The Law You Choose to Govern Your Contract May Not Be the Law that Governs

Despite its relegation to the realm of mere “boilerplate,” the choice of governing law clause in an agreement can be important.  And most deal professionals actually do focus on the law chosen to govern an agreement when advised of the differing results that may obtain depending on the chosen state law.  But in making a choice as to what law is to govern an agreement, there is often less focus on the actual wording of the clause that effectuates that choice.  Standard choice of law clauses do not in fact choose all of the law of the chosen state; many unknowingly only choose some of that law and that part of the chosen law may only apply to claims in contract but not in tort. A recent case out the Delaware Superior court, decided on December 29, 2015, serves as an important reminder of the need to not only wisely choose the law that will govern your contract, but also to thoroughly choose that law so that it covers all of the issues you desire to be determined by the chosen law.

In Pivotal Payments Direct Corp. v. Planet Payment , Inc., the court applied Delaware’s three-year statute of limitations to fraudulent inducement claims that arose from a contract that stated it was governed by New York law (where the applicable statute of limitations was six years).  And the court did so simply based upon the fact that statutes of limitations are considered a procedural, rather than a substantive, part of the law; and the choice of law clause failed to specify that the New York statutes of limitation were also part of the choice of New York law as the governing law.  According to the court:

The [Agreement] contains a provision that provides that the [Agreement] “shall be construed in accordance with the laws of the State of New York without regard to the conflicts of law provisions thereof.”  Under Delaware law, choice-of-law provisions in contracts do not apply to statutes of limitations, unless a provision expressly includes it.  If no provision expressly includes it, then the law of the forum applies because the statute of limitations is a procedural matter. Here, the parties selected New York law in the [Agreement], but they did not expressly include the statute of limitations in the choice of law provision. Therefore, the [Agreement’s] choice of law provision is not dispositive on the issue of which statute of limitations applies.

Even if another state’s substantive law may govern the parties’ rights in a given case, the “general rule is that the forum state’s statute of limitations applies.” This is consistent with the general principle that the procedural law of the forum state (here, Delaware) usually applies.

It has been previously observed that standard choice of law clauses can be problematic in certain states where they fail to clearly specify that the chosen law applies not only to contract-based claims but also to related tort-based claims (see text accompanying footnotes 200-211 of this 2009 The Business Lawyer article).  That was not the issue here, however, because unlike some other states, Delaware appears to treat a standard governing law clause as covering both contract and related tort claims without so specifying.  But, notwithstanding Delaware’s liberal construction of choice of law clauses to apply to both tort and contract based claims, the procedural versus substantive law distinction is one that Delaware apparently insists that the parties specifically cover if they want the statute of limitations of the chosen governing state’s law to apply to the claims that arise based on that chosen governing law.  Unless the statute of limitations applicable to a particular state law claim is somehow a part of a statutory claim (where the legislation creating the claim also requires that it must be brought in a prescribed time frame), almost all statutes of limitation are considered procedural law, not substantive law.  And anything else the law recognizes as a procedural, rather than a substantive, law will also be in the hands of the forum law, not the chosen law, without so specifying (like applicable burdens of proof).

Although substantive rights are nothing without the procedural remedies needed to enforce them, this procedural versus substantive distinction has a long history in the common law.  Bottom line: unless your choice of law clause specifically states that the statutes of limitations applicable to claims arising under or related to the contract are also governed by the contractually chosen law, the statutes of limitations applicable to the claims governed by the chosen law will be the applicable statutes of limitations of the forum state where the claim is made.  If the forum state has a “borrowing statute” that borrows the lesser of the forum state’s or the chosen state’s statute of limitations and the chosen state has a shorter statute of limitation then you may get that benefit without so specifying.  Not all states appear to have borrowing statutes and so you could have a longer statute applied in the forum state than that which would be applicable in the chosen state that governs the substantive cause of action itself.  Delaware does have a borrowing statute, but New York’s statute of limitations was longer so it really didn’t apply here.

The good news is that this may not matter for most private equity acquisition agreements as long as the law you choose to govern your agreement matches the forum you chose for claims to be made (and the forum selection and choice of law clause are otherwise valid), because the forum state’s statutes of limitation and other procedural rules will obviously match the chosen state’s law.   But if you have a choice of law clause without a matching choice of forum clause, like many service and ancillary agreements do (and which was the fact with the agreement under consideration in this case), this can in fact create a real issue.  So choose governing law wisely, but also choose it thoroughly!