Commercial Division Blog
Breach of a Contractual Representation or Warranty Occurs at the Time of Signing, Not the Effective Date of the Agreement
On October 21, 2014, the First Department issued a decision in U.S. Bank N.A. v DLJ Mortgage Capital, Inc., 2014 NY Slip Op. 07093, addressing the question of when a claim for breach of a representation or warranty occurs.
In U.S. Bank, the First Department affirmed a trial court's denial of a motion to dismiss a claim for breach of a contractual warranty on statute of limitations grounds, explaining:
If a contractual representation or warranty is false when made, a claim for its breach accrues at the time of the execution of the contract. This is true even where the contract states that its effective date is earlier. The claim cannot accrue earlier, because until there is a binding contract, there can be no claim for breach of warranty. Additionally, in the residential mortgage-backed securities (RMBS) context, it should be noted that the claim cannot generally accrue before the contract, because the trust that is the recipient of the representations and warranties typically does not come into existence prior to the closing of the transaction. Furthermore, the representations and warranties were made as of the closing date, and the contract, which did not explicitly address the statute of limitations, does not indicate a clear intent to alter the accrual date relating to claims for a breach thereof. As such, the IAS court correctly held that the representation and warranty claims accrued on February 7, 2007, the date the pooling and service agreement, the agreement sued upon, was executed.
(Internal quotations and citations omitted) (emphasis added). It is not unusual for agreements to be executed on a date other than the effective date of the agreement. This decision provides a rule for determining the accrual date of a breach of representation and warranty claim in that situation.