Is New York Or Delaware More Protective Of The Freedom To Contract? Two Important New York Decisions On The Accrual Of Breaches Of Representations And Warranties May Shed Light

• Published date: 15 February 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Contracts and Commercial Law, Trials & Appeals & Compensation, Securities
• Law Firm: Lowenstein Sandler
• Author: Ms Jennifer Fiorica Delgado

New York and Delaware each enjoy an excellent reputation in the business world and typically provide the governing laws and are the jurisdictions of choice in domestic (and many international) commercial contracts. But which law is more likely to uphold the freedom of contract? This blog post analyzes two New York Court of Appeals decisions that, while not newly decided, may shed light on this question.

In a landmark decision from 2015, the New York Court of Appeals in ACE Securities Corp. v. DB Structured Products, Inc., 25 N.Y.3d 581 (N.Y. 2015) (ACE), held that New York's six-year statute of limitations for claims for breaches of representations and warranties (R&W) in a residential mortgage-backed securities (RMBS) contract accrue when the contractual representations are made (i.e., the closing date of the securitization if the R&Ws concern characteristics of the subject at the time of closing) and not when a sponsor refuses to cure or repurchase the underlying mortgages as was required in the parties' contract. Id. at 589. Judge Susan Phillips Read, writing for a unanimous Court of Appeals, highlighted the 'finality, certainty and predictability' that New York statutes of limitations are designed to foster, even when the result 'may at times be harsh and manifestly unfair, and creates an obvious injustice.' Id. at 594 (internal citations and quotations omitted). In ruling in favor of the sponsor, the court found that the sponsor's obligation to repurchase loans that breached R&Ws was not a substantive condition precedent to filing suit but a remedy that was necessarily 'dependent on' and 'derivative of' the R&Ws, which 'did not survive the closing date' and were breached, if at all, on that date. Id. at 595.

The Court of Appeals was presented with a different, but related, question in 2018. Can commercial parties contractually define when a cause of action for breach of R&Ws accrues? The Court of Appeals answered this question in the negative in Deutsche Bank National Trust Co. v. Flagstar Capital Markets Corp., 32 N.Y.3d 139 (N.Y. 2018). Judge Eugene M. Fahey, writing for the majority, began the opinion by acknowledging that the case before the court 'steps into an area of subtle interplay that exists between the freedom to contract and New York public policy.' Id. at 143. The parties had an 'accrual clause' in their agreement; the clause conditioned the accrual of a cause of action on demand for compliance with the parties' agreement. The Court...