Seal No Longer Required in Delaware for Contract Survival Periods of More Than Three Years—Avoids Trap for the Unwary in M&A Deals

As we wrote in our Winter 2012 M&A and Corporate Governance Newsletter, Delaware courts have held that the three-year statute of limitations applicable to general contract claims trumps contractual language that purports to apply a longer survival period.  For example, the typical merger agreement applies a survival period of between one and two years for most breaches of representations and warranties, but provides that others, such as fundamental representations and warranties or those relating to tax matters, survive much longer than three years, or indefinitely.  Delaware courts have held that these types of survival provisions cannot extend the three-year statute of limitations applicable to general contract claims under Section 8106 of Title 10 of the Delaware Code[1].  An acquirer of a business that attempts to bring an indemnity claim for breach of a tax representation six years after closing, to pick a typical example, is therefore likely to be foreclosed from bringing that claim.  In order to benefit from a 20-year statute of limitations instead of the three-year statute of limitations under Section 8106, the parties would need to have the contract executed under seal.  As noted in our prior newsletter, there are various steps that can be taken, depending on whether a party is an individual or a corporate entity, in order to achieve this result.

Effective August 1, 2014, a seal is no longer required in most cases.  Section 8106 has been amended by adding a new paragraph (c), which provides that “an action based on a written contract, agreement or undertaking involving at least $100,000 may be brought within a period specified in such written contract, agreement or undertaking provided it is brought prior to the expiration of 20 years from the accruing of such cause of action.” To benefit from the extended statute of limitations, the contract must therefore involve at least $100,000 and specify another “period” within which claims must be made.  The synopsis accompanying the amendment provides that examples of a “period” would include, without limitation, “(i) a specific period of time, (ii) a period of time defined by reference to the occurrence of some other event or action, another document or agreement or another statutory period and (iii) an indefinite period of time.”

For M&A practitioners, new Section 8106(c) provides welcome relief from a rule that was at best an oddity, and at worst a potential source of embarrassment in the future.  The text of Section 8106(c) and the accompanying synopsis indicate that the Section should be interpreted broadly and will be easy for parties desiring a survival period longer than three years to comply with.  Nonetheless, out of an abundance of caution, it would be prudent to phrase survival language in agreements in terms of provisions surviving or claims being able to be brought “for a period of X years” after closing, instead of “for X years.” Parties should also make sure that there is no scenario under which their contracts could be interpreted as not “involv[ing] at least $100,000.” An acknowledgement as to value in a recital or survival paragraph could, in an appropriate case, be beneficial.