Using Survival Clauses in Employment Contracts to Shorten Employer Liability

A recent Court of Chancery opinion, addressing survival clauses in transactional contracts, provides guidance on the use of contractual statutes of limitations in employment contracts. In the case of GRT, Inc. v. Marathon GTF Technology, Ltd., the Court ruled on a contract governing a joint venture between two businesses in the natural gas industry. The Plaintiff, an investor, contracted with the Defendant to build a testing facility to allow the Plaintiff to conduct research related to new technologies. Because the testing facility involved the Defendant’s proprietary technology, the Plaintiff was not permitted to inspect the facility until the contract establishing the joint venture had been executed. In order to protect the Plaintiff’s investment, the parties’ contract included a Survival Clause.

Pursuant to the Survival Clause, any claim related to design specifications for the testing facility would survive for one year after execution of the joint venture agreement. The Survival Clause thereby preserved the Plaintiff’s rights, while shortening the three-year statute of limitations on contract claims to one year. The joint venture contract was executed in July 2008, but the Plaintiff waited until June 2010 to bring suit regarding alleged design problems and the Defendant’s failure to remedy the problems. The Defendant moved to dismiss the suit as barred by the Survival Clause.

In response to the Motion to Dismiss, the Plaintiff argued that (1) the Survival Clause limited the period during which the Defendant could breach the contract, but did not limit the period for enforcement and (2) it was not suing for failure to comply with design specifications-an issue governed by the Survival Clause-but was instead suing for over the Defendant’s failure to remedy the alleged design flaws. The Court rejected both arguments.

In addressing the Defendant’s contentions, the Court noted that Delaware has long recognized parties’ right to shorten statutes of limitations. Such limitations do not violate legislative prerogatives because they do not exceed the prescribed statutes or limitations, and in fact are seen to support the purposes of a statute of limitations-preventing plaintiffs from bringing stale claims. Moreover, there may be sound business reasons for such agreements. Consequently, so long as the limitation imposed is a reasonable one, parties are free to contractually shorten a statute of limitations. Significantly, the Court rejected the standard of review applied in New York and California, which requires that the parties’ intent to restrict the statute of limitations be “clear and explicit.” Instead, the Court applied the traditional standard of contract interpretation: the language at issue must be unambiguous.

Although it deals with the survival of contractual representations and warranties, the Court’s opinion bears two lessons for employers. First, clauses limiting the period in which employees or executives may bring suit are enforceable under Delaware law, so long as the contractual statute of limitations is a reasonable one. Second, if you are not already utilizing contractual statutes of limitations, it is time to start. In light of recent Court of Chancery opinions, there is some doubt as to whether such a provision would be enforceable against low-level employees, where the bargaining power is particularly uneven between employer and employee. However, such provisions are much more easily justified in contracts with senior employees or executives, whose employment is more closely tied to operational success.

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