Court Of Chancery Holds That ‘Discovery Rule’ Cannot Toll Claims Beyond A Contractually Established Limitations Period

more+
less-

In ENI Holdings, LLC v. KBR Group Holdings, LLC, the Delaware Court of Chancery ruled that parties to a stock purchase agreement may shorten the limitations period for contractual recovery by way of a clause providing for the survival, and subsequent termination, of representations. Unlike the prior case of GRT, Inc. v. Marathon GTF Technology, Ltd., where both the contractual representations and their remedies terminated simultaneously, the contractual language relevant to the court’s ruling in ENI Holdings was silent as to the termination of a remedy. Nonetheless, the court held that the survival provisions were unambiguous and limited counterclaims based on the stock purchase agreement.1

The court in ENI Holdings also concluded that tolling under the “discovery rule” – otherwise known as the doctrine of unknowable injury – should not apply as a matter of law:

“There is little Delaware case law directly addressing the availability of the discovery rule to toll a contractual limitations period. … Having considered Delaware law’s respect for parties’ contractual choices, and reviewed case law from other jurisdictions addressing that question, I conclude that application of the discovery rule to toll a contractual limitations period is inappropriate, at least, as here, where the inherent unknowability of a potential claim is itself knowable or predictable, and thus the proper source of negotiation and resolution between the parties to the contract. In such a case, parties who contract for an abbreviated limitations period must be held to their bargain.”

In contrast, the court assumed, without deciding, that the doctrines of fraudulent concealment and equitable tolling could apply to the limitations period established by the stock purchase agreement. However, the court concluded that the relevant allegations were not sufficient to support the application of those doctrines.

With respect to the survival of fraud claims, the court determined that the stock purchase agreement was ambiguous, thus requiring it to deny the motion to dismiss with respect to fraud-based counterclaims. In light of that determination, the court expressly declined to reach the argument that, as a matter of public policy, claims sounding in fraud cannot be subject to a contractually defined limitations period shorter than that provided by statute.

A copy of the decision, which may be appealed, is available here: http://courts.delaware.gov/opinions/download.aspx?ID=198140.

Endnote

1 The decision addresses numerous counterclaims and arguments; the discussion herein is an overview of selected aspects of the decision.

Topics:  Claims Limitations Period, Contract Interpretation, Discovery Rule, Fraud, Fraudulent Concealment

Published In: Civil Procedure Updates, General Business Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Pepper Hamilton LLP | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »