A proposed amendment to the Delaware statute of limitations for contract claims should go a long way toward eliminating uncertainty in parties’ attempts to extend limitations periods by written agreement or by entering into contracts under seal. Parties generally cannot extend (or waive) a statutory limitations periods by agreement, and the requisite formalities required to enter into contracts under seal can be easily botched due to a lack of guidance and inconsistent caselaw. The amendment would allow parties to extend the limitations period in writing to up to 20 years and would only apply to contracts involving at least $100,000.
Under current Delaware law, the statute of limitations for contract claims is three years (10 Del C. § 8106). Parties to corporate and commercial agreements governed by Delaware law often purport to extend periods for contract claims beyond the three-year statute and even indefinitely. While parties may shorten the applicable statue of limitations for claims (provided the shortened period is reasonable), public policy generally prohibits the extension of a limitations period. Parties wishing to extend the statutory limitations period for a particular type of claim in a contract (e.g., breach of representations and warranties) may do so by properly executing the contract under seal, which allows for an extended limitations period of 20 years. Contracts other than mortgages and promissory notes, and contracts between commercial entities, may require significant formalities, which are not clearly spelled out under current caselaw, in order to be properly “under seal.”
The proposed amendment is a good one that would (i) create greater flexibility for sophisticated parties to contracts (without creating significant risk of potential consumer harm), and (ii) eliminate ambiguities and uncertainty in current commercial and corporate contracts, whether or not under seal. There may, however, be some room for improvement in the approach to the amendment. As currently proposed, the amendment would create contrary provisions in two different Titles of the Delaware Code. Contracts under Article 2 of the UCC have a four-year statute of limitations (6 Del. C. § 2-725). While the statute expressly provides that parties may by their original agreement shorten the limitations period for contract claims to not less than one year, the statue also clearly states that the parties may not extend the four-year limitations period. So the proposed new paragraph (c) to be added to 10 Del C. § 8106 would plant an unfortunate land mine in the statutory landscape.
The clear prohibition on extending the limitations period by written agreement in 6 Del. C. § 2-725 (“By the original agreement the parties may reduce the period of limitations to not less than one year but may not extend it”) would exist unqualified in Article 2 of the Delaware UCC. But over in Title 10, amended section 8106(c) would trump that provision (“Notwithstanding anything to the contrary . . . in § 2-725 of Title 6, an action based on a written contract . . . may be brought within a period specified in such written contract . . . provided it is brought prior to the expiration of 20 years from the accruing of the cause of such action.”).
While there may be other examples of this in the Code, it is not ideal and should be avoided. The remedy is an additional proposed amendment to section 2-725 of the Uniform Commercial Code (UCC) conforming the two sections, or at least adding a cross reference. An additional conforming amendment to 6 Del. C. § 2-725 would be in the spirit of certain of the policy rationales for having a uniform statute such as the UCC, including consolidating and harmonizing disparate statutes and common law.
The proposed amendment, as currently written, would add a section (c) to 10 Del C. § 8106 as follows: “(c) Notwithstanding anything to the contrary in this chapter (other than Section 8-106(b)) or in § 2-725 of Title 6, 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.”
The proposed amendment was approved earlier this month by the Commercial Law Section of the Delaware State Bar Association (DSBA) and was unanimously approved by the Executive Committee of the DSBA. The amendment proposes by its own terms to take effect on August 1, 2014.