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Posted: August 15, 2016

Accrual Provision Extending Time to Bring Breach of Contract Claim Unenforceable

On August 11, 2016, the First Department issued a decision in Deutsche Bank National Trust Co. v. Flagstar Capital Markets Corp., 2016 NY Slip Op. 05780, holding that an accrual provision extending the time for a party to bring a breach of contract action was unenforceable as a matter of public policy, explaining:

Statutes of limitation not only save litigants from defending stale claims, but also express a societal interest or public policy of giving repose to human affairs. Because of the combined private and public interests involved, individual parties are not entirely free to waive or modify the statutory defense. Although parties may agree after a cause of action has accrued to extend the statute of limitations, an agreement to extend the Statute of Limitations that is made at the inception of liability will be unenforceable because a party cannot in advance, make a valid promise that a statute founded in public policy shall be inoperative.

In ACE, the Court of Appeals held that a breach of contract claim in an RMBS put-back action accrues on the date the allegedly false representations and warranties were made. The Court stated, “Where representations and warranties concern the characteristics of the loans as of the date they are made, they are breached, if at all, on that date. The agreement in the instant case made defendant’s representations and warranties effective on the date of the agreement (June 1, 2006), and on the closing date of the sale of the loans. It is undisputed that the closing dates of the loan sales were between December 7, 2006, and May 31, 2007. Therefore, plaintiff’s causes of action for breach of contract accrued, at the latest, on May 31, 2007, and this action, commenced more than six years later on August 30, 2013, is barred by the statute of limitations.

Plaintiff’s attempt to distinguish ACE by the absence of an accrual provision in that case is unavailing. The accrual provision in the agreement is unenforceable, despite the principle of freedom of contract upon which plaintiff relies. To be sure, freedom of contract is fundamental in New York law, but it is not absolute, and must give way to countervailing public policy concerns in appropriate circumstances. New York’s statutes of limitation codify the public policies of finality, certainty and predictability that our contract law endorses, The parties’ accrual provision runs afoul of these important policies.

Not only would enforcement of the accrual provision, entered into at the inception of the breach, serve to postpone the time from which the period of limitation is to be computed, but it also would contravene the principle that New York does not apply the discovery rule to statutes of limitations in contract actions. The accrual provision’s set of conditions creates an imprecisely ascertainable accrual date – possibly occurring decades in the future, since some of the loans extend for 30 years – which the Court of Appeals has repeatedly rejected in favor of a bright line approach

. . .

Plaintiff’s untimely action cannot be saved by construing the accrual provision as a promise of future performance by defendant. The ACE Court noted that although parties may contractually agree to undertake a separate obligation, the breach of which does not arise until some future date, the repurchase obligation undertaken by the seller in that case did not fit this description. . . .

Similarly, the accrual provision’s requirement that plaintiff make a demand on defendant for performance of the agreement does not constitute a substantive condition precedent that could delay accrual of the breach of contract claim. As in ACE, plaintiff overlooks the significant distinction between substantive and procedural demand requirements. A demand that is a condition to a party’s performance is a substantive condition precedent, which can delay accrual of a claim, whereas a demand that seeks a remedy for a preexisting wrong is a procedural prerequisite to suit, which cannot. Because plaintiff suffered a legal wrong at the moment defendant allegedly breached the representations and warranties, a cause of action existed for breach of a representation and warranty at that time. Plaintiff was merely limited in its remedies for that breach, and could only have pursued its sole remedies under the repurchase protocol. Hence, the condition that plaintiff demand defendant’s compliance with the agreement was a procedural prerequisite to suit, not a substantive condition precedent to defendant’s performance.

(Internal quotations and citations omitted).

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