Buyer of business not barred from pre-closing products liability indemnification because 2-year survival provision applied only to rep & warranty breach

Buyer (based 15 miles east of South Bend, Indiana) provides restraint systems for applications, including child seats, school buses, trucks, recreational and construction vehicles, and agricultural equipment. Target (based out of Oklahoma City) manufactures and supplies seat belts and seat belt assemblies for automotive and non-automotive equipment in North America, South America, and internationally.

Buyer contracted to purchase Target from Seller on January 30, 2013. The deal was set out in a stock purchase agreement. The stock purchase agreement included indemnification provisions which required Seller to indemnify Buyer for damages related to any injury to individuals or property resulting from or arising out of the ownership, possession or use of any product manufactured, sold, leased or delivered by Target on or prior to the closing date.

Seller also promised in the stock purchase agreement to indemnify Buyer for breach of any Seller representation or warranty. Seller’s liability to Buyer for breach of any Seller representation or warranty survived the closing and continued in full force and effect until the 2nd anniversary of the closing.

Buyer brought a claim against Seller on October 9, 2015 for indemnification of damages resulting from products liability claims made against Buyer for product sold by Target prior to the closing. Seller asked a federal district court in Delaware to rule that Buyer was too late since Buyer’s claim was made more than 2 years after the closing.

Buyer countered that the stock purchase agreement’s 2-year period only applied to Buyer’s claim for a Seller breach of a Seller representation or warranty. The 2-year period did not apply to a breach by Seller of its covenant or promise to indemnify Buyer for any loss Buyer suffers arising out of products Target sold prior to the closing.

The court agreed with Buyer, concluding that the 2-year post-closing provision only applied to a breach by Seller of a Seller representation or warranty; noting that Seller’s representations and warranties were contained in a different section of the stock purchase agreement than Seller’s promise to indemnify Buyer for loss Buyer suffers arising out of Target’s pre-closing product sales.

This case is referred to as Ark Group, Inc. v. Shield Restraint Systems, Inc., Civil Action No. 1:18-cv-00755-RGA, United States District Court, D. Delaware (October 10, 2018).

Comment. It is common to require a seller of a business to make representations and warranties about the business. It is also common to limit seller’s exposure to a buyer for seller’s breach of a representation or warranty to claims made before a deadline date (such as 18 months or 2 years after closing); which is a shorter than the deadline for making claims contained in the applicable statute of limitations (for example 4 years).

However, it is also common for a seller of a products business to be responsible for problems arising out of Target’s pre-closing product sales for as long as the applicable statute of limitations permit.

By John McCauley: I help people start, grow, buy and sell their businesses.

Email: jmccauley@mk-law.com

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Posted in indemnification, survival of reps and warranties

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