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Chancery Offers Guidance on When the Limitations Periods Begin to Run For Claims Concerning Breaches of Representations and Warranties and Related Indemnification

Kilcullen v. Spectro Scientific, Inc., C.A. No. 2018-0429-KSJM (Del. Ch. July 15, 2019).

Delaware law provides for a default three-year statute of limitations period for breaches of contract, generally applicable to claims for breaches of representation and warranties and related claims for indemnification concerning stock purchase agreements or assets sales.

This motion to dismiss opinion arose of a particular stock purchase agreement and concerned the seller’s alleged sale of products containing unlicensed software to end users, in breach of its representations and warranties to the buyer.  Those breaches resulted in the buyer reaching a post-closing settlement with non-party Microsoft.  The buyer initiated claims against the seller for breaches of representations and warranties and related indemnification over three years after closing, but within three years after its settlement with Microsoft.  On the seller’s motion to dismiss, the Court of Chancery dismissed some aspects of the buyer’s claims as time-barred, while upholding another.  As the Court explained, under Delaware law, a buyer’s post-deal contract claims arising from a seller’s breach of the representations and warranties, and related indemnification claims for the attendant damages occurring at the time of the closing, are subject to a three-year statute of limitations that accrues on the day that the transaction closes.  However, indemnity claims arising from losses in connection with third-party claims do not accrue until the third-party claims are “finally decided,” i.e., when indemnifiable damages are ascertainable.  Accordingly, while the buyer’s claims concerning its losses at closing were untimely, its claims concerning its losses in connection with the later Microsoft settlement were not.  Applying those same rules, the Court also dismissed as unripe the buyer’s claims for indemnification arising out of potential, unasserted claims by third-party end users that received the unlicensed software.