Statute of limitations on claims when a company is acquired

In acquisition practice, an important part of the process is the warranties given. In most cases, the buyer wants to obtain as many warranties as possible from the seller. This gives him more assurance that the purchase will not be a mis-sale. In fact, if a guarantee is breached, the buyer can claim damages. On the contrary, the seller wants to issue as few warranties as possible. This is because he wants to minimise his risk of being held liable. It is often agreed in the sales contract that the provisions of Sections 1 to 7 of Title 1 of Book 7 of the Civil Code (hereafter: BW) are excluded. Why does this happen and does this agreement always apply? What about the limitation provision in Section 7:23 of the Civil Code? I will elaborate on that in this article.

Background

Sections 1 to 7 of Title 1 of Book 7 of the Civil Code relate to contracts of sale. Pursuant to Article 7:47 of the Civil Code, these provisions also apply to property rights. Shares are property rights as a result of which these provisions in principle also immediately apply to share purchase agreements. The main reason for excluding the aforementioned sections can be found in Article 7:17 (and further) of the Civil Code: the non-conformity of the delivered good and its remedies. It follows from Section 7:17 of the Civil Code that the delivered good must comply with the agreement. Several factors must be taken into account: the seller’s communications, properties under normal use and any agreements on special use of the item. When taking over shares, therefore, extra close attention is paid to what exactly has been agreed in the contract in which the shares are bought.

Limitation of claims

Article 7:23 BW stipulates the buyer’s obligation to complain (paragraph 1) as well as the limitation period for claims (paragraph 2). The duty to complain means that the buyer must notify the seller within a reasonable time after discovering a defect. Or after he reasonably should have discovered the defect. The prescription of a claim means that a claim must be brought within a certain period of time. For example, against the seller.

If the buyer has a claim against the seller because a warranty has been breached, he has – it follows from Article 7:23 paragraph 2 of the Civil Code – two years to bring the claim. Does he not do so? Then his right to bring an action for damages on that ground expires. This limitation period can be interrupted. This means that the limitation period is stopped and will start running again. The buyer thus again has two years to bring the claim.

Exclusion of Article 7:23 paragraph 2 BW
Sections 1 – 7 of Title 1 Book 7 of the Civil Code are often excluded in purchase agreements in which shares are bought. This exclusion would also exclude Article 7:23 paragraph 2 of the Civil Code. However, the court has ruled that an exclusion of those sections does not mean that Article 7:23 paragraph 2 of the Civil Code is excluded. In fact, the court ruled that section 7:23(2) of the BW cannot be excluded. This is because Section 3:322(3) of the Civil Code provides that a limitation period can be shortened but cannot be excluded. Section 3:322 is mandatory in nature, which implies that parties cannot contractually deviate from it.

Practice

What does this mean for a possible dispute in takeover practice? The seller must be aware at all times – and therefore also when excluding sections 1 to 7 of title 1 Book 7 of the Civil Code – that the limitation period is not excluded. Thus, the buyer does have two years after discovering or reasonably ought to have discovered a defect/breach to bring a claim. The seller cannot therefore rely on the exclusion of those sections.

Conclusion

Acquisition practice is characterised by lavish agreements in which as much as possible is clearly stipulated so that the contract becomes guiding for the execution of the transaction. However, the contractual exclusion of the limitation period is therefore not possible. Are you planning to buy or sell a business? If so, we will be happy to help you ensure that your rights and obligations are best safeguarded!

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