GRT, INC. v. MARATHON GTF TECHNOLOGY, LTD., 5571-CS (Del.Ch. 7-11-2011)

Civil Action No. 5571-CS.Court of Chancery of Delaware.Submitted: April 19, 2011.
Decided: July 11, 2011.

Arthur L. Dent, Esquire, Ryan T. Costa, Esquire, POTTER ANDERSON CORROON LLP, Wilmington, Delaware; Jeffrey T. Thomas, Esquire, Linda D. Lam, Esquire, GIBSON DUNN CRUTCHER LLP, Esquire, Irvine, California, Attorneys for Plaintiff GRT, Inc.

Kenneth J. Nachbar, Esquire, Megan Ward Cascio, Esquire, Jay N. Moffitt, Esquire, MORRIS, NICHOLS, ARSHT TUNNELL LLP, Wilmington, Delaware; Bill Kroger, Esquire, Denmon Sigler, Esquire, BAKER BOTTS L.L.P., Houston, Texas; Michael J. Barta, Esquire, Michael Calhoon, Esquire, Jeremy I. Levin, Esquire, BAKER BOTTS L.L.P., Washington, District of Columbia, Attorneys for Defendants Marathon GTF Technology, Ltd. and Marathon Oil Company.

OPINION
STRINE, Chancellor.

I. Introduction
The plaintiff and the defendant are both corporations in the nascent business of developing and commercializing methods to convert comparatively “abundan[t]” natural gas into liquid transportation fuels such as gasoline.[1] The plaintiff, as an investor, and the defendant, as a facilities operator, formed a joint venture in which the operator, in exchange for favorably priced access to some of the investor’s intellectual property, agreed to build a highly experimental testing facility to enable the investor to conduct research on some of its new technologies that would be useful to the parties’ shared business goals.

In the joint venture contract, the operator made a series of representations that the facility was reasonably designed to achieve certain objectives (the “Design Representations”) because the facility was experimental and not expected to be complete until several months after the contract’s closing date. And, because the testing facility involved the operator’s proprietary information, the investor was not permitted access to the facility or other pre-closing due diligence regarding the facility’s design. Instead, the investor was allowed, after closing, to inspect the facility to make sure that the facility was designed as the operator had represented in the Design Representations. And, in order to give teeth to the investor’s post-closing inspection, the operator agreed to a

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“Survival Clause” which provided that the Design Representations would survive for a period of one year after the closing (the “Survival Period”). When the Survival Period expired, however, the contract made plain that the operator’s Design Representations as well as the contractually provided remedies for their breach, would terminate.

In the event that the investor proved that the operator breached its representations about the facility’s design, i.e., the Design Representations, the contract provided that the operator would have to modify the facility’s design in order to make the Design Representations true in all material respects. The contract further provided that in the event that the operator failed to remedy the breach in that manner, the investor could sue the operator for a second breach of contract, and seek specific performance.

The contract’s closing date was July 18, 2008, at which point the investor was granted access to the facility. The investor filed this suit on June 16, 2010 claiming in Count I of its complaint that the operator breached its contractual obligation to remedy alleged breaches of its Design Representations that the operator knew about because the investor “raised multiple issues” about the facility’s design with the operator within months after closing.[2] In response, the operator has moved to dismiss the investor’s breach of contract claim on the ground that it is time-barred by the contract’s Survival Clause that limits the survival of its Design Representations, as well as the remedy for their breach, to the one-year Survival Period. Thus, the operator’s motion to dismiss raises a straightforward question of contract interpretation: what does it mean when a contract expressly provides that representations will survive for one year after closing but

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thereafter will terminate, together with the sole contractually provided remedy for their breach?

According to the operator, because its Design Representations, as well as the contractual remedy for any breach thereof — the sole remedy — expired at the end of the Survival Period in July 2009, the contract plainly shortened the three-year statute of limitations applicable to breach of contract claims to one year. The investor responds in two ways. First, on the basis of case law from outside of Delaware, the investor says that the 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 of time in which a breach may occur subject to the ordinarily applicable three-year statute of limitations. Second, the investor insists that it is not suing for a breach of the operator’s Design Representations, representations it admits expired before it filed this suit, but is instead suing for a breach of the operator’s remedial obligations that were triggered when, during the one-year Survival Period, the investor “informed” the operator that the testing facility’s design was not as represented.[3]

In this opinion, I reject the investor’s argument. The contract unambiguously sets forth a three-step liability scheme, the first of which requires that the investor sue and prove a breach of the operator’s Design Representations. That first step is essential and cannot be skipped. The operator’s contractual obligation to remedy the identified breach of its Design Representations is only triggered by a determination of breach. This makes practical sense because by proving that the operator breached its Design Representations,

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the investor establishes the “gap” between the operator’s Design Representations and the facility’s actual design. That gap is critical because it shapes the remedial plan the operator must implement at the court’s direction, which is a plan that requires the operator to modify the facility’s design to close the gap between what was represented, and the reality of the facility’s actual design. If, after the investor has proven that the operator has breached its Design Representations (step one), the operator’s contractual remedial obligation to close the design gap is triggered (step two), but the operator then fails to comply with a court’s remedial order, step three of the contract’s liability scheme is traversed, at which point the investor can sue the operator for a second breach of contract and seek an order of specific performance.

Although the investor admits that basic three-step scheme, its arguments against dismissal require accepting that the Survival Clause limits not the time in which an action for breach of the Design Representations must be filed (step one), but instead only limits the time in which a breach may occur. But that is not a reasonable reading of the contract’s Survival Clause.

By its plain terms, the Survival Clause expressly says that the sole remedy for a breach of the Design Representations terminates along with the Design Representations themselves. Not only that, in contrast to the Design Representations that survive only for the one-year Survival Period, the contract provides that certain other representations and warranties survive indefinitely, and that still others survive until the applicable statutes of limitations expire. This makes clear that any claim for breach of the Design Representations had to be brought before the Survival Period expired.

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The investor attempts to undercut this reading, and to broaden the lens through which the court looks at the Survival Clause, by pointing to case law outside of Delaware that requires “clear and explicit” language for a court to conclude that a contract shortened the statute of limitations.[4] This line of argument is unconvincing for several reasons. For starters, even if the law of other states requiring “clear and explicit” language to contractually shorten the statute of limitations for breach of contract claims was applicable, [5] which it is not, the Survival Clause likely would meet that standard because, among other reasons, the Survival Clause expressly says that any remedy for a breach of the operator’s Design Representations terminates along with the Design Representations themselves.

As important, unlike the law in some other jurisdictions, Delaware law does not have any bias against contractual clauses that shorten statutes of limitations because they do not violate the legislatively established statute of limitations, there are sound business reasons for such clauses, and our case law has long upheld such clauses as a proper exercise of the freedom of contract.[6]
Consistent with that, prior case law in Delaware has read survival clauses like the one in this case as acting to shorten the statute of limitations and require that suit be brought before the relevant survival period expires.[7] That case law is also consistent with the treatise that most thoroughly addresses mergers and

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acquisitions agreements, generally, and the use of survival clauses in transactional contracts more particularly. That treatise concludes that “[t]he survival period is, in effect, a contractual statute of limitations.”[8]

Likewise, reading the Survival Clause as the investor wishes would result in the investor having up to four years after the contract closed to bring a suit, a result which clashes with the contractual text addressing other categories of representations and warranties, and does not seem plausible given the subject matter addressed by the Design Representations — the construction of a state of the art research facility, the very purpose for which could be thwarted by protracted proceedings for specific performance resulting from a lawsuit that, in the investor’s view, could be filed up to four years after closing.

In sum, I conclude that the Survival Clause unambiguously establishes a one-year limitations period for filing claims alleging a breach of the Design Representations. Because the investor did not file its complaint until after that period expired, the investor’s breach of contract claim in Count I based on the operator’s alleged breach of its Design Representations is time-barred and dismissed.

II. Factual Background
The standard of review applicable to a motion to dismiss brought under Court of Chancery Rule 12(b)(6) is well known, and applies when the motion is grounded, as is the case here, on an argument that the plaintiff’s suit is untimely.[9] Under that standard, I am required to accept as true all well-pled factual allegations in the complaint as well as

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to draw all reasonable factual inferences in the plaintiff’s favor.[10] In accordance with that standard, the following facts are drawn from the verified amended complaint and its attachments.

A. The Parties Enter Into A Contract Containing Design Representations That Would Survive For One Year From The Date Of The Contract’sClosing
The plaintiff investor is GRT, Inc., a closely held Delaware corporation that develops and markets transformational gas to liquid fuels technology for eventual use in the production of transportation fuels such as automobile gasoline.[11] The defendant operator is Marathon GTF Technology, LTD, also a Delaware corporation engaged in the experimental field of developing gas to liquid fuels technology.[12]

On July 18, 2008, after months of negotiation, GRT and Marathon entered into a series of contracts in order to form a joint venture, the purpose of which was to “cooperate on the advancement of technology for the conversion of natural gas into transportation fuels.”[13] In broad strokes, those agreements provide that in exchange for licenses to use some of GRT’s intellectual property, Marathon would grant GRT access to Marathon’s “Pilot Unit,” a small scale research unit, and more important for present purposes, to Marathon’s “Demonstration Facility,” a larger-scale testing facility that at the time of the agreements’ execution and closing, was designed but still under

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construction. Because the construction and design of both facilities involved Marathon’s proprietary information, GRT was not granted access to either facility during the time the contracts were negotiated and their terms finalized. In other words, GRT was unable to conduct pre-closing due diligence on the Demonstration Facility.[14]

Instead, in a contract known as the Securities Purchase Agreement (the “Purchase Agreement”), [15] Marathon made a series of representations about the Demonstration Facility’s pre-existing design (i.e., the Design Representations) that expressly survived that agreement’s closing — July 18, 2008 — solely for a period of one year (i.e., the Survival Period). To give GRT a chance to determine for itself if the Demonstration Facility was in fact designed in accordance with Marathon’s Design Representations, the Purchase Agreement granted GRT access to the Demonstration Facility after the Purchase Agreement’s closing, at which point GRT could inspect the Demonstration Facility’s design.[16] If GRT proved that Marathon breached any of its Design Representations, the Purchase Agreement required Marathon to remedy those breaches by undertaking, at its sole expense, the necessary modifications to the Demonstration Facility’s design in order to make the Design Representations true in all material respects.[17] But, the lifespan of that remedy expressly terminated along with the Design Representations at the end of the Survival Period.[18]

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B. GRT “Informed” Marathon That The Demonstration Facility Did Not Meet The Design Representations During The Survival Period But Did Not Sue For Breach Of The Design Representations During The Survival Period
Beginning on October 8, 2008, and continuing through April 9, 2009, GRT allegedly notified Marathon that the Demonstration Facility’s design failed to meet the Design Representations.

Specifically, GRT alleges that it “raised multiple issues”[19]
with Marathon regarding the Design Representations and “informed” Marathon that it believed there were deficiencies in the Demonstration Facility’s design.[20] Although GRT’s complaint describes the Design Representations as hard and fast promises about the Demonstration Facility’s ultimate physical specifications and technical capabilities such that anything short of measurable success constituted a breach, the Design Representations are couched in terms of the Facility’s design and hoped-for outcomes on the basis of that design.[21]

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For instance, GRT alleges in its complaint that “[o]n April 9, 2009, GRT informed Marathon [] that the Demonstration Facility was unable to demonstrate a commercial scaleup process, as represented and warranted by Marathon [] under Section 4.6(b)(i)(C).”[22] But § 4.6(b)(i)(C) provides only that “[The Demonstration Facility] [h]as been designed to be of adequate size to provide data which is useful in the scaleup of a fixed bed vapor phase process to commercial scale applications. . . .”[23]

In any event, GRT alleges that despite repeatedly “informing” Marathon about these purported “design” shortfalls during the Survival Period, Marathon failed to make any modifications to the design or construction of the Demonstration Facility, as GRT claims Marathon was obligated to do under the Purchase Agreement upon the breach of the Design Representations.[24] GRT further alleges that it even offered several proposed design modifications it believed would remedy the perceived flaws, and that Marathon agreed to test some of these proposed modifications in the smaller-scale Pilot Unit, but ultimately refused to do anything similar at the Demonstration Facility.[25]

But, despite its alleged serial communications to Marathon in which GRT expressed its opinion that the Demonstration Facility was not built in accordance with the Design Representations, GRT did not file suit against Marathon for breach of the Design Representations during the Survival Period, and further does not plead that Marathon, during the Survival Period, conceded that it breached any of the Design Representations.

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Instead of filing suit against Marathon for breach of the Design Representations, GRT filed this action on June 16, 2010, nearly one year after the expiration of the Survival Period. Count I of the complaint’s two counts is the only one subject to Marathon’s motion to dismiss.

III. Analysis
The primary issue raised by Marathon’s motion to dismiss is whether GRT had to bring its claim in Count I within the one-year Survival Period, as Marathon contends, or whether GRT could, as it asserts, sue and prove a breach of the Design Representations at any time up to three years after the end of the Survival Period. In other words, the key question that I must answer is whether the Survival Clause acted to shorten the statute of limitations during which GRT could sue for a breach of the Design Representations. This is a question that may be resolved on a motion to dismiss if the relevant terms of the Purchase Agreement are unambiguous, and together with “the facts pled in the complaint, . . . demonstrate that the claim[] [is] untimely.”[26]

In Delaware, the default statute of limitations applicable to claims based on contract, including breach of contract, is three years.[27] The three-year period typically begins to run when the contract is breached, whether or not the plaintiff was aware of

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such breach.[28] 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.[29]

Under Delaware law, however, parties to a contract are entitled to shorten the period of time in which a claim for breach may be brought, i.e., the statute of limitations, so long as the agreed upon time period is a reasonable one.[30] Shortening statutes of limitations, as opposed to lengthening them, does not conflict with the legislatively determined limitations period and, in fact, has been seen as being harmonious with the public policy purposes served by statutes of limitations in general.[31] As a venerable Delaware decision observed over a century and a half ago,

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[S]tatutes of limitation are founded in wisdom and sound policy. They have been termed statutes of repose, and are regarded as highly beneficial. They proceed on the principle, that it is to the interest of the public to discourage the litigation of old or stale demands; and are designed . . . to afford a security against the prosecution of the claims where, from lapse of time, the circumstances showing the true nature or state of the transaction, may have been forgotten; or may be incapable of explanation by reason of the uncertainty of human testimony, the death or removal of witnesses, or the loss of receipts, vouchers, or other papers.[32]

But, of course, the reality that parties to a contract may shorten the statute of limitations does not mean that they did, or did so unambiguously. To address that question, I also apply settled principles of Delaware law. These require that unambiguous contractual language be given “its ordinary and usual meaning.”[33] And, because questions of contract interpretation are to be determined objectively, “the true test,” it has been stated, is “what a reasonable person in the position of the parties would have thought it meant.”[34]

To apply these principles in addressing the merits of Marathon’s motion to dismiss, I first identify the key provisions of the Purchase Agreement that bear on the timeliness of GRT’s claims in Count I and then summarize the parties’ contending positions on what effect those provisions have on the timeliness of Count I.

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A. GRT’s Breach Of Contract Claim In Count I IsTime-Barred 1. The Relevant Provisions Of The Purchase Agreement
Section 4.6(b)(i) of the Purchase Agreement sets forth the Design Representations made by Marathon. As noted above, [35] the Design Representations are couched in terms of what the Demonstration Facility has been designed to be and do, not in terms of mandatory physical specifications.[36]

Section 7.4(b)(ii) provides GRT with a remedy, the “sole and exclusive remed[y],”[37] should it turn out that after the Purchase Agreement’s closing, GRT discovered that Marathon had breached its Design Representations made in § 4.6(b)(i):

In the event of a breach of any of [Marathon’s] [Design] [R]epresentations in Section 4.6(b)(i), [Marathon] will, at its sole cost and expense and as promptly as reasonably practicable, make modifications to the design of the Demonstration Facility in order to make the [Design] [R]epresentations in Section 4.6[(b)(i)] true and correct in all material respects. If the design is modified pursuant hereto, then [Marathon] shall complete construction of or make modification (if any) to the Demonstration Facility in order to cause the Demonstration Facility to be constructed in accordance with the design as modified. Promptly following the occurrence of any such breach, [Marathon] shall deliver to [GRT] a work plan and proposed schedule for remedying such breach, and thereafter shall keep [GRT] informed at reasonable periodic intervals regarding progress toward remedying such breach.[38]

And, Marathon further promised in § 7.5 that in the event that it breached the Design Representations, [39] and thereafter failed to undertake its remedial obligations in § 7.4,

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GRT could sue to enforce those obligations and Marathon would not plead in defense that GRT had an adequate remedy at law.[40] In other words, GRT could, upon a breach of § 7.4(b)(ii), seek specific performance.

But, the parties also contractually limited the survival of the Design Representations and Marathon’s related promise in § 7.4 to remedy any breach thereof by undertaking the necessary design modifications. Specifically, the parties agreed in § 7.1 of the Purchase Agreement, the Survival Clause, that Marathon’s Design Representations, and the associated remedy for their breach provided for in § 7.4, would only survive for a period of one year after the closing of the Purchase Agreement (i.e., the Survival Period):

The representations and warranties of the Parties contained in Sections 3.1, 3.3, 3.6, 4.1 and 4.2 shall survive the Closing indefinitely, together with any associated right of indemnification pursuant to Section 7.2 or 7.3. The representations and warranties of [GRT] contained in Section 3.16 shall survive until the expiration of the applicable statutes of limitations . . ., and will thereafter terminate, together with any associated right of indemnification pursuant to Section 7.3. All other representations and warranties in Sections 3 and 4 will survive for twelve (12) months after the

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Closing Date, and will thereafter terminate, together with any associated right of indemnification pursuant to Section 7.2 or 7.3 or the remedies provided pursuant to Section 7.4.[41]

2. The Parties’ Conflicting Arguments Regarding The Timeliness Of GRT’s Breach Of Contract Claim In Count I
In support of its motion to dismiss, Marathon argues on the basis of the Purchase Agreement’s clear language, that it has no remedial obligations under § 7.4 to modify the design of the Demonstration Facility unless and until it has first been proven that Marathon in fact breached the Design Representations. And, even though GRT contends that Count I asserts a claim not for a breach of the Design Representations, but instead for a breach of Marathon’s remedial obligations under § 7.4 such that any shortened statute of limitations does not apply to that claim, Marathon responds by arguing that GRT is skipping an essential step by bypassing the liability determination that is a necessary predicate to any right to a remedy under § 7.4. Moreover, to the extent that GRT seeks to prove a breach of the Design Representations in this action, it is too late because the Survival Period, which under Marathon’s reading is a contractual statute of limitations, expired before GRT filed its complaint.[42]

In that regard, Marathon contends that the Survival Clause shortened the statute of limitations for breach of contract claims grounded on the Design Representations to one year. By stating that the Design Representations and the “sole and exclusive” remedy for their breach survive the closing for the one-year Survival Period and thereafter terminate,

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the Survival Clause, says Marathon, unambiguously imposed an obligation on GRT to bring suit during the Survival Period and not after. Marathon says that its reading is the only reasonable one in view of the structure of the entire Survival Clause, which, in contrast to the Design Representations that were to survive for one year, provides that some representations would live indefinitely and some would survive for the applicable statute of limitations period. Furthermore, says Marathon, prior Delaware cases interpreting similar contractual provisions support this as the only fair reading.[43]

GRT responds to Marathon’s argument by offering several of its own. First and foremost, GRT argues by citation to cases outside of Delaware, that although parties may contractually shorten the otherwise applicable statute of limitations for breach of contract actions, in order for parties to do so successfully, they must use language that clearly and unequivocally evidences an intent to do so.[44] Because in GRT’s view, the Survival Clause does not say anything, at least expressly, about when a claim or action for breach of the Design Representations must be brought, GRT argues that its claim in Count I is subject to the ordinarily applicable three-year statute of limitations for breach of contract claims.

Similarly, GRT argues that if a breach of the Design Representations occurs during the Survival Period, as opposed to after, GRT is entitled to sue Marathon for

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breach of contract just as any plaintiff could do, subject to the ordinarily applicable three-year statute of limitations. In other words, GRT argues that the Survival Clause limits only the time in which a breach of the Design Representations can occur, not when a suit can be brought to remedy a breach.

In that vein, GRT posits that once GRT notifies Marathon of a “breach” of the Design Representations during the Survival Period, Marathon’s obligation under § 7.4 to remedy that breach is “trigger[ed].”[45] “Only after [Marathon] [is] given an opportunity to modify the [Demonstration] Facility to bring it into conformance, and [Marathon] then fail[s] to do so . . . can GRT sue to enforce the contract.”[46] Under Marathon’s proposed interpretation of the Survival Clause, argues GRT, GRT could notify Marathon of a breach within the Survival Period, Marathon could then promise to undertake the necessary design modifications as it is then, at least in GRT’s view, contractually obligated to do under § 7.4, but then on the first day of the thirteenth month after the Purchase Agreement’s closing, Marathon could walk away from the job, leaving GRT with a defective Demonstration Facility. “Indeed,” argues GRT, “the whole purpose of Section 7.4 is to allow [Marathon] to fix [its] mistakes before the parties head to court, a purpose that would be thwarted by [Marathon’s] interpretation.”[47]

Alternatively, argues GRT, even if the Design Representations expired after the Survival Period, and as a result, the right to sue for their breach, Marathon’s motion to dismiss mischaracterizes its complaint. That is, GRT emphasizes the fact that it is not

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directly suing Marathon in Count I for a breach of the Design Representations. Rather, GRT alleges in Count I that Marathon breached § 7.4 when Marathon, despite having been “informed” of alleged breaches of the Design Representations, failed to remedy those breaches in accordance with its remedial obligations under § 7.4.

Finally, GRT argues that even if GRT’s interpretation of the Purchase Agreement is not the only reasonable one, a finding of ambiguity requires the denial of Marathon’s motion to dismiss.

3. The Purchase Agreement Unambiguously Requires GRT To Sue And Prove A Breach Of The Design Representations Before Marathon Has A Contractual Obligation To Modify The Demonstration Facility’s Design
As an initial matter, I reject GRT’s argument that the Survival Clause, which limits the survival of the Design Representations, has no effect on the timeliness of its breach of contract claim in Count I because that claim is, at least on its face, only a claim that Marathon breached § 7.4 of the Purchase Agreement.

Together, § 4.6(b)(i) (the Design Representations), § 7.1 (the Survival Clause), and § 7.5 create what can be best described as a three-step liability scheme for GRT to follow in order to hold Marathon to task on its Design Representations post-closing. Step one requires GRT to sue Marathon for breach of the Design Representations. To succeed, GRT must show that the Demonstration Facility’s design does not meet the Design Representations. GRT’s successful prosecution of such a claim is necessary to both trigger, and shape, the contractual remedy in § 7.4 (step two), which requires Marathon, upon a “breach” of the Design Representations, to close the gap (by making modifications to the design) between what it represented to GRT as the Demonstration

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Facility’s design, and the actual design of the Demonstration Facility discovered by GRT when it was granted post-closing access to the Facility. Finally, if GRT sues Marathon for breach of its Design Representations successfully (step one), and thus obtains a remedial order obligating Marathon to modify the Demonstration Facility’s design to the extent GRT has proven it falls short of the Design Representations (step two), but Marathon fails to modify the Facility’s design in a way that makes the Design Representations true “in all material respects,”[48] then GRT can sue Marathon for a second breach of contract (based on Marathon’s breach of its remedial obligations in § 7.4) and seek an order of specific performance under § 7.5 (step three).

Importantly, a court cannot order a remedy under § 7.4 (step two) before GRT proves that Marathon breached the Design Representations by showing a material gap between the Design Representations and the Demonstration Facility’s actual design (step one). Thus, this lawsuit represents an attempt by GRT to skip essential steps in the three-step liability scheme codified in the Purchase Agreement. That is, GRT seeks to sue Marathon for a breach of its remedial obligations under § 7.4 (step three) before GRT has proven that Marathon has breached the Design Representations (step one) and was therefore obligated, under § 7.4, to undertake remedial measures with respect to the Demonstration Facility’s design (step two).

Counsel for GRT admitted at oral argument that in order to trigger Marathon’s contractual obligation under § 7.4 to modify the Demonstration Facility’s design, it must

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also prove that Marathon breached its Design Representations.[49]
Because the Design Representations survive for a period of one year from the date of closing, and thereafter terminate, along with the remedy for their breach spelled out in § 7.4, the only remaining question I must answer is when an action for breach of the Design Representations must be brought. Unless GRT has brought suit within the time permitted to sue for a breach of the Design Representations, its claim in Count I must be dismissed as time-barred.

4. The Purchase Agreement Shortened The Statute Of Limitations Applicable To GRT’s Breach Of Contract Claim In Count I
Having determined that Count I must be dismissed unless it asserts a timely claim for breach of the Design Representations, I now explain why any claim for a breach of the Design Representations had to have been filed while the Design Representations were alive and could not be brought after they and the remedy for their breach expired.

The conclusion that the only reasonable interpretation of the Purchase Agreement is the one advanced by Marathon is supported by: (i) a close reading of the relevant words of the Survival Clause in full contractual context; (ii) a consideration of how similar text has been interpreted by Delaware courts and learned commentary and treatises on the subject; and (iii) the commercial realities and business context facing the parties at the time the Purchase Agreement was negotiated and consummated.

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a. The Text Of The Survival Clause Unambiguously Shortened The Statute Of Limitations Applicable To Claims For Breach Of The Design Representations To One Year After Closing
After considering the text of the Purchase Agreement, and in particular, the Survival Clause in light of the relevant principles of contract interpretation, I find that the parties to the Purchase Agreement unambiguously shortened the statute of limitations applicable to claims for breach of the Design Representations to one year.

On its face, the Survival Clause is drafted in a liability-limiting fashion. It plainly states that the Design Representations in § 4.6(b)(i) will “terminate” one year after the Purchase Agreement’s closing.[50] That the parties intended to shorten the time period during which GRT could sue Marathon for a breach of the Design Representations is also made clear by their decision to expressly “terminate” § 7.4’s remedy for a breach of the Design Representations — the “sole and exclusive”[51]
remedy — simultaneously with the expiration of the Design Representations. This makes plain that the expiration of the Design Representations was intended to foreclose claims filed after the Survival Period.

Moreover, when, as required, I read the Survival Clause in full contractual context, [52] it further clarifies that in contrast to GRT’s representations and warranties contained in §§ 3.1, 3.3, 3.6. 4.1 and 4.2 of the Purchase Agreement which “will survive the Closing indefinitely,” and GRT’s representations and warranties in § 3.16 of the

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Purchase Agreement, which “shall survive until the expiration of the applicable statutes of limitations . . ., “[53] the parties intended to shorten the statute of limitations for claims brought for an alleged breach of Marathon’s Design Representations which, “together with . . . the remedies provided pursuant to § 7.4,” “will terminate” after the conclusion of the Survival Period.[54]
That the parties to the Purchase Agreement designated three specific buckets of representations and warranties, each of which provides for a different survival period and one of which couches the survival period in terms of the “applicable statutes of limitations,” confirms that the only reasonable way to read the Survival Clause is that it cabined the period of time in which GRT could timely file a claim for breach of the Design Representations to the one-year Survival Period.

b. Reading The Survival Clause As Establishing A One-Year Period To Sue Is Supported By Delaware Precedent
GRT’s contrary reading of the text — that the Survival Clause limits only the time period in which a breach of the Design Representations can occur, not when an action for breach must be filed — does little to address the glaring fact that the Survival Clause expressly terminates the Design Representations and the sole remedy for their breach at the end of the Survival Period while having other representations and warranties survive indefinitely or until the traditional statutes of limitations expire. Instead, GRT relies heavily on an interpretive maxim utilized by courts in other jurisdictions. In California and New York, GRT says, courts refuse to read a survival clause that merely limits the survival of a contractual representation as also shortening the statute of limitations absent

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“clear and explicit” language to that effect.[55] That heightened requirement is an outgrowth of the public policy of California and New York that “does not favor contractual stipulations to limit a statute of limitation.”[56] But even if the law of California or New York was applicable, and it is not, I am inclined to believe that the Survival Clause would meet that standard because unlike the survival clauses considered in the California and New York cases cited by GRT, [57] the Survival Clause in this case terminates not only the Design Representations, but also the sole remedy for their breach. That move underscores, to my mind, the parties’ intention to make indisputably clear, perhaps in response to the very case law cited by GRT, that the Survival Clause was intended to establish the statute of limitations for claims alleging a breach of the Design Representations.

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The more fundamental problem for GRT is, of course, that the Purchase Agreement is governed by Delaware law, [58] not by some other state’s, and GRT points to no Delaware decisions sharing the public policy concerns embraced by the courts of California and New York.[59] Under Delaware law, which is more contractarian than that of many other states, [60] parties’ contractual choices are respected and there is no special rule requiring that in order to contractually shorten the statute of limitations, parties utilize “clear and explicit” language.

In fact, the relevant Delaware precedent cuts against GRT. To wit, Delaware courts have interpreted contractual provisions that limit the survival of representations and warranties as evidencing an intent to shorten the period of time in which a claim for breach of those representations and warranties may be brought, i.e., the statute of

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limitations.[61] For instance, in Sterling Network Exchange, LLC v. Digital Phoenix Van Buren, LLC, [62] the Superior Court held, on the basis of a survival clause that “limit[ed] the survival of representations and warranties to six months after closing,” that the contract placed “[t]ime limitations on claims,” and therefore dismissed as time-barred an action filed more than six months after the closing alleging breaches of the expired representations and warranties.[63]

c. Learned Commentary And Treatises Support Reading The Survival Clause As Creating A Contractual Statute Of Limitations
As most corporate lawyers know, there are a number of valuable treatises and casebooks on mergers and acquisitions that address the corporate and securities laws that influence such transactions. But, much harder to find is any learned consideration of the important contract issues that are often even more central to the parties to such transactions.[64] In law school, the basic contracts class does not often delve into the

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admittedly obscure differences between covenants, representations, warranties, and conditions, and how they work together in an acquisition agreement.[65] The mysteries of bring-down clauses and indemnification are difficult to shoehorn into a first-year course, and do not seem to tickle the fancy of many scholars.

In part for that reason, and also because of its sensible and clear consideration of some of these issues, most young transactional lawyers are told that they would be well-served by reading the now nearly forty-year-old, Anatomy of a Merger: Strategies and

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Techniques for Negotiating Corporate Acquisitions, by James C. Freund.[66] Along with that text, young lawyers are now often pointed to the sections of Negotiated Acquisitions of Companies, Subsidiaries and Divisions, by Lou R. Kling and Eileen T. Nugent, which address in even more depth than Freund, just how complex acquisition agreements work.[67]

A consideration of these leading works helps to explain why I conclude that the Survival Clause can only be plausibly read as establishing a discrete, one-year period within which claims for breach of the Design Representations must be brought. In addressing these works, I acknowledge that there are strands of other commentary that do not necessarily accord in whole with these works. But a consideration of them reveals that, unlike Freund, Kling and Nugent, who attempt to explain what transactional lawyers have traditionally meant when using survival clauses, these other commentaries are trying to goad practitioners into using a new lexicon that their authors view, perhaps rightly, as preferable. Unlike a commentary designed to advocate for a change in commercial contracting techniques, however, a judicial decision interpreting a contract must respect the contractual lexicon the parties themselves chose to employ and accord the words their commonly accepted meaning within that tradition. When that approach is taken, the Survival Clause here emerges as establishing an unambiguous one-year limitations period.

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To explain why the most incisive learned commentary supports this conclusion, I begin by observing that there are at least four distinct possible ways to draft a contract addressing the life span of the contract’s representations and warranties, with each possibility having the potential to affect the extent and nature of the representing and warranting party’s post-closing liability for alleged misrepresentations.

The first possibility — i.e., where the contract expressly provides that the representations and warranties terminate upon closing — is the clearest of all. In that case, all the major commentaries agree that by expressly terminating representations and warranties at closing, the parties have made clear their intent that they can provide no basis for a post-closing suit seeking a remedy for an alleged misrepresentation. That is, when the representations and warranties terminate, so does any right to sue on them. For instance, Freund says that “[g]enerally speaking, there is no indemnification section in acquisition agreements between two public companies, inasmuch as the agreement usually states that the respective representations and warranties terminate upon the closing.“[68] It is therefore common in cases where the representations and warranties

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expire at closing for the parties to conduct robust due diligenc pre-closing, with it being understood that the contractual representations and warranties will be true as of the closing date and can provide a basis to avoid closing to the extent that their truth is made a condition to closing, but will not provide a basis for a post-closing lawsuit.[69]

The second possibility — i.e., where the contract is silent as to whether the representations and warranties survive or expire upon closing — is perhaps the least

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clear. The lack of clarity is most likely because it is a rare instance that parties to an M A contract fail to address the issue of survival given the important implications survival or non-survival has for the representing and warranting party’s potential post-closing liability, and for the non-representing and warranting party’s post-closing remedy in the event it discovers that certain representations and warranties were not true when made. Thus, some commentaries and treatises take a cautionary approach, advising parties to make explicit their intentions with respect to survival. Indeed, Kling and Nugent opine that “unless the contract specifically provides otherwise, it is not clear
that the representations and warranties contained in the acquisition agreement survive the closing (and form the basis for a cause of action).”[70] Kling and Nugent go on to suggest, in order to avoid that uncertainty, [71] that “if it is the intention of the parties that the Buyer

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may recover from the Seller post-closing for a misrepresentation, they should specifically provide that the Seller’s representations and warranties survive the closing.”[72] Adding to the lack of clarity in this category of contracts, there are some commentators, however, who suggest a hard and fast rule that “[u]nless the parties agree to a survival clause extending the representations and warranties in the agreement past the closing date, the breaching party cannot be sued for damages post-closing for their later discovered breach.”[73] What can be concluded from the foregoing discussion is that contracting parties who decide to remain silent on the question of whether their representations and warranties survive closing do so at some risk, and the better and more certain practice is to have the contract expressly state whether or not the representations and warranties survive the closing, and therefore will provide a basis for a post-closing lawsuit.

The third situation — i.e., where the contract contains a discrete survival period during which the representations and warranties will continue to be binding on the party who made them — is the one encountered here. The commentators and scholars who have chosen to tailor their analysis to contracts employing the traditional lexicon and the

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decisional law interpreting it have made plain their view that the effect of a survival clause with a discrete survival period is to limit the time period during which a claim for breach of a representation or warranty may be filed. For example, consistent with the idea that when the representations and warranties expressly terminate at closing there can be no post-closing lawsuit for their breach, by parity of reasoning, Kling and Nugent conclude that when the survival period ends, so does the period to sue: “[t]he survival period is, in effect, a contractual statute of limitations. . . . Perhaps in California, language should be included expressly stating that the parties intend the language to operate as a contractual statute of limitations, but this really should not be necessary.”[74] Likewise, Professor Samuel C. Thompson, Jr. views “it [as] clear that a provision of an acquisition agreement that states, for example, that a representation and warranty survives for a year, means that any claim that such representation was false must be made prior to the end of the one-year period. In other words, the survival period acts as a private statute of limitations on the claim.”[75]
Finally, although more oblique in his discussion, Freund seems to share the understanding that a survival period serves as a contractual statute of limitations for claims seeking post-closing remedies for breach of a representation or warranty. In his consideration of the issues that surround typical indemnification provisions in acquisition agreements between two privately held companies, Freund notes that a common defense raised by the seller to a purchaser’s claim for indemnification is “the length of time that the representations survive [the

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closing].”[76] “It is not unreasonable,” continues Freund, “that there should be a cut-off date beyond which the purchaser cannot assert claims. The rationale is the same as underlies statutes of limitations. . . .”[77] This is consistent with Freund’s view that no post-closing suit can be brought on representations and warranties that expressly do not survive the closing.[78]

Admittedly, there is some commentary that does not view a contractual survival clause as unambiguously establishing a contractual limitations period. But the purpose of that commentary is to urge practitioners to adopt a new approach to drafting the provisions of merger and acquisition agreements involving representations and warranties, their lifespan, and the ability to sue for their breach. This commentary is therefore designed more to advocate how M A agreements should be drafted if the traditional lexicon is abandoned than to explain what the traditional lexicon means. But the task before me is the interpretation of a contract using the traditional lexicon. Moreover, the commentary of this kind seems to hew more closely to the policy concerns embraced by the courts in California and New York that require “clear and explicit” language in order to conclude that a survival clause will act to set the limitations period.[79]

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The fourth situation — i.e., where the contract provides that the representations and warranties will survive indefinitely or otherwise does not bound their survival — is perhaps the most interesting. As a matter of strict or literal construction, one might imagine that a clause which provides that the representations and warranties shall survive indefinitely would mean that the representing and warranting party would face indefinite post-closing liability for its representations and warranties. But, in light of the public policy underlying statutes of limitations in general, and the widespread refusal of courts to permit parties to extend the limitations period beyond the legislatively determined statute of limitations and thereby violate the legislature’s mandate, [80] the general rule is that in such a situation, courts will treat the indefinite survival of representations and

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warranties as establishing that the ordinarily applicable statute of limitations governs the time period in which actions for breach can be brought.[81] In other words, a survival clause that states generally that the representations and warranties will survive closing, or one that provides that the representations and warranties will survive indefinitely, is treated as if it expressly provided that the representations and warranties would survive for the applicable statute of limitations.[82]

Considering these scenarios and what they suggest about the case at hand, two general points about survival clauses and the third situation emerge that support my conclusion that the Survival Clause established a one-year limitations period. The first is that the presence (or absence) of a survival clause that expressly states that the covered representations and warranties will survive beyond the closing of the contract, although it may act t shorten the otherwise applicable statute of limitations, never acts to lengthen the statute of limitations, at least in jurisdictions, like Delaware, whose statutes have been read to forbid such extensions. This strengthens the argument of those commentators who equate the termination date for representations and warranties with the last date to sue on those representations and warranties.[83]

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Second, and consistent with the prior point, the most persuasive authorities conclude that survival clause with a discrete survival period has the effect of granting the non-representing and warranting party a limited period of time in which to file a post-closing lawsuit. A survival clause is like a provision expressly terminating representations and warranties at closing in the sense that it is a tool utilized by contracting parties to avoid the uncertainty that learned commentary suggests exists where the contract is silent on the issue of survival. Where a given contract expressly terminates the representations and warranties at closing, it is understood that there can be no post-closing lawsuit for their breach.[84] Thus, a party to a contract with an express termination clause ordinarily has no post-closing recourse against the representing and warranting party because the grounds for such a remedy were expressly terminated in the contract.[85] By parity of reasoning, then, a survival clause, like the one found in the Purchase Agreement, that expressly states that the covered representations and warranties will survive for a discrete period of time, but will thereafter “terminate,” makes plain the contracting parties’ intent that the non-representing and warranting party will have a period of time, i.e., the survival period, to file a claim for a breach of the surviving

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representations and warranties, but will thereafter, when the surviving representations and warranties terminate, be precluded from filing such a claim.[86]

The Survival Clause at issue in this case goes a step further. That is, the Survival Clause not only expressly terminates the Design Representations upon the expiration of the Survival Period, it also terminates the “remedies provided pursuant to Section 7.4.”[87] The parties’ decision to terminate the Design Representations and the sole remedy for their breach, from an objective point of view, is further evidence of an intent to give GRT the one-year Survival Period to either file a claim for breach of the Design Representations, or accept the Demonstration Facility as designed, and move on.

d. The Business Context In Which The Purchase Agreement Was Negotiated Supports Reading The Survival Clause As Establishing A One-Year Limitations Period
In addition to GRT’s reading of the Survival Clause being unsupported by the Clause’s plain language, Delaware case law interpreting similar language, and learned commentary and treatises on the subject, I find that the business context in which the Purchase Agreement was negotiated and executed further supports the reading of the Survival Clause that limits GRT’s time to sue for breach of the Design Representations.[88]

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As an initial matter, GRT’s reading of the Survival Clause would require this court to accept the idea that by including the liability-limiting Survival Clause, the parties actually intended to lengthen the time that Marathon was exposed to liability for breach of the Design Representations. That is, under GRT’s reading of the Survival Clause, GRT could discover (or claim or conclude or decide) on the last day of the Survival Period that Marathon breached the Design Representations, keep quiet for three years from that date, and then, on the last day of the traditional three-year statute of limitations for breach of contract claims, file suit against Marathon and obtain the contractual remedy in § 7.4.[89]
That proposed reading of the Survival Clause, in addition to being at odds with our law addressing when a cause of action for a breach of a contractual representation accrues, [90] would give GRT up to four years from the Purchase Agreement’s closing to bring suit against Marathon on the basis of the Design Representations — representations about the Demonstration Facility’s existing design made at a time when the Demonstration Facility was still under construction.

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In a highly experimental industry like the one in which both GRT and Marathon participate, where, like most industries that involve the novel commercialization of new scientific discoveries, time is of the essence, it does not seem plausible that the parties intended that the Survival Clause give GRT up to three or four years after the contract’s closing to bring claims alleging that the cutting-edge Demonstration Facility’s design, as represented on the closing date, did not meet the Design Representations and therefore obligate Marathon to redo its design after the Facility’s construction was complete and its operations had commenced.[91] If the parties had wanted to do that, the Design Representations would have been in the category of the representations and warranties in the Survival Clause that were to live for the applicable statutes of limitations or in the category of representations and warranties that were to survive indefinitely. The fact that the parties explicitly chose to have the Design Representations live for only one year may only be plausibly read as a way to balance the commercial exigency of addressing design deficiencies promptly against GRT’s lack of pre-closing due diligence by giving GRT a limited one-year period to conduct diligence and sue.

e. Count I, Which Was Filed After The Survival Period, Is Time-Barred And Dismissed
Having determined that any cause of action, like GRT’s claim in Count I, premised on an alleged breach of the Design Representations accrued on the date the

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Purchase Agreement closed and further that the Survival Clause established a one-year statute of limitations for claims alleging a breach of the Design Representations, I note that GRT does not make any credible argument that the statute of limitations was, or should have been, tolled.[92] Although GRT does allege in Count I, without factual support, that “Marathon [] led GRT to believe [during the Survival Period] that it would repair and modify the Demonstration Facility so that it would meet” the Design Representations GRT claims it had breached, GRT does not argue, in the alternative, that if the Survival Clause shortened the statute of limitations for its claim, the doctrine of equitable tolling should be applied to revive Count I. Furthermore, to the extent that GRT’s arguments in opposition to the motion to dismiss could be construed as an appeal to the law in other jurisdictions, like California, that, through a liberal application of the so-called “discovery rule,” treats some breach of contract causes of action as accruing (and thus starting the running of the statute of limitations) on the date the plaintiff discovers the breach, [93]
GRT’s reliance is misplaced. Although Delaware courts do apply Delaware’s own, narrower version of the discovery rule, they do so only in “narrowly confined” circumstances in which the plaintiff can show both: (i) that her injury was

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“inherently unknowable;” and (ii) was “sustained by a `blamelessly ignorant’ plaintiff.”[94] GRT has not argued, nor has it pled facts from which the court could reasonably infer, that the alleged breaches of the Design Representations were “inherently unknowable” or that its failure to discover the breaches post-closing was a result of “blameless[] ignora[nce].” Instead, the complaint pleads facts that suggest that as early as October 8, 2008 — less than four months after the Purchase Agreement’s closing and well within the Survival Period — GRT “informed” Marathon of purported breaches of the Design Representations.[95] Thus, ordinary principles of claim accrual apply, [96] and in the absence of any basis for the contractual limitations period to be tolled, GRT’s claim for breach of § 7.4, [97] the success of which requires that GRT first prove the existence of a predicate breach of the Design Representations, fails as untimely, and is dismissed in its entirety.

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IV. Conclusion
For the foregoing reasons, Marathon’s motion to dismiss is GRANTED.[98] IT IS SO ORDERED.

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