Delaware law enjoys a well-earned reputation for certainty and predictability. This reputation leads many contracting parties to choose Delaware law as governing should a dispute arise. But interpreting these choice-of-law provisions often gives rise to tricky legal questions. Does the choice-of-law provision only encompass contract claims, or does it cover tort claims as well? How does the language of the provision affect the analysis? And what happens when Delaware law conflicts with another state’s strong public policy? Ironically, Delaware courts themselves often disagree on the answers to these fundamental questions, injecting the very type of uncertainty into the litigation that the parties sought to avoid by selecting the law of the “First State.”
A common threshold question is whether a contract’s choice-of-law provision encompasses tort claims or just contract claims. The seminal case of Abry Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1048 (Del. Ch. 2006) (J. Strine) holds that choice-of-law provisions generally do encompass tort claims, at least where the tort implicates the contract itself, e.g., fraud or misrepresentation. In so ruling, the Abry court declined to consider the breadth or narrowness of the provision. Instead, the court endorsed a strong preference for applying a single body of law to a dispute, in the name of business certainty:
Parties operating in interstate and international commerce seek, by a choice of law provision, certainty as to the rules that govern their relationship. To hold that their choice is only effective as to the determination of contract claims, but not as to tort claims seeking to rescind the contract on grounds of misrepresentation, would create uncertainty of precisely the kind that the parties’ choice of law provision sought to avoid.
Not all Delaware courts have agreed with the Abry court’s decision to look past the choice-of-law provision’s language in the name of certainty. Some have drilled down on choice-of-law language in deciding whether tort claims should fall within such a clause’s scope. For example, Delaware courts have sometimes drawn a distinction between provisions that simply govern the “agreement” on the one hand, and provisions that govern all claims “arising out of” or “relating to” the contract on the other hand. In Huffington v. T.C. Group, LLC, the Delaware Superior Court found that a “choice of law provision, without language such as ‘arising out of or relates to,’ only requires the Court to apply Delaware law to claims challenging the terms and provisions of the agreement.” 2012 WL 1415930 at *1 (Del. Super.). Similarly, Gloucester Holding Corp. v. U.S. Tape and Sticky Prods., LLC, found that a provision that “[did] not claim to cover litigation that arises out of or relates to the Asset Purchase Agreement” was “not sufficiently broad enough to cover tort claims such as fraud in the inducement.” 832 A.2d 116 (Del. Ch. 2003).
Even where a choice of law provision encompasses some torts, Delaware courts may disagree on which torts it encompasses. For example, one recent decision held that the Delaware choice-of-law provision allows only Delaware securities fraud claims, while barring securities law claims based on the laws of other states. Anschutz Corp. v. Brown Robin Cap., LLC, No. CV 2019-0710-JRS, 2020 WL 3096744, at *7 (Del. Ch. June 11, 2020) (dismissing Colorado and Texas securities law claims). In contrast, another case refused to dismiss sister-state securities law claims, noting that a Delaware choice of law provision is not “a mechanism for the wholesale importation of every provision of Delaware statutory law into the commercial relationship of contracting parties.” Wind Point Partners VII-A, L.P. v. Insight Equity A.P. X Co., LLC, No. CV-19C08260, 2020 WL 5054791, at *21 (Del. Super. Ct. Aug. 17, 2020).
Delaware courts may be particularly reluctant to apply a Delaware choice-of-law provision in a way that would frustrate another state’s strong public policy. For example, the Court of Chancery in Swipe Acquisition Corp. v. Krauss refused to apply a Delaware choice-of-law provision to bar California “blue sky” protections, which offered more expansive protections than Delaware law. No. CV 2019-0509-PAF, 2021 WL 282642, at *3 (Del. Ch. Jan. 28, 2021). In doing so, the Court of Chancery relied on California’s strong public policy in applying the protections to the California-based transaction, involving both a California plaintiff and misrepresentations made in California.
Our takeaway from these cases is that a Delaware choice-of-law provision may not always offer the contracting parties the litigation certainty that they hope to achieve. To lessen the chance of unbargained-for legal risk from other jurisdictions, parties would be wise to make any Delaware choice-of-law provision as concrete as possible. This may include drafting the contract with the specific examples of the claim types (e.g., contract, fraud, securities, business torts, etc.) that Delaware law should control. And parties should be aware that, even with the perfect Delaware choice-of-law provision, Delaware courts may decline to bar statutory protections that the laws of other states deem essential.
For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.
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