Drafting Alert: Survival of Representations and Warranties

A recent (albeit unpublished) Ninth Circuit decision is a cautionary tale which shows once again how important it is to have clear and precise language in your contracts, particularly when it involves waivers and the survival period of representations and warranties.

1. Herring v. Teradyne, Inc., 242 Fed.Appx. 469 (9th Cir. 2007), in an almost cursory opinion, the United States Court of Appeals for the Ninth Circuit reversed a decision of the United States District Court for the Southern District of California. This decision by the Ninth Circuit was not selected for official publication. That means that the holding of the case is technically limited to the peculiar facts and circumstances of the case before the Court of Appeals and cannot be cited in briefing as precedent.

Although the Herring decision is unpublished and was in the context of a M&A transaction, one would be well advised to consider its potential impact in future drafting:

The contract in Herring contained the following clause:

“11.01 Survival. The covenants, agreements, representations and warranties of the parties hereto contained in this Agreement or in any certificate or other writing delivered pursuant hereto or in connection herewith shall survive the Closing until the first anniversary of the Closing Date or (i) in the case of Sections 6.05 and 7.02, for the period set forth therein, (ii) in the case of Sections 6.06 and 7.01, indefinitely, (iii) in the case of the items set forth in Section 11.02(f), for the periods set forth therein, and (iv) in the case of the covenants, agreements, representations and warranties contained in Sections 3.17 and 8.05, until the expiration of the applicable statutory period of limitations (giving effect to any waiver, mitigation or extension thereof), if later. No claim for indemnity under this Agreement with respect to any breach of any representations, warranties and/or covenants of Company and/or Seller shall be made after the applicable period specified in the preceding sentence and all such claims shall be made in accordance with the applicable provisions of the Escrow Agreement.”

[Emphasis added]

The District Court relied on the general rule that if an agreement does not provide that representations and warranties survive the closing, they are extinguished as of the closing (commonly referred to, in the context of real estate purchase transactions, as being "merged" into the grant deed). Thus, if the agreement specifies that the representations and warranties survive for a particular period beyond the closing, it was thought that a party could sue for breaches of those representations only during the time specified in the agreement. It is fair to say that this was the expectation of most lawyers prior to the decision.

The Ninth Circuit reversed, finding that if the representations and warranties survived the closing, they would survive for the entire four-year statute of limitations applicable to misrepresentation claims, unless there were a specific waiver of such statute of limitations period. Although many practitioners would believe that the language quoted above appears to be quite explicit, the Ninth Circuit found that the language of the agreement was not specific enough to find such a waiver. Unfortunately, the Ninth Circuit was not clear or precise in explaining what would have constituted a sufficient, explicit waiver.

II. Waivers Under California Law. California case law traditionally stacks the decks against waivers, which are defined as "the intentional relinquishment of a known right after knowledge of the facts." (Waller v. Truck Ins. Exchange, 11 Cal.4th 1, 31 (1995)). While courts recite that whether there has been a waiver is a matter of intent of the parties (and it may be written or oral, express or implied), courts set up high hurdles to meet the test. To demonstrate a waiver, a party must prove it by clear and convincing evidence, with doubts resolved against finding a waiver. (Id.)

III. Herring's Lesson. The lesson of Herring is clear, even if its guidance is not. One can no longer assume that it is enough to state in a contract that a representation or warranty will survive for only a limited period. Now that the Herring court has found that such limitations are deemed waivers, based on existing California law, such waivers must be clear and explicit. Regardless that the Herring decision is unpublished, agreements– especially the "boiler-plate" provisions – should be reviewed and revised in light of this ruling. For those of our clients who wonder why agreements always seem so lengthy, this case provides yet another reason.