Canada: Survival vs Limitation Periods

Background

Survival periods for representations and warranties are frequently used in commercial agreements. The interplay between these survival periods and the Limitations Act (Alberta),¹ (the "Limitations Act"), has historically been treated differently in different jurisdictions, resulting in case law with inconsistent outcomes. However, the recent Alberta decision in NOV Enerflow ULC v. Enerflow Industries Inc.,² (the "NOV case") firmly advanced the principle that survival periods contained in commercial agreements that effectively reduce the 2 year minimum time period provided for in the Limitations Act, do not violate the Limitations Act.

The Facts

Enerflow Industries Inc. ("Enerflow"), as vendor, and NOV Enerflow Industries Inc. ("NOV"), as purchaser, entered into a Purchase and Sale Agreement ("PSA") for the sale of the business of Enerflow to NOV. The transaction closed on May 11, 2012 (the "Closing Date").

On March 3, 2014 NOV brought an action for indemnification and breach of certain representations and warranties. In February, 2015 NOV hired a third party to perform a financial review of the books and records of Enerflow and discovered outstanding purchase commitments and excess inventory that preceded the Closing Date. On August 11, 2015 NOV applied to amend its Statement of Claim for additional breaches of representations and warranties of the PSA.

The survival period provided that all claims for indemnification for breach of representations and warranties must be made within 2 years from the Closing Date. While the original claim was within the 2 years, Enerflow opposed the amendments on the ground that the survival period for the representations and warranties in the PSA had expired. NOV argued that its original claim was broad enough such that the amendments were not new claims, rather merely particularized existing claims. NOV further argued that the survival period contravened the Limitations Act and as such could not be relied upon to bar the action.

The Decision

The Court ultimately agreed with Enerflow and held that although NOV may have discovered a basis for bringing new claims in February, 2015, NOV could not pursue such claims as the survival period in the PSA had expired. Secondly, the Court held that enforcing expiry dates on representations and warranties as provided in the agreement between the parties does not violate the Limitations Act.

The Reasons

NOV's argument that the amendments merely elaborated upon and particularized an existing broad general claim was based on the language used in its original Statement of Claim which provided for breaches "including but not limited to" a list of breaches. The Court held that the language "including but not limited to" was insufficient to enable claims not expressly pled. Allowing all representations and warranties to survive on this basis would defeat the purpose of the survival period and the parties' intentions. The parties clearly could not have intended that giving notice of one claim for indemnification on the basis of one misrepresentation could mean that all representations and warranties not expressly pled could also survive beyond the survival period. This is particularly so because the nature of the provision is designed to limit liability under the PSA. In addition, as a public policy reason, the Court believed that parties would be incentivized to file a claim before the expiry of the survival period to extend it, whether or not it had a real basis for indemnification, just to preserve a claim in the event one arose in the future. And lastly, the Court emphasized the commercial context and the fact that the parties were sophisticated entities that were capable of understanding the legal consequences of placing expiry dates on representations and warranties in a PSA.

In a previous Alberta decision, Edmonton (City) v TransAlta Energy Marketing Corp,³ the Court found that imposing expiry dates on representations and warranties in a contract does not violate the Limitations Act, so long as the expiry date applies to representations and warranties, and not to all claims that may arise under the Agreement. The Court in the NOV case followed this reasoning and determined that the survival period did not purport to limit all claims under the PSA, rather it only applied to specific representations and warranties. The Court clarified that although in effect the time period for bringing an action may be shorter than it otherwise would be under the Limitations Act, the survival period is a limit on Enerflow's liability, not an agreement to shorten the time period within which NOV can pursue a claim under the PSA.

Concluding Thoughts

Commercial parties may negotiate time periods for the survival of representations and warranties. Vendors receive comfort in finality of potential claims for breaches of representations and warranties. Purchasers might consider extending the survival period for all or specific representations and warranties of concern or consider adopting the limitation period provided by the Limitations Act. Lastly, Purchasers filing actions for breach of representations and warranties must specifically reference each representation and warranty claimed because listing claims with the phrase "including, but not limited to" is not sufficient to enable a subsequent time-barred amendment

Footnotes

1. RSA 2000, L-12.

2. 2015 ABQB 759.

3. 2008 ABQB 426

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