Sealing the Deal

In many jurisdictions, a statute of limitations may not be extended by contract. [1] Delaware follows this rule, so its three-year statute of limitations for contract claims generally may not be extended. [2] Moreover, under Delaware’s borrowing statute, contract claims arising outside of Delaware but litigated in a Delaware court are subject to the shorter of that three-year period or the time established by the jurisdiction where the cause of action arose. [3] Notwithstanding these default rules, the statutory limitations period can be reduced by contract. [4] While many private company acquisition agreements do in fact shorten the statute of limitations for many breaches of certain representations and warranties by providing that such representations and warranties “survive” for a shorter period, it is also often the case that buyers want certain representations and indemnification obligations to “survive” longer, and in some cases, beyond the statutory period. [5] In order to achieve such a result, parties may, under Delaware law, use a so-called “specialty” contract, i.e., a contract that is entered into under seal, which will be subject to a twenty-year limitations period. [6]

In order to do so, buyers should ensure that the contract includes an indication that it is sealed in the signature block and certain other indicia of an intent to be bound by the rules applicable to a sealed instrument. In addition, in order to ensure that the parties receive the intended benefit of the extended limitations period, they should specifically choose Delaware law and Delaware courts so that the Delaware rules applying to statutes of limitations are applied in any litigation. [7] Examples of such provisions are set forth below.

Recitals. Include a statement in recitals that the parties intend to create a contract under seal:

WHEREAS, the parties intend to create a contract under seal;

Express agreement to create a sealed instrument. Include a statement in body of the agreement that the parties intend to create a contract under seal. Although such a statement should be sufficient to demonstrate the parties’ intent, it would be advisable to include an express reference to the twenty-year limitations period applicable to contracts under seal so that it is clear that the parties understood the consequence of creating a contract under seal:

The parties hereby acknowledge and agree that, to the fullest extent permitted by law, they intend that this Agreement be, and that it will be treated and construed as, a contract under seal under Delaware law with all of the consequences of such a contract under Delaware law, including causing the Agreement to be subject to the twenty-year limitations period applicable to sealed instruments[; provided, however, that the parties hereto agree that, notwithstanding the application of such longer limitations period under Delaware law, the parties hereby agree to reduce the applicable limitations period for all claims arising out of or relating to this Agreement to _______ years from the date of Closing]. [8]

Testimonium clause. Include a statement in the testimonium clause referring to execution under “seal:”

IN WITNESS WHEREOF, the parties have affixed their signatures and seals on the date first set forth above.

Signature lines. Include the word “SEAL” below or beside the signature lines. In addition, have the agreement attested to by a witness (the “attestation” portion of this step may not be essential, but is advisable):

ATTEST/WITNESS:	ABC CORPORATION (SEAL)
/s/ John Doe	By: /s/ Jane Doe
John Doe, Secretary	Jane Doe, President

Forum selection clause. Include a forum selection clause selecting Delaware as the exclusive forum for litigating actions arising out of or relating to the agreement:

In any action or proceeding between any of the parties arising out of or relating to this Agreement or any of the transactions contemplated hereby, each of the parties: (a) irrevocably and unconditionally consents and submits to the exclusive jurisdiction and venue of the Court of Chancery of the State of Delaware or, to the extent such court does not have subject matter jurisdiction, the Superior Court of the State of Delaware or the United States District Court for the District of Delaware, (b) agrees that all claims in respect of such action or proceeding shall be heard and determined exclusively in accordance with clause (a) of this Section, (c) waives any objection to laying venue in any such action or proceeding in such courts, (d) waives any objection that such courts are an inconvenient forum or do not have jurisdiction over any party, and (e) agrees that service of process upon such party in any such action or proceeding shall be effective if such process is given as a notice in accordance with Section __ of this Agreement. [9]

Choice of law provision. Include a choice of law provision specifying Delaware law and specifically noting that it applies to the determination of the applicable statute of limitations:

This Agreement and any claim, controversy or dispute arising out of or related to this Agreement, any of the transactions contemplated hereby, the relationship of the parties, and/or the interpretation and enforcement of the rights and duties of the parties, whether arising in contract, tort, equity or otherwise, shall be governed by, and construed in accordance with, the laws of the State of Delaware (including in respect of the statute of limitations or other limitations period applicable to any such claim, controversy or dispute), without regard to any applicable principles of conflicts of law that might require the application of the laws of any other jurisdiction.

Endnotes:

[1] See generally 15 Corbin on Contracts § 83.8 at 289-90 (“Because the purpose of a statute of limitations is to prevent the bringing and enforcement of stale claims, involving extra danger of fraud and mistake, courts do not enforce parties’ agreements to lengthen the limitations period.” (internal quotation marks omitted)); but cf. 51 Am. Jur. 2d Limitation of Actions § 82 (“Contracting parties may be permitted to extend limitation periods … There is also authority, however, … that contractual periods that lengthen the applicable limitations period are invalid.”).
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[2] 10 Del. C. § 8106(a). See GRT, Inc. v. Marathon GTF Tech., Ltd., 2011 WL 2682898, at *15 & n.80 (Del. Ch. July 11, 2011) (noting that generally parties to a contract may not extend the statute of limitations in Delaware); Shaw v. Aetna Life Ins. Co., 395 A.2d 384, 386-87 (Del. Super. Ct. 1978) (same).
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[3] 10 Del. C. § 8121.
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[4] ENI Holdings, LLC v. KBR Group Holdings, LLC, 2013 WL 6186326, at *7 (Del. Ch. Nov. 27, 2013); GRT, Inc., 2011 WL 2682898, at *6, *12 n.59.
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[5] Where the cause of action involves a claim to indemnify the buyer for third party liability, the statutory limitations period may not pose an issue if the contract is drafted so that the claim does not accrue until the liability to the third party is incurred. See Certainteed Corp. v. Celotex Corp., 2005 WL 217032, at *5 (Del. Ch. Jan. 24, 2005).
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[6] Whittington v. Dragon Group, L.L.C., 991 A.2d 1, 10 (Del. 2009). As noted above, the parties can shorten the limitations period for non-sealed instruments, see, e.g., ENI Holdings, 2013 WL 6186326, at *7; presumably, the same rule applies to contracts under seal.
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[7] The applicable statute of limitations is typically considered a procedural rather than substantive issue for conflict of laws purposes. As a result, the statute of limitations of the forum will generally govern. See Norman v. Elkin, 2007 WL 2822798, at *3 (D. Del. Sept. 26, 2007). When the chosen forum is a court of equity such as the Delaware Court of Chancery, the equitable doctrine of laches rather than a statute of limitations will apply to determine whether an action is time-barred. Whittington, 991 A.2d at 8. In applying laches, however, courts of equity often look, and give “great weight,” to the analogous statute of limitations, if any. Id. at 9.
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[8] Cross-references to any different survival periods should be included in this provision.
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[9] Based upon the American Bar Association’s Model Merger Agreement for the Acquisition of a Public Company, § 8.7 (2011).
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