As a general rule, legal rights may be waived by contractual agreement. The protection afforded by statutes of limitations may be waived like other rights, but only in very narrow circumstances, due to a Virginia law that few know about. The General Assembly decided to make it a bit more difficult to waive a statute of limitations than some other rights, and enacted Virginia Code § 8.01-232, which states in pertinent part as follows:
Whenever the failure to enforce a promise, written or unwritten, not to plead the statute of limitations would operate as a fraud on the promisee, the promisor shall be estopped to plead the statute. In all other cases, an unwritten promise not to plead the statute shall be void, and a written promise not to plead such statute shall be valid 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.
Now that’s a pile of nearly incomprehensible legalese. One of the purposes of this blog, however, is to help people understand stuff like this, so let me try to decode it for you.
Basically, Section 8.01-232 evinces a policy in Virginia to disfavor attempts to get another contracting party to agree in advance to waive the defense a statute of limitations might provide. There’s a reason we have statutes of limitation, the thinking goes, so giving up the right to rely on the protection afforded by such statutes should not be undertaken lightly. The statute prescribes only a couple of circumstances under which a contractual waiver of the right to plead the statute of limitations will be valid and enforceable:
- The waiver will be deemed valid and enforceable if the person giving up his rights understood what he was doing by signing the waiver but never actually intended to give up his right to rely on the statute of limitations (or had some other intend to defraud the other party). In other words, even if a court would ordinarily declare an attempted waiver to be unenforceable, the court will allow the waiver to be enforced if to hold otherwise would allow the promising party to effectuate a fraud.
- Assuming fraud is not involved, the waiver will be deemed valid and enforceable only if all four of the following conditions are met:
- The waiver is in writing;
- The waiver is made for the purpose of avoiding or deferring litigation to allow time to attempt to negotiate a settlement;
- The waiver is accomplished by way of a separate agreement (i.e., is not included as part of the same agreement that one party is presently trying to enforce); and
- The waiver lasts for a period not longer than the period that would result from doubling the applicable limitations period. (Waivers of indefinite duration are no good).
There aren’t many cases dealing with this statute, but I found a couple so let’s take a quick look at those decisions to shed some light on how this “anti-waiver” statute has been interpreted and applied in the real world.
Most recently, we have the Virginia Supreme Court’s decision in Radiance Capital Receivables Fourteen, LLC v. Foster, decided just last week. That case involved a guarantee of a construction loan. The guarantee agreement provided that the guarantor agreed to “waive the benefit of any statute of limitations or other defenses affecting the…Guarantor’s liability” under the agreement. Pretty standard stuff. But enforceable? Apparently not.
The parties agreed that Virginia’s five-year statute of limitations applied to the loan and guaranty agreement, and that the noteholder failed to file its complaint until after the expiration of five years from the default on the loan. The guarantors asserted that the claim was barred by the five-year statute of limitations (even though they had prospectively promised, in the language of the guaranty agreement itself, not to raise that defense). They argued that the waiver did not meet the requirements of § 8.01-232. The Virginia Supreme Court agreed, allowed them to plead the statute of limitations, and affirmed the trial court’s dismissal of the case as untimely.
First, the court rejected the notion that the statute only applies to “promises” not to plead the statute of limitations and not to express “waivers” of the statues of limitations. That distinction is without a difference, so the anti-waiver law applies to both. Waiver is defined as “the intentional relinquishment of a known right, with both knowledge of its existence and an intention to relinquish it.” (See May v. Martin, 205 Va. 397, 404 (1964)). A promise, on the other hand, is defined by Black’s Law Dictionary as “the manifestation of an intention to act or refrain from acting in a specified manner, conveyed in such a way that another is justified in understanding that a commitment has been made.” While waivers and promises are two different things, “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,” as they both “bar a party from asserting a statute of limitation defense.”
Having found the statute potentially applicable to the guaranty’s waiver clause, the Virginia Supreme Court proceeded to hold that none of the conditions for enforceability found in the statute was present under the circumstances of the case (other than the requirement that it be in writing), so the purported waiver was found to be ineffective.
Declining to give effect to the waiver would not “operate as a fraud on the promisee” (i.e., the lender) because there was no evidence to suggest that the guarantors had fraudulent intent when they signed the guaranty agreement. A basic tenet of fraud law is that fraud must relate to a present or pre-existing fact and cannot be predicated on unfulfilled promises or statements as to future events. If the sole basis for a fraud claim is that a person promised to pay a debt and then broke that promise by failing to pay it, that’s not fraud–it’s a breach of contract. Had there been evidence that the guarantors promised not to assert the statute of limitations while secretly harboring a fraudulent intent to not actually honor that promise, that would be a different story as a promisor’s state of mind is considered a matter of present fact, the misrepresentation of which could support a fraud claim. Here, the guarantors were breaking their written promise not to rely on the statute of limitations, but there was no evidence that at the time they signed the guaranty agreement they had the “fraudulent intent to refuse to be bound” by the waiver language, so the language of § 8.01-232 did not apply.
The court proceeded to hold that the waiver could not be enforced because the other requirements of the statute had not been met either. The waiver was in writing, but it had not been made in a separate standalone agreement “to avoid or defer litigation pending settlement of any case.” Rather, it had been made contemporaneously with the guaranty agreement, before there was any dispute about payment or anything else. It also attempted to waive the right to plead the statute of limitations for an indefinite period of time, rather than for a maximum five-year extension of the limitations period.
A similar result (a finding of waiver invalidity) was reached in Slaey v. Harrington, a 2015 bankruptcy appeal in the Eastern District of Virginia. There, a lawyer loaned $235,000 to his client. Three days before the expiration of the six-year statute of limitations applicable to negotiable instruments, the lawyer asked the client to sign a new agreement promising not to raise a statute of limitations defense “in any legal proceeding that relates to funds borrowed” during the time in question. The client signed the agreement.
Several years later, the client filed for bankruptcy protection, and the lawyer asserted a creditor’s claim in which he included the $235,000 from the original loan. The client argued that the waiver agreement was ineffective and that the statute of limitations had expired on the lawyer’s note-enforcement claim. The bankruptcy court held that the waiver agreement was valid because to hold otherwise would “operate as a fraud on the promisee” as provided in § 8.01-232. The district court, however, reversed.
No one disputed that the general requirements for waiver validity had not been met, as there was no evidence that the waiver was made “pending settlement” of any case, and it did not include any time limitation. The issue on appeal was how to interpret “operate as a fraud,” and the court dealt with the issue the same way the Virginia Supreme Court did in the Radiance Capital case: by noting that fraud requires the misrepresentation of a present or pre-existing fact and cannot rest solely on unfulfilled promises of future events.
Absent clear and convincing evidence that the client never intended to honor the waiver agreement and the time she signed it, the court found that enforcing the agreement would not operate as a fraud and felt compelled to overrule the bankruptcy judge and hold that the waiver agreement was invalid and thus unenforceable. The six-year statute of limitations on the lawyer’s claim had expired, so the lawyer could no longer seek to collect on the $235,000 note.