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Parties to stock purchase agreements and similar transaction contracts typically provide representations and warranties concerning key transaction elements, matched with indemnification remedies and a post-closing time limit for bringing claims.  However, contractual shortening of otherwise-applicable statutes of limitation, while permissible in California, is disfavored and “must be clear and explicit, and is to be strictly construed against the party invoking the provision.” 

Accordingly, in a case of first impression, a California Court of Appeal has ruled that purchase agreement language that certain reps and warranties “shall survive the Closing for a period of one year” is ineffective to limit rep & warranty claims to one year, if the applicable statute of limitations would otherwise be longer.  According to the court, this language is construed against the beneficiary and will be interpreted to mean “that the one year limitation serves only to specify when a breach of the representations and warranties may occur, but not when an action must be filed”.  Western Filter Corp. v. Argan, Inc., 9th Cir. No. 07-55535, August 25, 2008.  Thus even more explicit language would be needed to shorten the remedy, such as that the reps and warranties “shall survive the Closing for a period of one year only, and further that the statute of limitations is hereby shortened, such that no action for breach of such representations and warranties may be filed after one year from Closing.”

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