Considerations for Contractual Provisions Extending Statutes of Limitations

18 Min Read By: Louis G. Hering, Melissa DiVincenzo

Overview

Like the law in many other states, subject to the exception noted below for contracts under seal, Delaware law does not permit the extension of a statute of limitations by contract.1 While many practitioners may be familiar with this prohibition, some may not have considered the types of provisions that could be construed to run afoul of the prohibition and the implications for certain legal opinions. Practitioners who are drafting, or providing enforceability opinions on, provisions that could be construed as contractual extensions of the statute of limitations should be aware of the prohibition and, more importantly, the ways in which the issue can arise. For example, many private company acquisition agreements require the seller to indemnify the buyer post-closing for losses arising from a breach of the seller’s representations and warranties. The parties may approach this through a combination of survival clauses, notice provisions, and contractual indemnification obligations. Such indemnification obligations may, by their terms, extend for a number of years post-closing and, in the case of indemnification for breach of certain representations, such as authority and capitalization, may extend indefinitely.

Extension of the Statute of Limitations by Contract

If an acquisition agreement specifically provided that the right to file suit for breach of representations and warranties was extended for specified periods, for example, three years for business representations, ten years for environmental representations, and indefinitely for “fundamental” representations, the statute of limitations issue may be readily apparent to practitioners familiar with the public policy limitation. However, the provision purporting to extend the statute of limitations contractually may do so in a more subtle fashion. For example, many agreements provide that the representations and warranties will “survive” for a specified period of time, much like the time periods noted above.

In GRT, the Delaware Court of Chancery interpreted a survival clause in a securities purchase agreement as a contractual statute of limitations.2 There, the survival clause had the effect of shortening the statute of limitations rather than extending it.3 The survival clause provided that certain representations survived for a one-year period and would thereafter “terminate,” together with associated indemnification rights and contractual remedies.4 Under Delaware law, parties may shorten the statute of limitations by contract because a shortening of the statute of limitations is consistent with the policy behind statutes of limitation.5 Although the GRT court was only required to address the effect of the one-year survival clause, the court addressed, in dicta, the interpretation of a provision purporting to cause the representations and warranties to survive “indefinitely,” and explained that such a provision would constitute an impermissible attempt to extend the statute of limitations under Delaware law.6 The GRT court instructed that, under Delaware law, such a provision would be read “as establishing that the ordinarily applicable statute of limitations governs the time period in which actions for breach can be brought.”7 Thus, a Delaware court would give effect to such a provision by reading it in a manner consistent with Delaware public policy.

The “survival” provisions discussed above are often coupled with notice requirements and covenants to indemnify for breaches of the representations and warranties occurring during the survival periods.8 The covenants to indemnify can relate to third-party claims as well as claims between the parties. It is important to note, however, that, under Delaware law, the analysis of a claim for indemnification for breach ...

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ABOUT THE AUTHORS

Wilmington, DE

Louis G. Hering

Lou is a partner in the Firm’s Commercial Law Counseling Group. He is actively involved in the organization and structuring of all forms of Delaware alternative entities. His practice includes…

Wilmington, DE

Melissa DiVincenzo

Melissa is a partner in the Delaware Corporate Counseling Group. She provides advice on corporate governance matters and the Delaware aspects of various corporate transactions, including initial public…

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