later, that is valid."

While these cases are seemingly contradictory, Justice McCarthy distinguished the Shaver decision on the basis that it was a tort claim involving a motor vehicle accident and did not involve, as in the Edmonton (City) case and the present case, a contractual right of indemnification under the purchase and sale agreement between sophisticated commercial parties. However, Justice McCarthy did not expressly adopt the reasoning in Edmonton (City), referring instead to the position recently affirmed by the Ontario Court of Appeal in NFC Acquisition LP v Centennial 2000 Inc., 2011 ONCA 43 where the Court stated:

We do not agree that the notice requirement imposed by s. 3.5 [of the contract] was of no force and effect by virtue of the Limitations Act, 2002, s. 22. S.O. 2002, c. 24, Sch. B that provided that a limitation period prescribed by the act "applies despite any agreement to vary or exclude it". (Section 22 was amended, S.O. 2006, c. 21, Sch. D, s. 2 with respect to permit the variation of statutory limitation periods in business agreements but this case is governed by the earlier provision.) The notice provision at issue did not vary or exclude the limitation period prescribed by the Limitations Act. The right of indemnity was purely contractual in nature in a commercial agreement between sophisticated parties. The various indemnity rights granted were, by agreement, time limited. The timely notice requirement was a mutually agreed contractual condition precedent for triggering a right of indemnity. Once a timely notice is given, the cause of action accrued and at that point, the statutory limitation period begins to run. Notice provisions of this kind are acceptable in the context of commercial agreements between sophisticated parties.

Justice McCarthy concluded that the Limitations Act did not pose an obstacle to the expiry of the representations and warranties under the PSA.

This decision did not specifically address whether a survival period for representations and warranties that attempts to limit all claims would be invalid under the Limitations Act as suggested by the Court in Edmonton (City) but arguably this is the implication on a reading of the two decisions together.

Implications

Survival periods for representations and warranties are very common in purchase and sale agreements and accordingly, this decision has widespread application.

While the Court enforced the contractual survival periods in this case, the rationale used by Justice McCarthy in supporting this conclusion may lead to the opposite result in cases where the survival clause has slightly different wording. For example, the wording of the CAPL Property Transfer Procedure (the "CAPL PTP") is potentially problematic because it attempts to limit the ability of a party to commence an action outside of the limitations period. The provision reads:

In the absence of fraud, however, no claim or action may be commenced for a breach of any representation or warranty, unless, within that period, written notice specifying the breach in reasonable detail has been provided to the Party that made that representation or warranty, and each Party waives any rights it may have at law or otherwise to commence a claim or action for breach of a representation or warranty after that period. [Emphasis Added]

Unlike the Edmonton (City) decision and this decision, that clause does not simply put "limits on the warranties provided under the Agreement". Rather, the clause provides that a party waives "any rights it may have in law or otherwise to commence a claim". The Court in Edmonton (City) found that the clause in the case did not offend the Limitations Act because "it does not address the issue of the limitation period to commence an action". However, the CAPL PTP language arguably has that effect. Whether such a clause would be deemed invalid, or whether the fact that two sophisticated commercial parties entered into such an agreement would satisfy the requirements set forth in this decision, is unclear.

This is a potentially significant issue because the length of time that a claim can be commenced is a key area of negotiation between the parties and can affect the overall purchase price to which the parties agree. A purchaser in particular should carefully review the language of survival periods in their purchase and sale agreements to effectively manage the risk of potential future claims for breach of a representation or warranty.

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