Whose Law Applies Anyway?

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Posted on: Jun 8 2022

It is common in commercial and business contracts for the parties to agree upon the law to be applied in the event a dispute arises between them. Typically, these choice of law provisions only apply to the substantive law of the chosen state.¹ They do not apply to the procedural laws of the jurisdiction. For application of the procedural laws, the parties must look to the forum state.

In Baker v. Greentech Capital Advisors, L.P., 2022 NY Slip Op. 03679 (1st Dept. June 7, 2022) (here), the Appellate Division, First Department was asked to consider the scope of a contractual choice-of-law provision in the parties’ contract. In particular, the Court was asked whether the law of Delaware or New York governed the application of the statute of limitations for a breach of contract claim.

Baker involved the repurchase by defendant, Greentech Capital Advisors, L.P. (“Greentech”), an investment bank, of plaintiff’s Class B-2 Units (“Units”) in the partnership. Plaintiff was a partner of Greentech who had resigned from the partnership a year earlier. Pursuant to the partnership agreement, Greentech was required to pay “market value” for plaintiff’s Units. Greentech was also required to send plaintiff a written notice advising her of the repurchase (the “Call Notice”).

By letter dated February 17, 2016, Greentech sent plaintiff a Call Notice, wherein it advised her that Greentech was repurchasing her Units for $0. Plaintiff took no action with respect to the valuation until March 2020, when plaintiff brought suit against Greentech and Greentech Capital Advisors LLC (“GCA”), alleging a breach of the Partnership Agreement and challenging the repurchase of her Units.²

On October 6, 2021, Greentech moved for summary judgment on the plaintiff’s breach of contract claim. Greentech argued that plaintiff’s claim was time-barred by Delaware’s three-year statute of limitations because the partnership agreement’s choice-of-law provision stated the agreement would be “enforced” in accordance with Delaware law. Consequently, argued defendants, since plaintiff did not file her action within the three-year statute of limitations, her complaint should be dismissed.³

In opposition, plaintiff argued that Delaware law governed the choice-of-law clause, not New York law. Plaintiff maintained that, under Delaware law, a choice-of-law provision must specify that the agreed upon law extends to procedural matters, such as the application of the statute of limitations, for it to apply, and the partnership agreement did not do so.

The motion court denied Greentech’s motion, holding that the choice-of-law provision “must be interpreted under Delaware law, which requires application of the forum state’s rules absent explicit mention of the statute of limitations in the contract.”

On Appeal, the Appellate Division, First Department unanimously affirmed.

The Court noted that the first step in its analysis was to examine the language of the choice of law provision to determine the substantive law to be applied:

[T]he preliminary question of whether the choice-of-law clause should be “construed” to cover the applicable statute of limitations period must be decided under the law the parties chose in the contract, that is, Delaware substantive law, and not the law of the forum state.⁴

Under the partnership agreement, the parties selected Delaware law as the substantive law to apply. The next step in the process, therefore, was to determine whose law applied to procedural issues. Under Delaware law, noted the Court, “choice-of-law provisions apply to issues of substantive law, while procedural issues (such as the appropriate limitations period) are governed by the forum state.”⁵ Thus, explained the Court, “[u]nder Delaware law, a contract’s choice-of-law provision does not apply to the statute of limitations unless it says so explicitly.”⁶

Applying the foregoing analysis, the Court concluded that New York’s statute of limitations should apply to plaintiff’s breach of contract claim:

As the choice-of-law provision in the partnership agreement does not expressly mention the application of the Delaware statute of limitations, the law of the forum state (New York) governs the limitations period.⁷

Takeaway

Baker provides litigants with a basic, but important, takeaway that cannot be underscored enough: if the parties want their choice-of-law provision to include procedural issues, such as the application of a statute of limitations, then they must explicitly say so. As shown in Baker, the failure to expressly state that procedural issues are to be included in a choice-of-law provision, can be fatal to the survival of a complaint.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

References

Deutsche Bank Nat’l Tr. Co. v. Barclays Bank PLC, 34 N.Y.3d 327, 340 (2019) (noting that where parties to a contract have included in their agreement a “substantive choice-of-law provision, making it clear that contractual language is to be interpreted pursuant to [a certain state’s] law,” the courts are “bound to interpret the contract provisions according to [that state’s] substantive law.”).
Plaintiff filed a second amended complaint on March 31, 2021.
The choice of law provision in the agreement provided: “This agreement and the rights of the partners shall be governed by and construed and enforced in accordance with the internal laws of the state of Delaware, without regard to the conflict of laws rules thereof.”
Slip Op. at *2 (citing, Deutsche Bank, 34 N.Y.3d at 340).
Id. (citing, Pivotal Payments Direct Corp. v. Planet Payment, Inc., 2015 WL 11120934, at *3, 2015 Del. Super. LEXIS 1058, at *7-9 (Del. Super., Dec. 29, 2015); Portfolio Recovery Assoc., LLC v. King, 14 N.Y.3d 410, 415-416 (2010)).
Id. (citing, (Hatcher v. Collecto, Inc., 2021 WL 765759, at *2, 2021 U.S. Dist. LEXIS 36293, at *5 (D. Del. Feb. 26, 2021)). “If no provision expressly includes it, then the law of the forum applies because the statute of limitations is a procedural matter.” Pivotal Payments, 2015 WL 11120934, at *3. New York law is the same. See, e.g., Portfolio Recovery Assocs., 14 N.Y.3d at 416.
Id. (citing, Hatcher, 2021 WL 765759, at *2, 2021 U.S. Dist. LEXIS 36293, at *5).