Observations Regarding the Statute of Limitations in Swedish Law*

Authors: Marcus Nyberg and Johan Wahlund

Introduction

Disputes arising out of delivery agreements are frequently brought before the SCC Arbitration Institute. These agreements often contain various guarantees, which can include undertakings that stretch over decades and concern various forms of support, upgrades, and rectification of defects. Especially within certain business areas, such as transportation, aviation, and other sorts of machinery, the guarantee period may therefore be longer than the general ten-year statute of limitations set out in the Swedish Limitations Act.  As a result, the contractual relationship, albeit strictly speaking a delivery agreement, may in practice resemble more of a long-term partnership or a combined delivery and service agreement.

However, the mere fact that the parties have agreed on a guarantee period longer than ten years does not necessarily mean that a claim based on such a guarantee can be brought after the ten-year limitation period stipulated in the Swedish Limitations Act. The ten-year statute of limitations may thus interfere with the parties’ intentions. Combined with the fact that the limitation period under Swedish law starts at a relatively early stage, this may sometimes have highly (un)practical effects and lead to unexpected and draconian results. This is especially true for non-Swedish parties relying on long-term guarantees under an agreement governed by Swedish substantive law.

Are parties not free to agree on whatever guarantee period they want under Swedish law?

Yes and no. Swedish commercial law is based on the notion of freedom of contract. At the same time, the Swedish Limitations Act is generally applicable on all claims and provides a general ten-year time limitation on all claims. Therefore, unless the parties have explicitly agreed otherwise, a claim lodged after more than ten years, albeit within the guarantee period, may be time barred.

In addition, the Swedish Limitations Act is only semi-dispositive. Section 12 of the Limitations Act contains a mandatory provision stipulating that any agreement to the effect that a claim should never be time barred or that the limitation period should be interrupted in any other way than what is stipulated in the Limitations Act is invalid.

According to the preparatory works for the Swedish Limitation Act, it is, on the one hand, possible to agree on a limitation period longer than ten years, but the preparatory works also state, on the other hand, that a very long limitation period could be seen as unconscionable and therefore be set aside or adjusted in accordance with Section 36 of the Contracts Act. The relationship between the notion of freedom of contract, the Swedish Limitations Act, and the Swedish Contracts Act is therefore, to say the least, complicated.

So, how do I know if I can rely on my long-term guarantee even after ten years?

There is no relevant case law on the validity of long-term guarantees or the ultimate length of an extended limitation period. The only thing that is certain is that there has to be an agreed time limit for presenting a claim, as the agreement would otherwise violate Section 12 of the Limitations Act (and thus be declared invalid).

This means that, apart from a few general remarks in the preparatory works, parties to a long-term guarantee mainly have to rely on what is written in legal literature by one single scholar, Stefan Lindskog. According to Lindskog, an agreement must more or less expressly state that the parties have agreed on an extended limitation period. This would imply that the mere fact that an agreement contains a guarantee period longer than ten years is not enough, as it only implies the parties’ intent for an extended limitation period. As for how long of an extension can be accepted, Lindskog merely states that it must be decided on a case-by-cases basis taking all relevant circumstances into account.

Obviously, legal sources do not provide sufficient guidance for parties seeking to assess whether a specific long-term guarantee will survive in arbitration. In the absence of an explicit agreement on an extended limitation period, the tribunal would have to examine whether it somehow follows from the agreement (or other relevant circumstances) that the parties have not only agreed on a long-term guarantee, but also that the parties have agreed on a limitation period that spans over the entire guarantee period.

Another aspect that may affect validity is whether an undertaking is easy to define beforehand. For instance, if an agreement only concerns the undertaking to give out payment based on a promissory note and the debtor is to pay more than ten years after the parties entered into the agreement, the creditor’s claim for payment would most likely be time barred after ten years, unless the limitation period has been interrupted by the creditor. This is so because it is very simple for the creditor to interrupt the limitation period, since the undertaking is easy to define. Interruption is accomplished by simply sending the debtor a message that the payment is (or will become) due.

However, if the undertaking concerns, for instance, natural performance in the form of remedy or modification of defects in a piece of machinery, it is often much more difficult for the buyer/creditor to perform an interruption of the limitation period if defects have yet to occur. In the latter case, it is more likely that a long-term guarantee is valid despite the parties not expressly having agreed on a corresponding (extended) limitation period.

Sometimes it will follow from the commercial context or other relevant circumstances that the parties must reasonably have agreed on a long-term guarantee as well as a corresponding (extended) limitation period. This may very well be the case if the seller’s undertakings involve continuous performance or if the seller has acknowledged or accepted claims under the guarantee after more than ten years from the date of the contract. The same would probably apply if the guarantee clearly targeted defects or circumstances that typically arise after a longer period of use. But without an explicit agreement on an extended limitation period, it can be difficult to assess whether a long-term guarantee can be relied upon.

As for how long it is possible to extend the limitation period, it is inherently difficult to give a precise answer. However, when assessing whether a provision should be set aside or adjusted according to Section 36 of the Contracts Act, both courts and arbitral tribunals are usually hesitant to set aside or modify provisions in commercial relationships. For as long as the extended limitation period corresponds to the guarantee period, the risk of the provision being set aside or modified according to Section 36 of the Contracts Act should not be emphasised.

OK, but is this really a practical issue?

Yes, it may very well be. Swedish law sets itself apart when it comes to its approach to the starting point of the limitation period. The limitation period generally starts when an agreement is entered into and not, like in several Nordic and continental jurisdictions, when there is a breach of contract or when damage or defects appear. In other words, the clock starts ticking at a considerably earlier stage than in other jurisdictions. A non-Swedish party will find that this differs considerably from the relevant provisions in, for instance, CISG, the UN Convention on the Limitation Period in the International Sale of Goods, and the UNIDROIT principles.

Conclusions

The fact that a long-term guarantee may be time barred before the end of the guarantee period can come as a surprise and lead to draconian results, especially for non-Swedish parties relying on long-term guarantees under a contract governed by Swedish substantive law.

There is little guidance to be found from legal sources on this issue. However, if the parties explicitly agree on an extended limitation period that corresponds to the guarantee period, the guarantee should not be timed barred. Parties with an interest in preserving long-term guarantees are best off addressing the issue when drafting a contract.

*This article addresses issues related to the statute of limitations. A buyer, depending on the circumstances, may of course also be considered to have forfeited the right to invoke a defect if the buyer has failed to put the seller on notice within reasonable time, albeit within the ten-year limitation period.