GRT Inc. v. Marathon GTF Technology Ltd., C.A. No. 5571-CS (Del. Ch. July 11, 2011), read opinion here.

Issue Addressed

What does it mean when a contract expressly provides that representations will survive for one year after closing but thereafter will terminate, together with the sole contractually provided remedy for their breach?

Short Answer:  Among other things it means that a lawsuit must be filed within one-year of closing in order to challenge those representations.

Brief Background

This case was decided on a motion to dismiss and involved certain representations in an agreement with a provision that the representations would expire after a year, and the contractually provided remedies for their breach would also expire after one year.

Highlights of Court’s Ruling

The Court referred to prior Delaware case law that upheld contractual shortening of the statute of limitations requiring suits to be brought before the relevant survival period expires.  See footnotes 6 and 7 and accompanying text.  The Court found Delaware law to be consistent with leading treatises that address mergers and acquisition agreements generally, and survival clauses in transactional contracts more particularly, with those treatises concluding that:  “The survival period is, in effect, a contractual statute of limitations.”  See footnote 8, citing Kling and Nugent, 2 Negotiated Acquisitions of Companies, Subsidiaries and Divisions, Section 15.02[2] n. 45 (2011).

The Court also discussed the Delaware public policy and established authority supporting freedom of contract.  See footnotes 59 through 60 and accompanying text.

Extensive footnote references to “learned commentary and treatises” in the mergers and acquisitions field included: Stephen M. Bainbridge, Mergers and Acquisitions, 72-73 (2d ed. 2009), cited at footnote 64 of the opinion.  The Court also quoted extensively from Professor Samuel C. Thompson, Jr.’s scholarship regarding mergers and acquisitions.  See footnote 68, 69 and 75.  In addition, the Court relied on Professor Thompson’s analysis in the text of its opinion to support its conclusion that was consistent with Professor Thompson’s views that:  “It [is] clear that a provision of an acquisition agreement that states, for example, that a representation and warranty survives for a year, means that any claim that such representation was false must be made prior to the end of the one-year period.  In other words, the survival period acts as a private statute of limitation on the claim.”

The Court provided several practice tips for drafters of agreements including the guidance that:  “Contracting parties who decide to remain silent on the question of whether their representation and warranties survive closing do so at some risk, and the better and more certain practice is to have the contract expressly state whether or not the representations and warranties survive the closing, and therefore will provide a basis for a post-closing lawsuit.”  Slip op. at 32.  See also footnote 79 which includes an extensive discussion of preferred drafting styles for contracts with generous citations from a work by Kenneth A. Adams entitled, A Manual of Style for Contract Drafting (2d ed. 2008).

The Court also observed the general rule that the applicable statute of limitations governs the time period in which actions for breach can be brought if representations in the agreement survive closing but the terms do not provide for any time limitation for that survival.

Additional contract interpretation guidance is provided in footnote 88 and accompanying text which describes the importance of the business context in which a contract was negotiated because “the reality is that the same word can have more than one general meaning and that the commercial context can influence which meaning the parties intended.”  In that same footnote the Court referred to a common misunderstanding of the parol evidence rule, and that a consideration by the Court of “surrounding circumstances” refers to the commercial or other setting in which the contract was negotiated and other objectively determinable factors that give a context to the transaction between the parties, and should not be considered parol evidence.

Supplement: Professor Stephen Bainbridge writes here about the Court’s reference in footnote 64 to his scholarship—and his reaction to the Court’s reference.