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GRT, Inc. v. Marathon GTF Technology, LTD., C.A. No. 5571-CS (Del. Ch. July 11, 2011)

July 11, 2011

In this opinion, the Court of Chancery granted defendant’s Motion to Dismiss breach of contract claims brought by plaintiff after the expiration of the survival period set forth in the underlying contract. In so holding, the Court confirmed existing Delaware case law holding that survival clauses may effectively shorten the statute of limitations and require that claims be brought prior to the time that the relevant survival period terminates.

Plaintiff and defendant were parties to a joint venture contract, pursuant to which Marathon agreed to build an experimental testing facility to enable GRT to conduct research on certain of its new technologies (the “Design Representations”). As part of the contract, Marathon GTF Technology, LTD. (“Marathon “) made a series of representations that the facility, which was not expected to be complete until after the contract’s closing date, was reasonably designed to meet certain objectives. Following the closing, GRT, Inc. (“GRT“) was permitted to inspect the facility to ensure that it was designed as represented. In the event that GRT proved that Marathon breached the Design Representations, the contract provided that Marathon would have to modify the facility’s design to make such representations true in all respects and if such breach was not so remedied, GRT could bring suit for breach of contract and seek specific performance. The joint venture contract provided that the Design Representations would survive for a period of one year after the closing, and thereafter, such representations and the contractually provided remedies for breach thereof would terminate. The closing date under the contract was July 18, 2008. Between October 2008 and April 2009, GRT allegedly notified Marathon of certain deficiencies in the facility’s design, but did not file suit against Marathon until June 2010.

Defendant filed the instant Motion to Dismiss on the grounds that plaintiff’s breach of contract claims were time-barred by the one-year survival clause, arguing that the Design Representations and the sole remedy for any breach thereof expired on the first anniversary of the closing. In response to defendant’s Motion to Dismiss, plaintiff argued that the one-year survival clause should not be read as shortening the time period in which a claim for breach must be brought, but instead only as shortening the period in which a breach may occur. Under this argument, plaintiff posited that the claim itself should still be subject to the applicable three-year statute of limitations on breach of contract claims. Plaintiff also argued that its breach of contract claim was based on the breach of Marathon’s remedial obligations (and not the purported breach of the Design Representations) that were triggered when, during the one year following the closing, plaintiff informed defendant of the breach of the Design Representations.

The Court rejected both of plaintiff’s arguments. As a preliminary matter, the Court noted that the joint venture contract established a 3-step liability scheme, which required that GRT first sue and prove a breach of the Design Representations. After there had been a determination that Marathon breached its Design Representations, Marathon was contractually obligated to remedy such breach (step 2), and if it failed to do so, GRT could sue for breach of contract and seek specific performance (step 3). In filing its suit against Marathon, GRT sought to move immediately to step 3 without first having proven that Marathon breached its Design Representations. The question for the Court, then, was when an action for breach of the Design Representations had to have been brought. If such suit was not initiated within the time permitted to sue for breach of the Design Representations, GRT’s claim for breach of Marathon’s remedial obligations had to be dismissed.

In considering whether the survival clause operated to shorten the statute of limitations applicable to a breach of the Design Representations, the Court examined the text of the joint venture contract, which stated that the Design Representations and the “sole and exclusive” remedy for breach “terminate” one year following the closing. In the Court’s view, this language evidenced the parties intention to foreclose claims filed after the expiration of the survival period. In support of its reading, the Court observed that the parties designated certain reps and warranties as surviving indefinitely and others as surviving until the expiration of the applicable statute of limitations. That the parties designated different buckets of representations and warranties, each of which were subject to different survival periods, suggested to the Court that the only reasonable way to read the one-year survival clause was as a limitation on the time in which GRT could timely file a claim for breach of the Design Representations to the one-year period following closing. The Court also observed that its interpretation is consistent with existing Delaware case law, which permits parties to a contract to limit the period of time in which claims for breach may be brought, provided that the agreed upon period of time is reasonable. GRT cited case law outside of Delaware in arguing that any such limitation on the statute of limitations must be “clear and explicit.” The Court distinguished the cases that plaintiff relied upon in making this argument and noted that, even if that were the standard in Delaware, the language of the joint venture contract likely would meet the standards applied in such cases. Moreover, the Court made clear that there is no requirement under Delaware law that parties seeking to contractually shorten the statute of limitations utilize “clear and explicit” language. Finally, the Court reviewed the writings of a number of commentators on this point, the majority of which conclude that survival clauses with discrete survival periods effectively grant the non-representing party a limited period of time in which to file a post-closing lawsuit. GRT’s reading of the survival clause would require the Court to reject the foregoing and also to accept that the one-year survival period was intended to lengthen the time that Marathon was exposed to liability for breach of the Design Representations, a concept that is contrary to existing Delaware case law addressing when a cause of action for breach of a representation accrues. CertainTeed Corp. v. Celotex Corp., 2005 WL 575776 (Del. Ch. Jan. 24, 2005). “Because representations and warranties about facts pre-existing, or contemporaneous with, a contract’s closing are to be true and accurate when made, a breach occurs on the date of the contract’s closing and hence the cause of action accrues on that date.” Having determined that any alleged breach of the Design Representations accrued on July 18, 2008, and that the survival clause established a one-year statutes of limitations, the Court concluded that GRT’s claim for breach of contract was not timely and dismissed such claim in its entirety.

The full opinion is available here