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    CIVIL PROCEDURE: Contractual Waivers of the Statute of Limitations Unenforceable in Virginia

    Posted by Paul A. Ferrer on Mon, Dec 16, 2019 @ 12:12 PM

    The Lawletter Vol 44 No 6

    Paul Ferrer—Senior Attorney, National Legal Research Group

                In a decision with far-reaching implications in the commercial world, the Virginia Supreme Court has decided that contractual waivers of the right to plead the statute of limitations that do not meet specified statutory criteria are unenforceable under Virginia law. See Radiance Capital Receivables Fourteen, LLC v. Foster,  ___ Va. ___, 833 S.E.2d 867 (2019), available at http://www.courts.state.va.us/opinions/opnscvwp/1180678.pdf. The statute in question provides that unless the failure to enforce a promise not to plead the statute of limitations would operate as a fraud on the promisee, a written promise not to plead the statute of limitations is valid and enforceable only "when (i) it is made to avoid or defer litigation pending settlement of any case, (ii) it is not made contemporaneously with any other contract, and (iii) it is made for an additional term not longer than the applicable limitations period." Va. Code Ann. § 8.01-232(A).

                In the instant case, the borrower executed a promissory note in favor of the lender, and the borrower’s principals guaranteed payment of the debt. The guaranty included an agreement to "waive[] the benefit of any statute of limitations or other defenses affecting the . . . Guarantor’s liability." 833 S.E.2d at 868. When the lender’s assignee sued the guarantors more than five years after the lender’s claim for breach of the guaranty had accrued, the guarantors asserted that the claim was barred by the applicable statute of limitations despite their waiver, which did not meet the requirements of § 8.01-232(A). In response, the creditor argued that their waiver was not within the statute because it involved a present waiver of their statute-of-limitations defense rather than a "promise not to plead the statute" at a later date.

                Breckenridge Ingles was the attorney for the guarantors. He contacted NLRG attorney Paul Ferrer to provide the research underlying the successful assertion of the statute-of-limitations defense in the circuit court and then to prepare the appellees’ brief for the Virginia Supreme Court. In a unanimous opinion, the Virginia Supreme Court rejected the creditor’s argument, reasoning that a waiver of the right to plead the statute of limitations and a promise not to plead the statute of limitations have the same practical effect. If enforceable, both a waiver of, and a promise not to plead, the statute of limitations would bar the contracting party from asserting an otherwise viable statute-of-limitations defense. In addition, a waiver made in a contract, which is nothing more than a series of promises, implicitly includes a promise that the waiving party will refrain from pleading the statute of limitations when the time comes.

                The court also noted, and rejected, the obvious workaround for creditors, which would permit them to circumvent the requirements of the statute (which has been around in some form for about a hundred years in Virginia) simply by characterizing a promise not to plead the statute of limitations as a contractual "waiver." In that way, creditors would never be time-barred from seeking to collect any note or guaranty including such a waiver, despite the beneficial purposes served by statutes of limitations. As the court noted, "[i]f a promise not to plead the statute [of limitations], made at the inception of the contract, were treated as valid . . ., the creditor would acquire a perpetual cause of action." Id. at 870 (quoting 4 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts § 8:44, at 696-97 (4th ed. 2008)).

                The creditor made a last-ditch effort to ward off the effects of section 8.01-232(A), arguing that the failure to enforce the guarantors’ waiver of the statute of limitations would operate as a fraud on the creditor. However, the court rejected that argument as well, concluding that the statutory phrase "operate as a fraud on the promise" requires clear and convincing evidence that the promisor made its promise not to plead the statute of limitations with fraudulent intent, that is, with no present intention of performing that promise. As such, the fraud in question cannot be established by alleging or proving nothing more than that the promisor eventually broke its promise. Since the creditor provided no evidence that the guarantors in this case signed the guaranty with the fraudulent intent to refuse to be bound by their waiver of the statute of limitations, they were not estopped from asserting the statute of limitations as a defense pursuant to section 8.01-232(A).

                The court’s decision is of significant import with regard to the enforcement of loans and guaranties in Virginia. Many thousands of loans and guaranties executed in Virginia likely contain a waiver of the statute of limitations similar to the one executed by the guarantors in Radiance Capital. Those waivers are now unenforceable. Going forward, a creditor that wishes to obtain an enforceable waiver of the statute of limitations can do so only in compliance with section 8.01-232(A), which applies only in the limited circumstance where the waiver is made, among other things, to avoid or defer litigation pending settlement of any case involving the underlying obligation. 

                In an email informing Paul Ferrer of the positive outcome in the case, attorney Ingles stated as follows: "You should get all of the credit. The case would have been lost but for your excellent work."

    Topics: Paul A. Ferrer, statute of limitations, civil procedure, contractual waivers, unenforceable contract

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