Retroactive Effect Given to Delaware Statute Authorizing Up to 20-Year Statute of Limitations for Certain Breach of Contract Actions

The Delaware Court of Chancery, in Bear Stearns Mortgage Funding Trust 2006-SL1 v. EMC Mortgage LLC, C.A. No. 7701-VCL (Del. Ch. Jan. 12, 2015) (Laster, V.C.), held that the recently enacted 10 Del. C. § 8106(c), which authorizes parties to a written contract involving at least $100,000 to agree to a statute of limitations of up to 20 years, should be applied retroactively to the plaintiff’s breach of representation and warranty claims filed almost six years after the closing of the underlying transaction.

Section 8106(c), which became effective on August 1, 2014, gives parties to a written contract the freedom to agree to a limitations period longer than the typical three or four years from accrual of the cause of action, without the need to resort to Delaware’s technical requirements for a contract under seal. The synopsis to the legislation explains that examples of the limitations period to be stated in the contract include, without limitation, (i) a specific period of time, (ii) a period of time defined by reference to the occurrence of another event, another document or agreement, or another statutory period, and (iii) an indefinite period of time.

Under the agreement at issue in Bear Stearns, a cause of action for breach of representation or warranty accrued only after a particular condition precedent was met, namely, after the defendant’s receipt of notice or discovery of a breach and the defendant’s failure to take remedial action in response. The Court held this accrual provision validly extended the statute of limitations for claims of breach for up to 20 years after the closing under Section 8106(c), because it stated a limitations period “defined by reference to the occurrence of some other event or action” without specifying an outside date for bringing claims. In giving Section 8106(c) retroactive effect, the Court held that a modification of a limitations period is a procedural matter to which the ordinary presumptions against retroactive application to ongoing suits does not apply absent a showing of “manifest injustice.” As the plaintiff’s claims were filed before the statute of limitations had expired under New York law which governed the claims, the defendants did not assert a timeliness defense until two years after the dispute arose and extensive efforts at resolution had been undertaken without prior mention of a timeliness argument, the case was pending when Section 8106(c) was enacted, and the contract’s accrual provision contemplated the assertion of claims well after the closing of the transaction, the Court found that there was no manifest injustice from the retroactive application of Section 8106(c) to the plaintiff’s claims.

Bear Stearns is important in two ways insofar as Section 8106(c) is concerned. First, it shows that, depending on the circumstances, Section 8106(c) may be applied retroactively to render timely an action based on a contract entered into well before the enactment of the statute. Second, Bear Stearns shows that contractual claim-accrual provisions which serve as a condition precedent to a plaintiff’s ability to sue may be treated as agreements under Section 8106(c) to extend the statute of limitations.

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