Private Equity

The decision as to which law applies in resolving a dispute arising from or related to a contract can be outcome determinative—i.e., a claim may be sustainable if one state’s law applies, but unsustainable if another state’s law applies. Contractually-related disputes include both traditional breach of contract claims, as well as tort-based claims such as fraud and negligent misrepresentation. A properly-worded choice-of-law clause can, in most instances, ensure that the contractually chosen law will be the law applied to both kinds of disputes.

A similar but related decision that can be outcome determinative in a contractually-related dispute is the decision as to what is the proper forum for the dispute. Regardless of what law is required to be applied in that forum by an otherwise valid choice-of-law clause, procedural rules of a forum can override the application of certain aspects of the chosen substantive law. As a result, valid claims under the chosen substantive law can be rendered unsustainable based on procedural rules of the forum (some of which are not recognizable to most as procedural), unless the choice-of-law clause is sufficiently broad to address these procedural rules. 

Despite the importance of these issues, and the number of times courts are forced to decide which law applies to a particular claim, or whether the forum court should even hear the claim, these provisions continue to receive short shrift by deal lawyers. There is what UNC Law Professor John Coyle, who is the foremost authority in this area, a “Secret Language of Choice-of-Law and Forum Selection Clauses.”[1] Becoming fluent in this secret language is not difficult, and prior Weil Private Equity Blog posts have provided frequent opportunities to master this language.[2] Nevertheless, it seems like new cases requiring the courts to apply this secret language to clauses that were drafted by lawyers who have refused to learn this language, or remain unaware of its existence, are ubiquitous.

So, how about a quiz to test your fluency in the secret language of choice-of-law and forum-selection clauses?

A. The following choice-of-law clause is contained in a stock purchase agreement (“SPA”) governing the acquisition of stock in a Delaware corporation:

This Agreement shall be governed by and construed in accordance with the Laws of the State of Delaware, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the Law of any jurisdiction other than the State of Delaware.

The SPA was negotiated and closed in Boston, Massachusetts. Assume that there is no forum-selection clause in the SPA. Assume further that suit is filed in New York by the purchasing shareholders against the selling shareholders alleging breach of contract and fraud arising from the negotiations of the SPA, and New York would otherwise have jurisdiction over the parties. Finally assume that the SPA contains a robust anti-reliance clause that would preclude the extra-contractual claims under Delaware law. Answer the following questions by choosing the best answer:

1. Which law will the New York court apply in determining the scope of the choice-of-law clause? (a) The law of the forum state, New York; or (b) The law of the contractually selected state, Delaware.
2. Does the scope of the choice-of-law clause include tort claims, like extra-contractual fraud alleged to have been committed in connection with the negotiation and execution of the SPA? (a) No, because under the law of New York, the forum state, the scope of the choice-of-law clause is limited to breach of contract claims arising from the SPA; or (b) Yes, because under the law of Delaware, the contractually chosen state, the scope of the choice-of-law clause is considered sufficiently broad to include both breach of contract claims and any related tort claims.
3. Assuming there is no applicable “borrowing statute,” which state’s statute of limitations applies to the fraud and breach of contract claims? (a) Delaware’s three year statute of limitations applies to both the contract and tort claims, unless the statute of limitations was validly extended in the SPA for up to twenty years; (b) Delaware’s three year statute of limitations applies to the contract claims (unless validly extended for up to twenty years in the SPA) and New York’s six year statute of limitation applies to the tort claims; or (c) New York’s six year statute of limitations applies to both claims.
4. Assuming there is an applicable “borrowing statute,” which state’s statute of limitations applies to the tort and contract claims? (a) Delaware’s three year statute of limitations applies to both the contract and tort claims, unless the statute of limitations was validly extended in the SPA for up to twenty years; (b) Delaware’s three year statute of limitations applies to the contract claims (unless validly extended for up to twenty years in the SPA) and New York’s six year statute of limitation applies to the tort claims; (c) Assuming that the contract breach is deemed to have occurred in Delaware and the tort claim is deemed to have occurred in Massachusetts, then Massachusetts’ three year statute of limitations will be applied to the tort claims, and Delaware’s three year statute of limitations would be applied to the contract claims.
5. If the scope of the choice-of-law clause was not deemed broad enough to cover the fraud claims, what law governs the effectiveness of the anti-reliance clause? (a) Delaware law because that is the law chosen to govern the contract; or (b) Massachusetts law because that is the likely law that will govern the fraud claims.

B. Assume that the SPA contained a forum selection clause that read as follows:

The parties hereto agree that any action seeking to enforce any provision of, or any matter arising out of, this Agreement may be brought in the Delaware Court of Chancery and any state appellate court therefrom within the State of Delaware (or, only if the Delaware Court of Chancery declines to accept jurisdiction over a particular matter, any federal court within the State of Delaware).

Assuming the same breach of contract and fraud claims are commenced in a suit filed in New York, answer the following questions choosing the best answer:

1. Should the New York court dismiss the claims and require that they be filed in Delaware in accordance with the forum-selection clause? (a) Yes, because forum-selection clauses are almost uniformly enforced and Delaware is the selected forum; or (b) Although forum-selection clauses are almost uniformly enforced, this particularly forum selection clause is permissive not mandatory; therefore, while it allows a party to sue in Delaware and hold the other party to that chosen forum, it does not require the parties to only sue in Delaware.
2. Are both tort claims and contract-based claims covered by this forum-selection clause? (a) Yes, because contact claims would be “seeking to enforce any provision of” the Agreement, and the fraud claims would be “any matter arising out of” the Agreement; or (b) No, because “arising out of” is considered limited language that deals with contract-based claims only, not tort claims that do not necessarily arise out of, but instead relate to the Agreement.

C. Assume the forum-selection clause in an executive employment agreement read as follows:

The sole and exclusive venue for any suit or proceeding between the parties arising out of, in connection with, or related to this Agreement shall be in courts of the State of Texas that are located in Denton County, Texas.

Assume that the Company’s headquarters are in New York, but their main facility, out of which the executive works, is located in Denton, Texas (a City to the North of Dallas that is located in Denton County, Texas). Federal court jurisdiction for Denton County is in the Sherman Division of the Eastern District of Texas. There are two federal court houses in the Sherman Division of the Eastern District of Texas, one in Grayson County, Texas and one in Collin County, Texas, but no federal courthouse is physically located in Denton County, Texas. The Company is sued by the executive regarding some purported breach of the employment agreement and some related claims of fraud in a Texas state court in Denton County, Texas. The Company removes the case to the federal court having jurisdiction over Denton County (and assume that they have a basis for that removal). Will the federal court accept the removal or remand the case back to state court? (a) The court will most likely retain the case because the federal court has jurisdiction over Denton County, Texas; (b) The court will most likely remand the case back to state court because the forum-selection clause limits venue geographically to courts located in Denton County, Texas (and there is no physical federal courthouse in Denton County, Texas; (c) The court will most likely remand the case back to state court because the forum-selection clause limits venue to state courts and does not contemplate federal courts at all; or (d) both (b) and (c).

If you are not sure of your answers, you might want to try enhancing your secret language fluency by reading Coyle, who is the forum-selection and choice-of-law equivalent of Poker’s Hoyle.

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[1] See e.g., John F. Coyle, Interpreting Forum Selection Clauses, 104 Iowa L. Rev. 1791 (2019), available here; John F. Coyle, The Canons of Construction for Choice-of-Law Clauses, 92 Wash. L. Rev. 631 (2017), available here.

[2] See Glenn West, There Is More to a Choice-of-Law Clause Than Filling in the Name of the Selected State, Weil’s Global Private Equity Watch, June 30, 2021, available here; Glenn West, Special Order Your Forum Selection Clause, Weil’s Global Private Equity Watch, October 28, 2019, available here; Glenn West, “Location, Location, Location”—The Three Things that Matter the Most in Real Estate May Also Matter the Most in Ensuring the Proper Application of All of Your Contractually Chosen Law, Weil’s Global Private Equity Watch, August 14, 2019, available here; Glenn West, Something Borrowed May Make You Blue—Re-Examining New York Choice of Law Clauses, Weil’s Global Private Equity Watch, June 27, 2018, available here; Glenn West, Not So Funny Things That Can Happen on the Way to Your Contractually Selected Forum, Weil’s Global Private Equity Watch, February 13, 2018, available here; Glenn West, Making Sure Your “Choice-of-Law” Clause Chooses all of the Laws of the Chosen Jurisdiction, Weil’s Global Private Equity Watch, September 5, 2017, available here; Glenn West, The Law You Choose to Govern Your Contract May Not Be the Law That Governs, Weil’s Global Private Equity Watch, January 12, 2016, available here.