Delaware Code Reform: Long-Term Survival of Representations and Warranties Made Easy (Maybe Too Easy, If You’re Not Careful with Your Curative Provision!)

February 23, 2015

In this post, we revisit an issue that we discussed less than a year ago – survival periods for representations and warranties under Delaware law. The reasons that we’re returning to this topic so soon are (i) that the law has changed and (ii) that a recent Delaware decision shows that the amended law comes with an unexpected twist.

Old law: maximum 3 years, unless you say the magic word (then, up to 20 years) In our May 2014 post, we noted that under the law of Delaware, the survival period for representations and warranties was generally limited to three years. That was because the limitation period that generally applied to Delaware commercial contracts was three years and also because Delaware was one of those jurisdictions where you couldn’t extend the limitation period even if everyone wanted to. That didn’t really make sense in the context of the sophisticated parties that like to do their commercial transactions in Delaware, so, as we also noted, a workaround had been developed. Representations and warranties could survive for up to 20 years under Delaware law if the agreement was under seal. In other words, if you knew the magic word (SEAL) and typed it in the right place on the signature page, your representations and warranties could survive for as long as 20 years, rather than just three.

New law: maximum 3 years, unless the parties specify more (then, up to 20 years) The good news is that the magic word is no longer required: survival periods can now be as long as 20 years if the agreement (sealed or not) so provides. This is the result of an amendment to the Courts and Procedure provisions under Title 10 of the Delaware Code. Effective August 1, 2014, a new subsection (c) under Section 8106 provides:

…an action based on a written contract, agreement or undertaking involving at least $100,000 may be brought within a period specified in such written contract, agreement or undertaking provided it is brought prior to the expiration of 20 years from the accruing of the cause of such action.

Section 8106(c) recently took centre stage in the Delaware Court of Chancery decision in Bear Stearns v. EMC Mortgage LLC. Released on January 12, 2015, the ruling by Vice Chancellor Laster is of interest for several reasons, not least of which is the fact that the proceeding was a re-hearing of a motion to dismiss that Laster VC himself had previously granted on timeliness grounds. In this highly unusual re-hearing, Laster VC overruled himself on three substantive issues, noting that, on the first go-round, his attention had not been drawn to a number of salient developments in the law, including the above-noted amendment.

The twist: A curative clause can extend the 3-year limitation

The central issue in Bear Stearns didn’t actually concern a survival clause as such – there was one, but it doesn’t appear to have said anything about time limits. Instead, the question was whether a curative clause in the agreement (which had to do with a residential mortgage loan securitization) should be construed as an agreement or undertaking to take advantage of the extended limitation under Section 8106(c).[2] The curative clause – or “accrual clause”, to use the Delaware terminology – provided, in essence, that the plaintiff could bring an action under the agreement (with respect to non-conforming mortgage loans) only after (i) it had given the defendant notice of the alleged breach and (ii) that breach had not subsequently been cured by the defendant in accordance with protocols set out in the agreement. No time limits were specified with respect to the initiation of such an action.

Before it could decide whether the clause conformed with Section 8106(c) and thereby amounted to the election of an extended limitation period, the court needed to determine whether the new 20-year limitation period could apply retrospectively to an agreement signed several years before the amendment took effect. Laster VC determined that it could and did. In Delaware, he stated, limitations law is considered procedural, which means that changes to that law can apply retroactively. Exceptions may be made if a court is persuaded that retroactive application would be unjust, but Laster VC saw no injustice in this case.

Having disposed of the retroactivity issue, the court proceeded to consider whether the curative clause should be understood as extending the limitation. This question in turn had two parts: (i) can this happen in general? and (ii) should it happen here? With respect to (i), there was undeniably some judicial authority that a curative clause cannot extend a limitation period. Indeed, in Laster VC’s first hearing of this motion, the defendant had focused the court’s attention on the 2014 U.S. District Court (Southern District of New York) ruling in Lehman XS Trust v. GreenPoint, in which it was held that a curative provision could not extend limitations under New York law.[3] However, in these reasons, Laster VC agreed with the plaintiff that the bulk of Delaware authority – including the August 4, 2014 ruling in Aircraft Service International, Inc. v. TBI Overseas Holdings, Inc. – supports the contrary proposition, i.e. that a curative clause (or other notice or tolling provision) can create a condition precedent to the commencement of a limitation period.[4]

The line of Delaware authority culminating in Aircraft Service International therefore established that, in principle, curative clauses can extend a limitation. Nevertheless, the second question remained: did the curative clause in this case have the effect of amounting to an agreement to extend the limitation beyond the usual three years as per the new Section 8106(c) of the Code? While the matter indisputably met the $100,000 threshold, it was less obvious that the action had been brought “within a period specified in such written contract, agreement or undertaking” because the curative clause didn’t refer to any particular “period”. Laster VC considered this question in light of the legislative “Synopsis” published with the amendment, wherein it is stated that the “period” referred to in the Act includes (inter alia) “a period of time defined by reference to the occurrence of some other event or action”.[5] As in his view the curative clause met this test, Laster VC concluded:

[T]his scheme constituted “a period of time defined by reference to the occurrence of some other event or action” that is a sufficient “period specified” for [the] purpose of Section 8106(c).

Importantly, the parties had not specified any “outside date” beyond which a cause of action would cease to accrue. This was held by Laster VC to amount to a choice of the 20-year limitation. This meant that the plaintiffs had until June 28, 2026 to bring any claims relating to the securitization. Given the state of Delaware limitations law at the time the securitization closed, it is hard to imagine that either side would have expected this.

The plaintiffs were obviously well within the 20-year period and their claim was therefore timely. It should be noted that this was an “in the alternative” holding – Laster VC had already held that, contrary to his earlier ruling, the New York limitation period of 6 years should have applied in this case, in preference to the 3 year limitation under Delaware’s Borrowing Statute.[6] So even without the fortuitous appearance on the scene of Section 8106(c), the plaintiffs would have been able to proceed, as they were within New York’s 6-year limit as well.[7]

Concluding thoughts One lesson of the case is that, where litigation in the courts of Delaware is a possibility, Section 8106(c) and Bear Stearns should be borne in mind when it comes to drafting a curative clause, lest a 20-year limitation should unexpectedly result.

[1] The authors are members of the bar of Ontario, Canada. References in this article to the laws of U.S. jurisdictions are not intended to imply qualification to practice law in those jurisdictions.
[2]The securitization agreement did contain a survival clause, but it does not appear to have said anything about the duration of the survival.
[3] Lehman XS Trust, Series 2006-4N ex rel. U.S. Bank Nat’l Ass’n. v. GreenPoint Mortgage Funding, Inc., 991 F.Supp.2d 472 (S.D.N.Y. 2014).
[4] Aircraft Service International, Inc. v. TBI Overseas Holdings, Inc., 2014 Del. Super. LEXIS 412, 10-12.
[5] The quoted words appear in context in the following passage from the Synopsis: “[e]xamples of a “period” that may be specified in a written contract, agreement or undertaking would include, without limitation, (i) a specific period of time, (ii) a period of time defined by reference to the occurrence of some other event or action, another document or agreement or another statutory period and (iii) an indefinite period of time.” (emphasis added)
[6] 10 Del. C. § 8121. It should be noted that, in U.S. parlance, a “Borrowing Statute” is not a law regulating the borrowing of money but rather a provision in a civil procedure code ostensibly preventing a plaintiff from forum shopping for a longer limitation period. If State A has a longer limitation than State B, where a cause of action arose, and if a plaintiff (being out of time in State B) presses its claim with respect to that cause of action in State A, State A will “borrow” State B’s limitation and declare the plaintiff out of time in State A as well. Note that exceptions are often made when the parties include residents of State A.
[7] It appears that, under Saudi Basic Industries Corp. v. Mobil Yanbu Petrochemical Co., Inc., 866 A.2d 1 (Del. 2005), the Delaware courts will generally not impose the 3-year Delaware limitation period in cases in which the cause of action arose in a jurisdiction in which a longer period would otherwise apply, as such a prohibition would not advance the Borrowing Statute’s purpose, which (the court said) is to discourage forum shopping. As Laster VC noted in the present decision, this interpretation is contrary to the plain language of the Borrowing Statute, which requires prima facie that the shorter of the two limitation periods apply, but is binding precedent nevertheless.

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