Delaware Extends Statute of Limitations For Contract Claims to 20 Years

The time period for bringing claims for breaches of representations and warranties in corporate transactions (known as “survival” periods) are usually heavily negotiated. General reps and warranties about the condition of the business often have the shortest survival periods (usually 6 months to two years) and often track the length of an escrow period. However, special reps and warranties such as those relating to environmental liability will typically have a longer “survival” period and are frequently are tied to the underlying statute of limitations (SOLs).   If a purchase agreement is silent on survival of reps and warranties, courts tend to default to the state’s contract SOL.

SOLs for claims for breach of contract vary considerably by jurisdiction, usually ranging from 3 to 10 years. The contracting parties will identify the state that will govern the enforcement and interpretation of an agreement. Depending on the state, survival clauses attempting to shorten or extend (or waive) the SOL for breach of contract claims may not be enforceable. States also differ on if a survival clauses tends to operate as a contractual statute of limitation in which a party must file a lawsuit or simply period for an injured party to file a notice of claim.

In states that prohibit extension of the survival period beyond the SOL for breaches of contract, the SOL is essentially also acting as a statute of repose (SOR). Click here  for a prior post on the difference between SOLs and SORs as well as delayed discovery rules that can suspend the running of SOLs.

The SOL will start generally begin to run on the date of the closing though often times survival clauses relating to claims filed by third parties may not be triggered for a period of time after the closing. Because of the variation among state contract SOLs, it is important that the contracting parties understand the SOLs of the state law that govern their agreements.

For example, many transactions will be governed by Delaware law when the companies are Delaware entities. Earlier this summer, the Delaware legislature amended the contract SOL to 20 years for contracts involving at least $100K. The extended SOL became effective on August 1st. However, it is unclear if the change applies to contracts executed after the effective date or if it applies to contracts entered into prior to that date that simply reference. the SOL. If the  SOL amendment is considered  “remedial”  and since it extends a plaintiff’s right to bring suit, it is possible the Delaware courts may  apply the new SOL to contracts entered into prior to its effective date.

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