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Limiting Business Risks by Contractually Truncating Statutes of Limitations

Under California law, the statute of limitations for a lawsuit involving a business contract is four years. This means that, if there is a breach of the contract, the aggrieved party must bring the lawsuit within four years of the breach. Otherwise, the breach is legally waived and any lawsuit filed after the statute of limitations has run will be dismissed. This is set out in the California Code of Civil Procedure. See Cal. Code of Civ. Proc., § 337.

However, in today’s business environment, four years is a long time and represents a substantial financial risk. As many know, litigation is expensive. Best business practices argue in favor of reducing financial risks by eliminating — as far as is allowed by California law — potential lawsuits that may be buried in the “contracts completed” drawer of the filing cabinet. Among the best methods to accomplish this risk-reduction is to truncate the statute of limitations through contractual agreement. There are two court-approved methods:

Specially limiting the statute of limitations for any causes of action and/or
Limiting the statute of limitations through a notice provision of some sort

Both methods will reduce the time period allowed for the other party to successfully file a lawsuit claiming breach. To have well-drafted provisions like these inserted into your business contract, you should retain an experienced San Diego corporate attorney to provide advice and counsel.

With respect to the first option, in general, California courts will enforce a truncated statute of limitations under circumstances in which the parties agreed to the truncation. As usual, we can distinguish business contracts made and entered into between sophisticated parties and what might be called “consumer contracts.” Courts will be more inclined to enforce a truncated statute of limitations where the provision is the subject of negotiation between parties who have lawyers and who might be deemed “sophisticated”. California courts will enforce such provisions where the intent to truncate the statute of limitations is clear. Indeed, to be enforced, the contract must specifically and clearly mention the intent to shorten the statute of limitations.

This was the result of a case decided by the US Ninth Circuit applying California law called Western Filter Corporation v. Argan, Inc., 540 F.3d 947 (US 9th Cir. 2008). The case involved a stock purchase agreement. As is common and customary, in the purchase agreement, the seller made various representations and warranties (such as a representation of the annual sales of the company). The agreement also stated that the ability to sue for breach of those representations and warranties would survive the closing for a period of one year. This was supposed to be a contractual truncation of the statute of limitations. However, based on California law, the Ninth Circuit rejected the idea that the statute of limitations was successfully truncated because the provision did not clearly state that the statute of limitations was being shortened.

With respect to consumer contracts, the courts will scrutinize the contracts more closely since consumers do not generally have an opportunity to negotiate such contracts. Consumer contracts are “take-it-or-leave-it.” Under these circumstances, the keys to limiting the statute of limitations will be clarity, specifically stating that the statute is being limited, and conspicuousness.

Contact San Diego Corporate Law Today

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard has been named a “Rising Star” for four years running by SuperLawyers.com. Mr. Leonard provides a full panoply of legal services for businesses and proudly serves the San Diego business community. Like us on Facebook.