Something Borrowed May Make You Blue—Re-Examining New York Choice of Law Clauses

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New York’s highest court recently ruled, in 2138747 Ontario, Inc. v. Samsung C&T Corp., No. 57, 2018 NY Slip Op 04274 (N.Y. June 12, 2018), that a breach of contract claim arising from a non-disclosure agreement containing a New York choice of law clause and brought in a New York state court was “time-barred pursuant to Ontario’s two year statute of limitations.” This seemingly surprising result presents an opportunity to re-examine standard boilerplate New York choice of law clauses and the nature and extent of the law chosen thereby.

Prior posts to Weil’s Global Private Equity blog have cautioned that boilerplate choice of law clauses can be deficient in terms of the scope of the law chosen thereby.1 The primary concerns addressed in those prior blog posts were the necessity of specifically including tort claims as well as contract claims in the choice of law clause, as well as the necessity of recognizing the difference between substantive and procedural law in adopting the chosen jurisdiction’s law, particularly where the forum for any potential dispute may be different than the chosen jurisdiction. But none of those issues manifest themselves in this case.

Instead, the choice of law clause in this case worked all too well. By selecting New York as the applicable law for the governance, construction and enforcement of their non-disclosure agreement, the parties had also (perhaps unwittingly) selected New York’s “borrowing statute”2 for the applicable statute of limitations for any claim brought for a breach of that agreement. Pursuant to New York’s borrowing statute, a cause of action that “accrues” outside of the state of New York is subject to the statute of limitations of the jurisdiction where that cause of action accrued if (a) that statute of limitations is shorter than New York’s own statute of limitations for such cause of action, and (b) the plaintiff is not a resident of New York. The New York Court of Appeals has previously held that a cause of action for breach of contract “accrues,” for the purposes of New York’s borrowing statute, where the plaintiff “sustained the economic impact of the alleged breach,”3 and the parties in this case both agreed that Ontario was the place where the alleged breach had accrued (the defendants having allegedly made improper use and disclosure of plaintiff’s confidential and proprietary information in entering into an agreement with the Ontario government, where the plaintiff, an Ontario corporation, had its place of business). Accordingly, unless the choice of New York law in the non-disclosure agreement somehow precluded the application of New York’s borrowing statute, the applicable statute of limitations was Ontario’s two years, rather than New York’s six years (and in this case the claim had been commenced in New York after the expiration of Ontario’s two year time limit, but within New York’s six year time limit).

The plaintiff argued that by stating that the agreement was to not only be “governed by,” but also “enforced in accordance with,” New York law, the parties had adopted not only New York’s substantive law, but also its procedural law.4 Because statutes of limitation are a part of New York’s procedural law, the plaintiff’s position was that the parties clearly intended to apply New York’s six year statute of limitations for breach of contract without any consideration of statutory provisions that would point to the procedural law of some other jurisdiction. While agreeing that the parties had indeed selected both New York’s substantive and procedural law to govern the non-disclosure agreement, the court held that the borrowing statute was a part of New York’s procedural law. Therefore, in the absence of an express provision precluding application of New York’s borrowing statute, the borrowing statute was part of the governing law adopted by the parties. Of course, New York’s procedural laws (absent some exclusion in the choice of law clause) would have been applicable in any event because New York was the forum jurisdiction for the dispute and the borrowing statute, like statute of limitations themselves, are procedural rules of the forum state.5

The choice of law clause in this case simply read as follows: “This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of New York.” So some may be asking what would have happened had the parties expressly excluded New York conflicts of law rules from the choice of New York law, as is commonly found in many boilerplate New York choice of law clauses? As an example, what if the choice of law clause had read as follows:

This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of New York, without regard to the conflicts of law provisions thereof.

[Or]

This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of New York, without giving effect to any conflicts of law rules or provisions that would cause the application of the laws of any jurisdiction other than the State of New York.

Well, the first example would not have accomplished the desired result for three reasons. First, the New York Court of Appeals has previously held that language excluding the application of New York’s conflicts of laws principles in a choice of law clause is completely unnecessary because a valid choice of New York law precludes any requirement for a conflicts of law analysis at all.6 Second, the first example is also potentially self-defeating. New York has a statute that validates the choice of New York law for qualifying contracts, even where New York has no other relationship to the transaction.7 Thus, excluding New York conflicts of law principles may exclude the very statute that would otherwise validate the choice of New York law.8 And third, New York’s borrowing statute is a part of New York’s procedural law, not its conflicts of laws rules, provisions or principles.9

The second example does not fare much better. It does avoid the potentially self-defeating aspect of the first example by only excluding conflicts of law principles that would point to a jurisdiction outside of New York. But, it still fails to directly address the borrowing statute problem; i.e., it’s not a conflicts of law principle to begin with. So, how should this issue be addressed?

One approach, of course, would be to simply eliminate the qualifier “conflicts of laws” in the exclusion provision of the choice of law clause as follows:

This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of New York, without giving effect to any conflicts of law  laws, rules or provisions that would cause the application of the laws of any jurisdiction other than the State of New York.

Another approach is to address this issue head-on, as in the following clause:

This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of New York, including its statutes of limitations, but without regard to any borrowing statute that would result in the application of the statute of limitations of any other jurisdiction.

Still another approach is to make your revisions part of a more comprehensive rewrite of otherwise encrusted boilerplate, and thereby address all of the deficiencies previously identified in the standard-fare choice of law clauses.  That revision (with alternatives in brackets) would look like this:

Governing Law.  This Agreement, and all claims or causes of action (whether in contract, tort or statute) that may be based upon, arise out of or relate to this Agreement, or the negotiation, execution or performance of this Agreement (including any claim or cause of action based upon, arising out of or related to any representation or warranty made in or in connection with this Agreement or as an inducement to enter into this Agreement), shall be governed by, and enforced in accordance with, the internal laws of the State of [       ], [without giving effect to any laws, rules or provisions of the State of [      ] that would cause the application of the laws rules or provisions of any jurisdiction other than the State of [    ]] or [including its statutes of limitations, without regard to any borrowing statute that would result in the application of the statute of limitations of any other jurisdiction].10

It is worth noting, of course, that in 2138747 Ontario, Inc. the court specifically declined to opine as to whether New York law permitted the waiver of its borrowing statute. Under New York law, “an agreement to waive or extend the statute of limitations for contract claims made in advance and before a claim has accrued is generally unenforceable pursuant to section 17-103[1] of the General Obligations Law, which requires such agreements to be adopted after the cause of action has accrued.”11 And some commentators have suggested that a provision waiving the applicability of a borrowing statute, which would have provided for a shorter statute of limitations than New York’s otherwise applicable six years, could potentially be viewed as in effect “impermissibly ‘extending’” the shorter limitations period “made applicable by the borrowing statute.”12 While this author is dubious of that concern,13 if such a waiver is somehow declared invalid then the additional language is of no effect. But until the court decides that issue it would appear prudent to make an effort to include the additional language excluding the effect of the borrowing statute, at least to the extent that the parties’ intent is to take advantage of New York’s typically longer statute of limitations.

A prior post to Weil’s Global Private Equity blog likened unexamined boilerplate to a sea squirt, a creature that becomes attached to an immovable object, “eats its own brain,” and thereafter exists as a water filter.14 Unfortunately, that is the fate of many of the provisions that end up at the back of the contract, but which nevertheless become critical when a dispute arises. Indeed, generally excluding “conflicts of laws principles” was debunked as “absurd” fifteen years ago.15 Yet it continues to be included in many choice of law clauses.

Private equity deal counsel must examine and un-encrust boilerplate in light of the most recent caselaw. And private equity deal professionals should ensure that the deal counsel they hire are regularly doing so. Otherwise, something “borrowed” may indeed make you blue.

 

Endnotes    (↵ returns to text)

  1. Glenn West, Making Sure Your “Choice-of-Law” Clause Chooses all of the Laws of the Chosen Jurisdiction, Weil Insights, Weil’s Global Private Equity Watch, September 5, 2017; Glenn West, The Law You Choose to Govern Your Contract May Not Be the Law That Governs, Weil Insights, Weil’s Global Private Equity Watch, January 12, 2016.
  2. CPLR 202.
  3. Global Fin. Corp. v. Triarc, 93 N.Y.2d 525 (1999).
  4. See John F. Coyle, The Canons of Construction for Choice-of-Law Clauses, 92 Wash. L. Rev. 631, 655 n.113 & n.115 (2017).
  5. See West, The Law You Choose to Govern Your Contract May Not Be the Law That Governs, supra note 1.
  6. IRB-Brasil Resseguros, S.A. v. Inepar Investments, S.A., 20 N.Y.3d 310 (2012); The Ministers and Missionaries Benefit Board v. Snow, 26 N.Y.3d 466 (2015).
  7. New York General Obligations Law § 5-1401.
  8. See Michael Gruson, Governing Law Clauses Excluding Principles of Conflict of Laws, 37 Int’l Law. 1023, 1025 (2003).
  9. See 2138747 Ontario, Inc. v. Samsung C&T Corp., No. 57, 2018 NY Slip Op 04274 (N.Y. June 12, 2018).
  10. See West, Making Sure Your “Choice-of-Law” Clause Chooses all of the Laws of the Chosen Jurisdiction, supra note 1.
  11. William J. Hine & Sevan Ogulluk, Standard New York Choice of Law Provisions May Apply Foreign Laws to Bar Claims, 20 N.Y. Bus. L.J. 25, 28 (2016).
  12. Id.
  13. See Coyle, supra note 4, at n.110 & n.115.
  14. Glenn West, Avoiding the Mindless Use of the Brainless MAC Clause, Weil Insights, Weil’s Global Private Equity Watch, August 7, 2017, https://goo.gl/JMCELc.
  15. Gruson, supra note 8, at 1024.