February 5, 2018

Survival Clauses: Delaware Chancery Okays Contractual Limitations Period

Survival clauses setting forth a date on which a parties contractual obligations under a purchase agreement will expire are pretty standard fare in M&A transactions.  Dealmakers take their enforceability for granted, but it’s unusual to see a Delaware Chancery Court decision on this topic.

Francis Pileggi recently blogged about a decision from late last year – HBMA Holdings v. LSF9 Stardust Holdings, (Del. Ch.; 12/17) – in which Vice Chancellor Montgomery-Reeves was called upon to address the issue in the context of a dispute over an earnout. Fortunately, there were no surprises.  Here’s an excerpt:

The facts of this case involved indemnification claims that were based on a contract.  That contract provided that a notice of claims for indemnification needed to be made within 30 days of the matter giving rise to such a claim.  The court found that the notice of claim was not given within that 30-day period.

The court explained that Delaware enforces shortened statute of limitations based on contracts if the period is considered reasonable.  See footnotes 53 and 54.  The court found that a provision in the contract in this case that notice of claims for indemnification needed to be made within 30 days was enforceable.

Referring to these types of contract provisions as “survival clauses,” the court explained that Delaware courts uphold unambiguous survival clauses that, in effect, serve as shortened statutes of limitations. The claim in this case was barred because the applicable 30-day period passed, and therefore the claim was barred. This decision and the explanation of the law it applies, has great relevance to many similar contractual provisions.

Another reason that the case is worth reading is for the insight it provides into how Delaware courts interpret a contract’s dispute resolution, indemnification, and notice requirements – all of which were at issue here.

John Jenkins