Delaware case law is replete with decisions upholding provisions in contracts that choose Delaware as the governing law for any disputes related to an agreement. A recent Delaware decision adds to the large body of Delaware jurisprudence on this topic. See, e.g., selected decisions on choice-of-law enforceability from the Delaware Supreme Court and Delaware Court of Chancery, highlighted on these pages over the last decade or so. Similar reasoning has been applied by the Delaware courts to uphold forum selection clauses requiring that suits relating to a contract be filed exclusively in state or federal courts located in Delaware. See, e.g., selected cases on forum selection clauses highlighted on these pages over the last ten years-plus, including reference to a recent update of Delaware statutes validating such provisions in corporate bylaws. These two related topics are of widespread applicability that extend beyond the corporate and commercial litigation fare, and legal ethics topics, typically covered on this blog.
The recent decision in Change Capital Partners Fund I, LLC v. Volt Electrical Systems, LLC, et al., C.A. No. N17C-05-290-RRC (Del. Super. April 3, 2018), by the Delaware Superior Court (Delaware’s trial court of general jurisdiction that does not hear the equitable claims filed in Chancery), provides an excellent overview of the doctrinal underpinning for the longstanding position of the Delaware courts that choice-of-law provisions in agreements are generally enforceable.
The agreement involved was for the purchase of accounts receivable. The unsuccessful argument made was that either New York or Texas law should apply, despite the choice-of-law provision selecting Delaware as the governing law, because (i) either of those states would be the “default state” in the absence of a choice-of-law provision; (ii) enforcement of the agreement would be contrary to the public policy of either Texas or New York; and (iii) both New York or Texas have a materially greater interest in the determination of the issues between the parties to the agreement.
Delaware’s Public Policy Upholding Freedom of Contract
Part of the court’s introductory summary of its conclusion provides a preview of the more detailed reasoning that the scholarly decision provides: “Delaware courts are generally reluctant to subvert parties’ agreed-upon choice-of-law provisions.” In the context of a motion to dismiss, this opinion provides many eminently quotable statements of Delaware law that are perfectly suitable for use in future briefs. For example, the court started with the basic public policy of Delaware regarding contracts in general, separate from the choice-of-law issue:
Delaware courts are ‘strongly inclined’ to respect the widely recognized and fundamental principles of freedom of contract. This Court will not interfere unless ‘upon a strong showing that dishonoring the contract is required to vindicate a public policy interest even stronger than freedom of contract.’ With very limited exceptions, Delaware courts will enforce the contractual scheme that the parties have arrived at through their own self-ordering, both in recognition of a right to self-order and to promote certainty of obligations and benefits. Upholding freedom of contract is a fundamental policy of this State. (internal footnotes omitted)
Delaware Choice-of-Law Policy and the Exception in Restatement (Second) of Conflicts, Section 187(2)(b)
It remains well-settled that:
Delaware courts will honor a contractually-designed choice-of-law provision so long as the jurisdiction selected bears some material relationship to the transaction. The existence of a choice-of-law clause establishes a material relationship between the chosen state and the transaction. Title 6, section 2708(a) of the Delaware Code recognizes that a choice-of-law clause is a significant, material and reasonable relationship with this State and shall be enforced whether or not there are other relationships with this State (citing Oak Private Equity Venture Capital Ltd. v. Twitter, Inc., 2015 WL 7776758, at *9 (Del. Super. Ct. Nov. 20, 2015)).
If an agreement has no choice-of-law provision, Delaware applies the “most significant relationship” test from Section 188 of the Restatement. Where such a provision does exist, however, Section 187(2)(b) of the Restatement provides for exceptions to enforceability, which were the arguments made unsuccessfully as noted at the beginning of this synopsis. Those exceptions may apply if: (i) the “default state’s” law would apply absent a choice-of-law provision; (ii) Delaware law would be contrary to a fundamental public policy of the default state; and (iii) the default state has a materially greater interest in the enforcement of the agreement.
Importantly, a “mere difference between the laws of two states will not necessarily render the enforcement of a cause of action arising in one state contrary to the public policy of another.” (citing Vichi v. Koninklijke Philips Elecs. N.V., 62 A.3d 26, 45 (Del. Ch. 2012)). The Vichi case was highlighted on these pages. The Superior Court distinguished several mostly Chancery decisions involving covenants not to compete, in which the public policy of California and Delaware on that topic is substantially different. See, e.g., EBP Lifestyle Brands Holdings, Inc. v. Boulbain, 2017 WL 3328363, at *7 (Del. Ch. Aug. 4, 2017); Kan-Di-Ki, LLC v. Suer, 2015 WL 4503210, at *18 (Del. Ch. July 22, 2015); Ascension Ins. Holdings, LLC v. Underwood, 2015 WL 356002, at *3 (Del. Ch. Jan. 28, 2015).
Notably, the Superior Court found that New York and Delaware do have different public policy on the topic of usury laws, which were relevant to the agreement at issue in this case. New York has a strong policy against interest rates higher than 25%. See footnote 30. Delaware, by contrast, has no cap on interest rates. See footnote 31 for statutory and case law citations.
But, it is not enough for the public policy of two states simply to be conflicting. In addition, a party seeking to avoid a choice-of-law provision pursuant to Section 187(2)(b) of the Restatement, must demonstrate that the other state has a “materially greater interest in the enforcement or non-enforcement” of the agreement at issue. In this case, the Superior Court found a sufficient connection to Delaware because: (i) one of the parties was a Delaware entity; and (ii) both parties agreed to choose Delaware law to control their agreement.
Delaware Public Policy to Uphold Contracts Generally is Stronger than Public Policy of Other States to Enforce This Particular Agreement Under Other State Law
Several prior Delaware decisions were cited to support the reasoning in this opinion that when the court must choose between the law of other states that arguably may apply, the choice of Delaware law typically prevails. See, e.g., footnotes 40 and 47. For example, in Abry Partners V, L.P. v F & W Acquisition, LLC, 891 A.2d 1032, 1048, n.25 (Del. Ch. 2006), the Court of Chancery needed to choose among different choice-of-law provisions in several interlocking agreements that provided for different state laws to apply, and reasoned that no rational businessperson would intend that the law of multiple jurisdictions would apply to a single controversy having its origin in a contract-based relationship. In Abry, therefore, the agreement calling for Delaware law prevailed.
Additional reasoning to support the conclusion in this Superior Court opinion was based on the recognition that there is an inherent difficulty in avoiding the terms of a contract based on allegedly contrary public policy of another state. In part, this is due to the fundamental, strong Delaware public policy of freedom of contract and the inclination of the Delaware courts to enforce otherwise valid contracts. Stated another way, “Delaware courts regularly express their reluctance to allow avoidance of the contractual choice-of-law provision” and are “strongly inclined to respect [a] parties’ agreement….” See footnotes 36 to 39 and accompanying text.
In sum, this opinion should be included in the toolbox of every litigator who needs to know the latest iteration of Delaware law on the enforceability of choice-of-law provisions selecting Delaware law to govern issues that arise in connection with an agreement.