Western Filter Corporation v. Argan, Inc.
United States Court of Appeals for the Ninth Circuit
25 August 2008
No. 07-55535 D. C. No. CV-05-03548-SGL

Contracts Reducing Statute of Limitation in Law not Favored

Argan, Inc., the respondent herein, wholly owned Puroflow as subsidiary which designs, manufacturers and sells industrial aerospace and automotive filtration products while Western Filter, the petitioner herein, is a competitor in the filter business.

After several courtships, Western Filter decided to buy its competitor. It bought Puroflow’s stock in the amount of $3.5M. The parties dispute whether Argan conditioned the sale of Puroflow on an October 30 closing date.

The two executed a Stock Purchase Agreement (SPA) which contained several representations and warranties. Amongst which is a Survival Clause which provides that the representations and warranties of Western Filter and Argan in the agreement shall survive the Closing for a period of one year, except the representations and warranties contained in Section 3.1 paragraph a, b, c and f and 3.2 paragraph a and b shall survive indefinitely.

Following the purchase, Western Filter discovered that Puroflow was worth significantly less than what Argan represented. It claimed that “the management of Puroflow and Argan grossly misinterpreted the financial condition of Puroflow.”

Six months later, Western Filter sued Argan and its officers before the Los Angeles County Superior Court for breach of contract, intentional misrepresentation, concealment and nondisclosure, negligence misrepresentation, false promise, negligence and declaratory relief.

Argan moved for a summary judgment and the district court granted it. The trial court concluded that Western Filter’s claims were barred by one-year limitation set forth in the Survival Clause. The trial court ruled that “the plain meaning of Section 8.1’s provisions (the Survival Clause) clearly indicate that, if (Argan) breached certain representations and warranties, then for a one-year period after the closing Western Filter could file a claim against defendants for such breach, be it a suit for indemnification (subject to the $300,000 monetary cap) or a suit in law not subject to the monetary cap in the case of intentional misrepresentations.”

Upon appeal, the United States Court of Appeals disagreed with the trial court.

The Court held that while it is true that under the California law, the parties to a contract may stipulate therein for a period of limitation, shorter than that fixed by the statute of limitations, and that such stipulation violates no principle of public policy, provided the period fixed be not so unreasonable as to show imposition or undue advantage in some way – such contractual stipulations are not favored because they are in derogation of the statutory limitation.

The Court concluded that where a provision in the SPA permits parties representation and warranties to survive closing but did not unambiguously state the parties’ intent to contractually reduced applicable state statute of limitations – the provision does not in effect created a contractual statute of limitation that reduced longer period provided by California law.

The California statute of limitation for a contract claim is four years, three years for a fraud or intentional misrepresentation claim and two years for a negligent misrepresentation claim.

Concluded the Court: the contractual one-year limitation agreed upon served only to specify when a breached of representations and warranties may occur and not when an action must be filed.

The Court of Appeals, therefore, reversed the decision and remanded the case to the trial court.