Survival Periods Versus Limitation Periods: Which Prevails?

NOV Enerflow ULC v Enerflow Industries Inc.

Written By Bryan Haynes, Kristos Iatridis and James Bartlett

The recent Court of Queen's Bench of Alberta decision in NOV Enerflow ULC v Enerflow Industries Inc. (the NOV Decision) considered survival periods of representations and warranties in commercial contracts and the interplay of such survival periods with the Alberta Limitations Act. The Court reviewed and commented on recent Alberta decisions in the area and unequivocally advanced the principle that sophisticated contracting parties are able to agree upon expiration dates for representations and warranties in a commercial contract and that enforcement of such dates will not be in contravention of the Limitations Act.

The Decision

NOV brought an action against Enerflow for misrepresentation and breach of contract. The parties entered into a purchase and sale agreement (PSA) on March 4, 2012, and closing took place May 11, 2012. In the PSA, Enerflow made a variety of representations and warranties as part of the sale of its business to NOV. The PSA provided that the representations and warranties of Enerflow survived for a period of two years following the closing date. Any claim for a breach of a representation and warranty would have to be brought forward by NOV within that two-year period and adhere to the notice provisions set forth in the PSA. NOV did deliver a notice of claim for indemnification and breach of certain representations and warranties to Enerflow on January 31, 2014, in compliance with the required time periods in the PSA in respect of those breaches identified at that time. A lawsuit was commenced on March 3, 2014. However, in February 2015, NOV hired a third party to perform a financial review of the books and financial records of the purchased business; in NOV's view, that review uncovered certain issues that constituted further breaches of representations and warranties of the PSA. On August 11, 2015, NOV sought to amend its statement of claim to add additional representations and warranties to those already being pleaded as breached. Enerflow contested the amendments to the statement of claim on the basis that the representations and warranties NOV sought to add to the statement of claim had expired and any claim for damages was therefore hopeless. The Court agreed with Enerflow. To this end, although NOV may have discovered a basis for bringing certain new claims in February 2015, the Court firmly ruled that NOV would not be able to pursue these new claims due to their survival period having expired under the terms of the PSA.

The Court held that NOV is able to pursue amendments to claims that have been made under the original statement of claim, but any amendments which add claims for breaches of representations and warranties which are not directly related to those made in the original statement of claim were disallowed on the basis that such representations and warranties had expired. While NOV argued that its original claim was broad and that it should be allowed to amend its statement of claim to add additional breaches of representations and warranties to particularize its claim, the Court focused on the policy reason that if NOV was able to amend its statement of claim to add breaches after the expiry of the survival periods mandated by the PSA, NOV would in effect have circumvented the express terms of the PSA. Furthermore, it would be setting the precedent for commercial parties to launch a general claim for damages on the last day before the end of the survival period, just to preserve that party's right to sue by amending the statement of claim, if a claim were to later arise.

The Court also reviewed the potential application of the Limitations Act to these types of contracts. Generally, the Limitations Act provides for a two-year period to bring a claim after the circumstances of the claim are discovered while restricting parties from entering into an agreement to shorten this two-year period. However, the Court ruled that the expiry of the representations and warranties under the PSA does not offend the Limitations Act for a number of reasons. First, the PSA did not include a broad restriction on NOV's right to bring an action at any time; rather, the time limits specified in the PSA only applied to the expiry of representations and warranties. Second, in its decision, the Court wrote: "the Court must bear in mind the commercial context in which the parties operate. They are sophisticated entities capable of understanding the legal consequences of placing expiration dates on representations and warranties in the PSA". Finally, the Court found that the limitations on the survival of the representations and warranties were an agreed upon limit to Enerflow's liability, as opposed to an agreement to shorten the period within which NOV was permitted to bring its claim and, as such, Enerflow could have no liability to NOV for claims based on representations and warranties that had expired pursuant to the terms of the PSA.

Implications

The NOV Decision provides clarity to an area of the law which in Alberta has been the subject of uncertainty arising from the strict wording of the Limitations Act and its prohibition on the shortening of limitations periods. Prior to the NOV Decision, the jurisprudence in Alberta remained somewhat ambiguous as to whether parties could mutually agree upon the expiry period for representations and warranties and expect to have such agreements enforced in court if the effect of such agreement could be argued to result in a shortening of the limitation period. The NOV Decision makes it clear that sophisticated commercial parties are free to negotiate the time periods during which their representations and warranties will survive closing.