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Surviving the Statutes of Limitation: The Relationship Between Survival and Statute of Limitation Provisions
Practical Law Legal Update w-005-5065 (Approx. 7 pages)
Surviving the Statutes of Limitation: The Relationship Between Survival and Statute of Limitation Provisions
by Practical Law Commercial Transactions
| Published on 07 Feb 2017 • USA (National/Federal) |
Parties often include survival provisions in their commercial contracts to address which contract provisions remain in force after the contract's term. Among other things, a survival provision can define the time limits for discovering or bringing a legal action after the contract has expired or terminated. This legal update discusses the relationship between survival provisions and contractual statutes of limitations for bringing legal actions related to the contract and outlines how some states differ in interpreting and enforcing these provisions.
When negotiating and drafting contracts, parties often include survival provisions to address which contract provisions remain in force after the contract expires or terminates. It is not practical for parties to include survival language in every contract provision, therefore parties frequently include a separate general survival clause to limit or extend the effectiveness of certain provisions beyond the contract's term. For example, a party might use a survival clause to:
- Limit the time during which representations and warranties are effective. For more information on using representations and warranties in commercial contracts, see Practice Note, Representations, Warranties, Covenants, Rights, and Conditions.
- Extend either party's confidentiality or non-compete obligations beyond the term of the contract. For more information on protecting confidential information during commercial transactions, see Practice Note, Confidentiality and Nondisclosure Agreements.
- Set a time limit for bringing a legal action after the contract has expired or terminated.
This legal update discusses the relationship between survival clauses and contractual statutes of limitations for bringing legal actions related to the contract.
Limiting Statutes of Limitations Within Survival Clauses
Before using a survival clause to create contractual statutes of limitations, parties should carefully review the contract's governing law to determine how the jurisdiction interprets and enforces statutes of limitations (both those created by contract and those created by law). For example, a survival clause that:
- Shortens the effectiveness of contract provisions to a time period less than the normal statute of limitations could be subject to review under either a reasonable basis standard (see Reasonable Basis) or a heightened scrutiny standard (see Heightened Scrutiny).
- Extends the effectiveness of contract provisions beyond the expiration or termination of the agreement is generally enforceable only if the clause does not seek to extend the statute of limitations period beyond what is statutorily allowed. For more specific information on how states codify and regulate statutes of limitations, see Statutes of Limitations: State Q&A Tool.
The parties should research state law to determine which standard of review state courts use to interpret and enforce survival provisions. For example, Florida and Missouri generally prohibit contractual limitations on when an action may be filed (see Standard Clauses, General Contract Clauses: Survival (FL): Drafting Note, Enforceability of Survival Clauses and General Contract Clauses: Survival (MO): Drafting Note, Enforceability of Survival Clauses). However, Missouri does permit contractual statutes of limitations in sale of goods contracts.
For a sample survival clause, see Standard Clause, General Contract Clauses: Survival. For a sample standalone statute of limitations clause, see Standard Clause, General Contract Clauses: Contractual Statute of Limitations.
For more information on other factors to consider when choosing a contract's governing law, see Practice Note, Choice of Law and Choice of Forum: Key Issues and Standard Clause, General Contract Clauses: Choice of Law.
Reasonable Basis
Many states generally presume the validity of a contractual provision that shortens the statute of limitations. These states defer to the parties' freedom to contract unless the contractual provision is unreasonable or unconscionable. The definition of reasonable can vary based on state law and the specific circumstances of the transaction, but key factors generally include:
- The extent to which the provision reduces the statutory period for filing similar claims. The greater the limitation, the less reasonable the contractual statute of limitations is likely to be.
- Whether the contractual period provides sufficient time for the claimant to identify, investigate, and pursue a judicial remedy. If claims covered by a contractual statute of limitations can be discovered quickly and the judicial remedy can be pursued promptly, the contractual statute of limitations may be found reasonable even if it significantly shortens the applicable statutory period.
Heightened Scrutiny
Some states, such as New York and California, apply a heightened standard to provisions that limit the right to sue to a period shorter than the statute of limitations. In these states, courts tend to disfavor these stipulations and strictly construe them against the invoking party. Citing public policy concerns, courts in these jurisdictions have concluded that lawmakers, not private parties, are in the best position to determine what constitutes an adequate amount of time for a party to pursue a claim. In addition to the reasonableness of the limitation, courts interpreting these states' laws also carefully review:
- Any evidence of the parties' intent to shorten the applicable statute of limitations or waive their rights under any longer statute of limitations.
- The nature of the covered claims.
Courts interpreting these states' laws are likely to:
- Interpret the contract language as:
- merely limiting the time period during which an actionable breach may occur or be discovered; and
- not shortening the statute of limitations.
- Require that parties attempting to shorten the statute of limitations include explicit contractual language in either the survival clause or another standalone provision to shorten the statute of limitations.
When parties draft a contractual statute of limitations as a standalone provision in the contract, their intent is generally clear. However, there can be questions and ambiguity when a contractual statute of limitations is built into a survival clause. To ensure that courts interpreting the provision honor their intent, contracting parties should include in a survival clause language that explicitly details their intended rights during the survival period.
For sample New York specific survival and standalone statute of limitations provisions, see Standard Clauses, General Contract Clauses: Survival (NY) and General Contract Clauses: Contractual Statute of Limitations (NY).
For sample California specific survival and standalone statute of limitations provisions, see Standard Clauses, General Contract Clauses: Survival (CA) and General Contract Clauses: Contractual Statute of Limitations (CA).