Some Questions About Delaware’s New Law Allowing Parties To Extend The Statute Of Limitations

Delaware recently amended its law to allow parties to a written contracting involving at least $100,000 to provide that any action based on that contract may be brought within a period specified in that contract provided that the action is brought prior to the expiration of 20 years from the accrual of the cause of action.  10 Del. Code § 8106(c).  This new provision, which took effect on August 1, 2014, is being touted as being useful in merger and acquisition transactions.

Many M&A transactions take the form of asset purchases.  As someone who taught sales transactions for many years, my first question was how does this new statute interact with the statute of limitations set forth in Article 2 of the UCC (in California, we call it Division 2)?  The new Delaware statute appears to override the UCC’s four-year limitations period by providing “Notwithstanding anything to the contrary in . . . § 2-725 of Title 6 . . .”.  (In California, the limitations period is codified as Cal. Com. Code § 2275.)

When Does A Cause of Action Accrue?

Nonetheless, it doesn’t appear that Section 8106 negates Section 2-725 entirely.  Under Section 8106, an action must be brought prior to the expiration of 20 years from the “accrual of the cause of action”.  Most lawyers would assume that a cause of action for breach accrues at closing, but Section 2-725(b) provides that a cause of action accrues when the breach occurs.  Generally, this will be upon tender of delivery.  While this may be at closing, the UCC provides that the manner, time and place of tender are to be determined by the agreement and Article 2.  See Del. Code tit. 6, § 2-503 and Cal. Com. Code § 2503.  Another wrinkle is that Section 2-275(b) provides a special rule when a “warranty explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance”.  In that case, “the cause of action accrues when the breach is or should have been discovered.”

Snoozing May Mean Losing Even Under A 20 Year Limitations Period

Section 8106 also doesn’t address the mother of all “you snooze, you lose” statutes - Section 2-607(3)(a).  That statute provides that when tender has been accepted, a buyer must within a reasonable time after he or she discovers or should have discovered any breach notify the seller of breach or be barred from any remedy.  Thus, it won’t matter how long the statute of limitations is if the buyer fails to notify the seller of a breach under Section 2-607(3)(a).

Does The Transaction Have A Reasonable Relation To Delaware?

Another thing to keep in mind is that the UCC has a governing law provision, which is found in Section 1-301.  That statute provides “Except as otherwise provided in this section, when a transaction bears a reasonable relation to this State and also to another state or nation the parties may agree that the law either of this State or of such other state or nation shall govern their rights and duties.”  Note that the statute  requires that the “transaction” not the “parties” bear a reasonable relationship to the chosen state.  The official UCC commentary explains “reasonable relation” as ordinarily requiring that “a significant enough portion of the making or performance  of the contract occurs or is to occur in the chosen state.   I think it remains to be seen whether a Delaware choice of law provision will be honored when the relationship is based solely on the fact that one or more of the parties is incorporated in Delaware.

Yet another question is to what extent a claim will be considered “based on a written contract”.  Under the UCC an “agreement” and a “contract” aren’t the same thing.  A “contract” is defined as “the total legal obligation that results from the parties’ agreement as determined by the Uniform Commercial Code as supplemented by any other applicable laws”.  (Section 1201(b)(12).  This definition applies to the UCC.  Section 8106 isn’t part of the UCC and thus it remains to be seen whether an action “based on a written contract” includes obligations imposed by law (such as the UCC) or just those expressed in the parties’ written agreement.  Another wrinkle might be the effect, if any, of the Convention on the Limitation Period in the International Sale of Goods.

 

Topics:  Cause of Action Accrual, Statute of Limitations, UCC

Published In: Civil Procedure Updates, General Business Updates, Mergers & Acquisitions 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.

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