In ENI Holdings, LLC v KBR Group Holdings, LLC(1), the Delaware Court of Chancery provided important guidance with respect to the use of survival clauses to shorten by agreement the three-year statute of limitations for breach of contract claims, as well as procedural aspects of contractual indemnification.
In December 2010 ENI Holdings, LLC sold Roberts & Shafer Co to KBR Group Holdings, LLC pursuant to a stock purchase agreement. The seller filed suit against the buyer alleging breach of contract and the covenant of good faith and fair dealing with respect to the seller's request for a release of certain escrowed funds under the terms of the stock purchase agreement. The buyer responded with counterclaims alleging fraud and breach of various representations, warranties and covenants. The seller moved to dismiss the counterclaims, asserting that the buyer had not satisfied the contractual prerequisites for indemnification and that the buyer's counterclaims were time barred.
The court found that, absent clear contractual language to the contrary, an indemnified party's failure to provide a notice called for by the contract did not relieve the indemnifying party of any obligation, except to the extent that the indemnified party was prejudiced by such failure. The court also found that the buyer satisfied the stock purchase agreement's good-faith negotiation requirement when it communicated with the seller before filing counterclaims, particularly in circumstances where the seller initially filed the complaint, thereby limiting the amount of good-faith negotiation that could occur between the parties.
The court's holding on this point emphasises the need for contracting parties to make clear any contractual prerequisite for litigating an indemnification claim.
The seller argued that the buyer's counterclaims relating to non-fundamental representations and warranties should be dismissed because the stock purchase agreement's survival clause acted as a contractual statute of limitations (effectively shortening the otherwise applicable Delaware statute of limitations) and barred such counterclaims.
The survival clause stated that the representations and warranties of the seller would survive closing and terminate on the 'termination date', except in the case of certain specified fundamental representations which had a different termination date. The buyer did not commence litigation before the termination date, but it argued that only notice to the seller was required. The seller asserted that failure to commence litigation before the termination date meant that the claims were time barred under the stock purchase agreement.
The court found that "it is not a reasonable interpretation of the [Stock Purchase Agreement] that [the buyer] can preserve a lawsuit based on an expired representation or warranty merely by providing notice before the applicable Termination Date."
Accordingly, the court dismissed the counterclaims involving the non-fundamental representations as time barred under the stock purchase agreement's survival clause.
The court's decision serves as a reminder that, absent language in the contract to the contrary, a contractual survival clause for indemnification will operate as a contractual statute of limitations under Delaware law and not merely as a notice period.
The court separately analysed whether the buyer's fraud claims were subject to the survival clause. The survival clause was silent with respect to fraud claims, and other sections in the stock purchase agreement (eg, the exclusive remedy provision) specifically carved out fraud claims, resulting in what the court determined was an ambiguous contract. As such, the court denied the seller's motion to dismiss with respect to the fraud-based claims. However, the court left unresolved whether fraud claims can be subject to a shortened contractual limitations period as a matter of public policy.
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