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    Business Law Legal Research Blog

    CONTRACTS: Importance of Carefully Drafting Contractual Choice-of-Law Clauses

    Posted by Charlene J. Hicks on Thu, Oct 27, 2022 @ 09:10 AM

    Charlene Hicks—Senior Attorney, National Legal Research Group

                It is common enough for an overworked attorney drafting a contract to regard a choice-of-law clause as boilerplate and therefore not in need of thoughtful consideration. However, the specific wording of such a clause may well alter the outcome of a future dispute between the contracting parties. Perhaps the most important consideration in this regard is whether the clause is worded broadly enough to encompass all potential causes of action that may arise in both contract and tort. In addition, specific language may be included to ensure that the chosen forum’s statute of limitations will also apply.

                One recent illustrative case is ARKRAY America, Inc. v. Navigator Business Solutions, Inc., No. N20C-12-012 MMJ (2021) (CCLD), 2021 Del. Super. LEXIS 463 (June 9, 2021). There, the parties entered into two separate contracts, one for software and consulting services and one for a license. Both contracts contained nearly identical choice-of-law clauses except that one provided for Utah law to apply and the other for Delaware law. Both choice-of-law clauses utilized traditional language stating that the agreement shall be governed by and in accordance with the named state’s laws without reference to the state’s conflicts-of-law principles. Id. at *8. Although the ARKRAY parties agreed that the choice-of-law provisions applied to the plaintiff’s contractual claims, they disagreed as to whether those provisions also extended to the tort claims.

                The court found that there was “divergent precedent in Delaware on this issue.” Id. Upon review, the court stated that a choice-of-law provision may be either narrowly worded so as to cover only contractual claims or it may be broadly worded to also include tort claims. To invoke a broad interpretation, the choice-of-law clause must include additional language beyond the traditional phrasing utilized in the ARKRAY contracts. To be effective, however, the additional language need not be extensive. The simple use of the phrase “arising out of or relates to” is sufficient to extend coverage to tort claims, including fraud. Id. at *11. Because the two choice-of-law provisions in the ARKRAY contracts did not include any expansive language, the court interpreted them narrowly as covering only the parties’ contractual claims. Id.

                To ensure that a particular choice-of-law clause will broadly extend to both contractual and tort claims, a drafting attorney should take care to include expansive phrasing. For example, a choice-of-law provision will be broadly extended to tort claims where it states that it covers any disagreement or dispute “arising out of or relating to” the contract. Turtur v. Rothschild Registry Int’l, 26 F.3d 304, 309 (2d Cir. 1994).

                To be safe, the drafter may also specify that to the extent allowable, the chosen state’s statute of limitations should also apply. See Gluck v. Unisys Corp., 960 F.2d 1168, 1179 (3d Cir. 1992) (“Choice of law provisions in contracts do not apply to statutes of limitations, unless the reference is express.”). Choice-of-law provisions normally cover only substantive matters, but statutes of limitations are often classified as procedural. Hence, the application of the chosen state’s statute of limitations is an issue that should be specially raised in the drafted choice-of-law contractual provision.

    Topics: contracts, statute of limitations, Charlene J. Hicks, choice of law clauses, causes of action in contract and tort

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