Lawyers inserting curative provisions in any transactions should pay heed
Sometimes a judicial decision falls into the category of a curiosity, particularly when it has no binding effect in the jurisdiction where it is so regarded.
The January 2015 decision of the Delaware Court of Chancery in Bear Stearns v. EMC Mortgage LLC, which deals with the effect of curative provisions on survival periods for representations and warranties in commercial agreements, including mergers and acquisitions, is a case in point.
“The court somehow turned a three-year limitation into a 20-year limitation,” says Simon Romano of Stikeman Elliott LLP in Toronto. “Given the state of Delaware limitations law at the time the securitization closed, it is hard to imagine that either side would have expected this.”
In most cases, enough said — at least from a Canadian perspective. Except that there’s a dearth of Canadian law on the subject.
“Anytime a Delaware court comes up with an opinion on which there are no cases in Canada, you’ve got to pay attention,” Romano says. “Which is not to say that Canadian judges will go the same way, but you can’t be sure.”
Bear Stearns arose in the context of a residential mortgage loan securitization that experienced high rates of default, saddling the plaintiff with some US$295 million in losses representing nearly 60 per cent of the original principal loan balance.
The contract in question contained a survival clause that did not include a time limit. But it did have a curative clause, again without a time limit, that allowed the plaintiff to sue with respect to non-conforming mortgage loans after giving the defendant notice of the alleged breach, and only if the defendant had not cured the breach in accordance with procedures set out in the agreement. This the plaintiff did, but the defendant did not comply in this case.
The plaintiff sued and the defendant relied on the new limitation provision in the Delaware Code that came into force in August 2014.
The Code provides that “ … an action based on a written contract, agreement or undertaking involving at least $100,000 may be brought within a period specified in such written contract, agreement or undertaking provided it is brought prior to the expiration of 20 years from the accruing of the cause of such action.”
Simply put, the limitation period for contracts is determined by the “period specified” in the contract, which, however, may not exceed 20 years. The Delaware Code also mandates that, if there is no “period specified” in the contract, the limitation is three years.
As the action was filed after more than three years had passed, the core issue was whether the curative clause could extend the limitation period. The court ruled that the bulk of Delaware authority, including the August 2014 decision of the Superior Court in Aircraft Service International, Inc. v. TBI Overseas Holding Inc., supported the proposition that a curative clause could create a condition precedent to the beginning of a limitation period.
In this case, the court concluded, the curative provision did have the effect of extending the limitation from three years to twenty. Although the clause did not specify any “period,” the legislative “Synopsis” published with the Code defined “period” as including “a period of time defined by reference to the occurrence of some other event or action.” The curative provision, the court ruled, fell within this definition, and the failure to specify any outside date invoked the 20-year maximum in the legislation.
“In Canada, lawyers would generally say that when you come to the end of the contractual limitation period, you can’t sue unless perhaps there’s fraud,” Romano says.
For the most part, curative provisions are found in public company transactions.
“When you’ve gone public with a deal, you want to make allowances to ensure it goes through as announced even if some problem turns up,” Romano says. “That’s not necessarily a consideration in private sector transactions.”
Caution, however, dictates that lawyers inserting curative provisions in any transactions pay heed to Bear Stearns.
“The key thing is to make it clear than any curative periods are not intended to extend the limitation period,” Romano says.