The New York State Court of Appeals ("Court of Appeals") upheld a decision that contractual attempts to extend the statute of limitations for causes of action dealing with breaches of contracts are unenforceable on the grounds that they violate New York law and public policy. The Court of Appeals ruled against the plaintiff, who contended that the it should honor the parties' intent. The plaintiff argued that the accrual clause (i) "created a substantive condition precedent" and (ii) signified the parties' intent to delay accrual of a breach of contract cause of action until the events took place.

In affirming a lower court decision that the accrual clause did not create a substantive condition precedent, the Court of Appeals remarked that the language of the accrual clause itself refers to a breach of the representations and warranties. Further, according to the attorneys, the Court of Appeals noted that while parties may agree to a shorter limitations period under New York law, New York public policy prevents parties' ability to prolong the statutory period before a claim accrues.

As explained more fully in a Cadwalader memorandum, the attorneys asserted that the Court of Appeals decision has implications for structured finance and other transactions governed by New York law dealing with transfers of financial assets. For New York law-governed residential mortgage-backed securities transactions and other transactions regarding the transfer of financial assets, the attorneys said, the Court of Appeals' holding indicates:

  • existing contracts in which "cure or repurchase are the sole remedies for a breach of representations and warranties" are not likely to support the argument that a cause of action for breach accrued at any time after the making of the contract; and
  • accrual clauses need to be evaluated in future transactions and rewritten to address flaws identified by the Court of Appeals (i.e., accrual clauses that merely delay the accrual of the cause of action are not enforceable).

Commentary / Peter Morreale

Because of the New York public policy in favor of enforcing the statutory period of limitations (or some shorter period agreed to by the parties), the bar to create contractual provisions that would either serve to create a true substantive condition precedent or to extend the statute of limitations in a way that does not run afoul of New York's law and public policy is very high. However, the court took pains to make clear that its holding had no impact on (i) contracts creating true substantive conditions precedent to a party's performance, (ii) separate promises of future performance or (iii) contractual provisions for post-accrual tolling agreements that comply with GOL Section 17-103.

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