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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.

Vichi v. Koninklijke Philips Electronics, N.V., C. A. No. 2578-VCP (Del. Ch. Feb. 18, 2014). Why is this case noteworthy: Although the practical application of this decision to the average litigator is not likely to be widespread, this Court of Chancery opinion is notable for a few less conventional reasons. For example, it has the distinction of being–perhaps–the longest opinion in the more than 200 year history of the court. Weighing in at 182 pages in the slip opinion format, we will not attempt to summarize it in a medium designed for more pithy highlights (even though it is not uncommon for Chancery opinions to approach or exceed 100 pages.) In its simplest form, this opinion is the latest iteration of seven-years of litigation to collect on a loan of 200 million Euros based on fraud and related claims. [Yes, that is the correct spelling of the defendant company.]

Suffice it to say that it is worth reading for many reasons–on your own time, for those who may enjoy the painful description of a largely unsuccessful and undoubtedly very expensive effort to recoup an unpaid loan. In addition, for example, Italophiles will enjoy the analysis of Italian law by a Delaware jurist. Prior Chancery decisions in this case, which also applied Italian, Dutch and English law, were highlight on these pages.

In Vichi v. Koninklijke Philips Electronics N.V., C.A. No. 2578-VCP (Del. Ch. Nov. 28, 2012), the Delaware Court of Chancery issued a 65-page decision that applies Dutch, Italian, English and Delaware law in the context of granting in part, and denying in part, a summary judgment motion. A prior 55-page Chancery decision in this case was highlighted on these pages here.

Issues addressed: Unjust Enrichment; Breach of Implied or Oral Contract under Italian law; Breach of Fiduciary Duty under Dutch law; Fraud under Italian law;  English Statute of Frauds; as well as Fraud under Delaware law; and Delaware’s “Borrowing Statute” (which determines the applicable statute of limitations when a cause of action arises outside of Delaware but litigation is brought in Delaware).

This carefully written opinion deserves a more extensive summary, but due to the somewhat esoteric topics and mostly “non-Delaware law” applied, I will confine myself in this short blurb, at least for the time-being, to the following point of Delaware law that applies when a party is seeking to ask the court to decide a case based on foreign law:

The party seeking the application of foreign law has the burden of not only raising the issue that foreign law applies, but also the burden of adequately proving the substance of the foreign law. (See  footnote 112).  

Vichi v. Koninklijke Philips Electronics, No. 2578-VCP (Del. Ch. Dec. 1, 2009), read opinion here. This Chancery Court opinion of 55-pages in its original format, involves multiple non-U.S. residents and foreign companies engaged in international business transactions. A central fact on which the legal issues were based, was a loan of 250 million Euros by an Italian businessman to an "affiliated Delaware subsidiary" of the Dutch conglomerate Philips. The Court addresses the following issues that I will cursorily cover in a format of bullet points.

  • Personal jurisdiction based on Sections 3104(c)(1) and 3104(c)(3) of Title 10 of the Delaware Code. As is required, the two-step analysis was performed to determine if personal jurisdiction exists over a nonresident defendant. This includes the statutory basis, as well an analysis of whether exercising personal jurisdiction over a nonresident comports with the Due Process Clause of the 14th Amendment. Of particular note is the reiteration of established Delaware law that “a single act of incorporation in Delaware [of an entity], if done as part of a wrongful scheme, will suffice to confirm personal jurisdiction over the nonresident defendants responsible for the scheme.” (citing Papendick v. Bosch, 410 A.2d 148, 152 (Del. 1979)).
  • One interesting aspect of this case is that the Court denied a motion to dismiss a fiduciary duty claim based on Dutch law  against a Dutch company (over which the Court determined it has jurisdiction in Delaware). That claim will thus proceed in Delaware.
  • The Court, however, did dismiss a claim by a creditor that was deemed to be a direct claim for a breach of fiduciary duty under Delaware law. In Gheewalla, the Delaware Supreme Court established that creditors are barred from asserting direct claims against directors (or in this case, against managers of an LLC.)
  • The Court also discussed the well established parameters of the conspiracy theory of exercising jurisdiction as well as the “apparent agency test” which allowed Philips to be held directly responsible for the actions of its agents in relation to the wrongful incorporation of a company in Delaware as part of a larger scheme.
  • Among the claims dismissed was one based on the Delaware Securities Act.  See 6 Del. C. Sections 7303 and 7323. The Court reasoned that there was an insufficient nexus to Delaware to apply the Act. The Delaware Supreme Court had ruled many years ago that the Delaware Securities Act would not be incorporated via the "internal affairs doctrine". See footnotes 138 to 140.  Moreover, the Chancery Court in this case determined that Section 7303 provided a remedy of restitution in a criminal proceeding–not in civil litigation. 
  • The Court also addressed the three-year statute of limitations in Delaware for claims of unjust enrichment, fraud and breach of fiduciary duty based on 10 Del. C. Section 8106(a), and also discussed were the three tolling doctrines that can potentially forestall the applicable deadlines until one either discovers or "should have discovered" the cause of action. Moreover, the Court referred to the Delaware Borrowing Statute at 10 Del. C. Section 8121 which refers to situations where a cause of action arises outside of Delaware and the statute of limitations in that state is shorter than the statute of limitations in Delaware. In those situations, the cause of action may be barred by the shorter statute of limitations.           
  • The Court also referred to the longer six year statute of limitations for actions on promissory notes but that statute of limitations must truly arise directly out of a breach of that promissory note and not ancillary claims (e.g., such as fraudulent inducement to enter into the note, to which the longer period would not apply). See 10 Del. C. Section 8109 and cases cited at footnotes 117 and 118.
  • The Court also addressed the “overwhelming hardship” threshold and other factors applied for the very rarely granted motion to dismiss based on forum non conveniens. See footnotes 82 to 88.
  • This opinion is replete with many detailed facts and extensive legal analysis throughout its 55-pages that could very easily warrant a much more extensive synopsis, but my intent here was to merely highlight the key legal issues addressed by the Court so that any interested readers can download the entire opinion at the above link.