Only The Strongest Survive M&A Litigation ' The Importance Of Robust Survival Clauses

• Law Firm: Crawley MacKewn Brush LLP
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Contracts and Commercial Law
• Author: M&A Risk Advisor, Joshua Shneer and Dan Thomas
• Published date: 16 January 2023

Purchase and sale agreements almost invariably contain representations and warranties given the inherent knowledge imbalance between the parties. A representation is an assertion to a fact that is true; a warranty guarantees indemnity should that assertion be false. For example, a seller will often give representations about compliance with local laws or in respect of claims against the seller. Representations are, at their core, meant to mitigate the risk to the buyer of unknown liabilities¹.

If a representation is revealed to be false, a buyer will want to avail themselves of the indemnity and enforce the promise (the representation) against the seller. In Ontario, a party ordinarily has two years from discovering a claim to bring a claim, failing which it will be statute-barred (irrespective of the strength of the claim)².

However, commercially sophisticated parties are free to deviate from the default rules and agree to negotiate timelines for bringing claims regarding representations and warranties.

Survival Clauses

(i) The Default Framework

Purchase and sale agreements often contain what are colloquially known as 'survival clauses', which are generally designed to limit the duration of the representations and warranties contained within the agreement and, therefore, the time in which to bring a claim in respect of breaches or misrepresentations. Contractual clauses of this nature are designed to provide some measure of certainty to the seller about potential future obligations and liability³. While sellers can procure insurance to alleviate their risk, a well-drafted survival clause is a tool that may help limit claims altogether.

As noted above, the presumptive rule in Ontario is that a party cannot bring a claim more than two years after 'discovering' that claim. Discoverability is a highly fact-specific issue and is beyond the scope of this article, but it is sufficient to understand that discoverability essentially means knowledge of the material facts giving rise to a claim⁴.

(ii) Contracting Out of Statutory Limitation Periods

Parties to a "business agreement"⁵ are able to contract out of the statutory limitation period and can agree to extend or abridge the basic two-year period⁶, subject to the "ultimate" limitation period of 15 years. Parties who are tempted to include language seeking to preserve representations and warranties "indefinitely" will find that, no matter what language is deployed, in Ontario, the 15-year period is applied...