Delaware law limits parties’ ability to contractually agree to lengthen the time period for making claims beyond the statute of limitations that would otherwise apply to the underlying claims. A line of Delaware cases (the most well known of which is GRT, Inc. v. Marathon GTF Technology, Ltd.) have held that the public policy behind statutes of limitations overrides contract language that states that representations and warranties survive “indefinitely”. In such cases, Delaware courts will hold that the underlying statute of limitations governs the time period in which actions for breach may be brought.
While not a new issue, this limitation under Delaware law is currently receiving attention among M&A lawyers because of the practical issues it creates for drafting agreements that implement the parties’ intent. For example, claims based upon inaccurate representations would usually be based upon a breach of contract claim, for which the statute of limitations in Delaware is three years from the time of breach. As a result, a business agreement that the time period for making claims based upon “fundamental representations” shall be longer than three years presents issues for the M&A lawyers seeking to draft enforceable contract language that implements the parties’ intent.
Because of the potentially disastrous consequences of improperly addressing this issue in the contract, all M&A lawyers should understand the law in this area and have strategies for addressing the issues it creates.
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