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Virtual Roundtable Series II, Program 3:

Advanced Contract Drafting Techniques and Tips for Choice of Law and Venue Clauses

November 17, 2016

Roxanne Khazarian – former General Counsel of Gerald Metals, Gibson Guitar, Kaplan and Ethan Allen  

PANELISTS

Bonnie Uphold – General Counsel (former), DPI Specialty Foods, Inc.  

Josef Bobek - Moderator - General Counsel of Landmark Dividend LLC (the general partner of Landmark Infrastructure Partners LP (NASDAQ:LMRK); formerly a Partner with Glaser Weil (f/k/a Christensen Miller)

Ronald L. Hicks - Co-Chair of the Litigation & Dispute Resolution Group of Meyer, Unkovic & Scott LLP and Co-Chair of the US/Canada Litigation Group of Meritas, Inc.  

OBJECTIVES AND OPTIONS TO BE CONSIDERED

Fundamental Understanding of The Standard Analysis

Generally, the rights and duties of contracting parties with respect to any contractual issue or dispute is determined by the law chosen by the parties in their agreement or if no law is chosen by the law of the state with the most significant relationship to the transaction and the parties. Restatement, Second, Conflict of Laws, §§ 186-188 (1971).

•  Lex Loci Contractus: Place of Contract -

•  Restatement (Second) Conflict of Laws: Most Significant Relationship / Contacts- Section 187(1971) 561

•  Governmental Interest; ( for example – California)

•  Statutory Provisions;

CHOICE OF LAW RULES APPLIED BY COURTS

LEX LOCI CONTRACTUS

•  Validity and construction of a contract is to be determined by the law of the place where the contract is made.

•  Some states may still adhere to this rule

RESTATEMENT (SECOND) CONFLICT OF LAWS: Most Significant Relationship / Contacts-

•  Apply the law of the state with the most significant relationship to the transaction and the parties on a particular issue.

•  This analysis can be fact specific and considers a number of factors –  place of contracting; –  the place of negotiating the contract; –  place of performance; –  location of the subject matter of the contract; –  domicile, residence, nationality, place of incorporation, and place of business of the parties

GOVERNMENTAL INTEREST

•  Court is first required to determine if the law of the competing states differ •  If so, whether each state has an interest in seeing its law applied. •  Court must then conduct a “comparative impairment analysis” to determine

which state’s interests would be more impaired

STATUTORY PROVISIONS

•  There may be specific rules relating to certain disputes or industries •  This may be particularly true for regulated industries •  Example – Insurance Related Contracts

•  Substantial Relationship •  “Limited“ Substantial Relationship •  Neutral Choice Established By Statute

HOW COURTS APPLY THESE FUNDAMENTAL CONCEPTS TO REVIEW THE ENFORCEABILITY

OF CONTRACTUAL CHOICE OF LAW PROVISIONS

SUBSTANTIAL RELATIONSHIP

•  Some States – i.e. - California, Ohio, Pennsylvania, Washington and Texas - follow the Restatement of Law 2d and will enforce the parties’ choice-of-law clause, unless either:

•  the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice; or

•  application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state.

LIMITED SUBSTANTIAL RELATIONSHIP

•  Other states, like New York, follow the more limited “substantial relationship” approach, or variations thereof –

–  the courts will enforce the parties’ choice-of-law clause, unless the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice.

NEUTRAL CHOICE ESTABLISHED BY STATUTE

•  Could a Delaware corporation based in Florida and with a California corporation based in California entering a contract agree on New York law and venue and have the choice be enforceable?

•  Some States Provide for an Enforceable Choice of Law and Even Forum if there is No Relationship to that State

•  New York, Illinois and California– specific statutes provide for this option

NEW YORK GENERAL OBLIGATIONS LAW (GOL) SECTIONS 5-1401 and 5-1402

GOL §5-1401 - parties to a contract, involving not less than $250,000, may agree that New York law governs their rights and duties under the contract—whether or not such contract bears a reasonable relation to New York. GOL §5-1402 - a party to a contract that includes such a choice of New York law and that involves not less than $1,000,000 may maintain an action to enforce such contract in the courts of the State of New York against another party that has agreed in the contract to submit to the jurisdiction of the courts of the State of New York.

§ 5-5.  Choice of law.  The parties to any agreement or relating to any obligation arising out of a transaction covering in the aggregate not less than $250,000, including a transaction otherwise covered by subsection (1) of Section 1-105 of the Uniform Commercial Code, … may agree that the law of this State shall govern their rights and duties in whole or in part, whether or not the contract, agreement, or undertaking bears a reasonable relation to this State.

§ 5-10.  Choice of forum.  A party may maintain an action or proceeding against a foreign corporation, non-resident, or foreign state if the action or proceeding arises out of or relates to any contract, agreement, or undertaking and is in consideration of or relates to any obligation arising out of a transaction covering in the aggregate not less than $500,000 and contains a provision or provisions under which the foreign corporation or non-resident agrees to submit to the jurisdiction of the courts of this State.

ILLINOIS STATUTES CHAPTER 735 CIVIL PROCEDURE§105

The parties to any contract, relating to a transaction involving in the aggregate not less than two hundred fifty thousand dollars ($250,000), including a transaction otherwise covered by subdivision (a) of Section 1301 of the Commercial Code, may agree that the law of this state shall govern their rights and duties in whole or in part, whether or not the contract, agreement, or undertaking or transaction bears a reasonable relation to this state.

CALIFORNIA CIVIL CODE 1646.5

•  Need to First Understand What is “ Conditionality” •  Conditionality Might Come in Various Forms

–  A condition that New York law or jurisdiction applies if one party files a claim – but California law or jurisdiction applies if the counterparty files a claim

–  A condition that the choice of law clause in the contract applies expressly only to one party – and is silent as to the law applicable to the counterparty

–  A clause that indicates that New York law applies generally but includes a proviso / condition that California law will apply to any issues relating to intellectual property

HOW COURTS ASSESS A CONDITIONAL CHOICE OF LAW CLAUSE

•  Not a prevailing practice -In US based contracts – may see but only as to discreet areas / issues - subject to internationally accepted guides or association / organization rules –

–  Incoterms – terms which relate to sales of goods, risks and costs of transit, etc. –  UCP - The Uniform Customs and Practice for Documentary Credits - a set of rules on the

issuance and use of letters of credit. –  Technical / Regulatory Standards – such as American Society for Testing and Materials

(ASTM), best manufacturing standards, regulatory standards for product compliance – such as FTC, FAA, etc. – or product weight, quality and condition claims under a commodity contract

–  Organizational Rules – for example – rules relating to or set forth in collective bargaining agreements and arbitration precedent, professional organization rules – i.e. – Code of Professional Responsibility, Rules relating to professional sports leagues and teams, etc.

HOW COURTS ASSESS A CONDITIONAL CHOICE OF LAW CLAUSE (con’t.)

•  “This Contract shall be governed by and construed in accordance with the laws of [TBD] without giving effect to the choice of law rules thereof, provided however that any claims involving, arising out of or relating to (i) delivery, or any failure thereof, and/or transfer of risk shall be governed by Incoterms as set forth in Clause “Incoterms” and (ii) letters of credit and any payment or failure of payment shall be governed by UCP 600 as set forth in Clause “Payment/Letters of Credit”.

•  “Any dispute, controversy or claim arising out of or in connection with this Contract, or the breach,

termination or invalidity thereof, (‘Disputes’) except for Disputes as set forth in Clause “Claims for Weight, Quality and Condition” shall be submitted to, and the parties irrevocably submit to, the jurisdiction of the High Court of Justice in [TBD].”

BEST TO SEPARATELY ADDRESS APPLICABILITY

IDENTIFY UNUSUAL SITUATIONS / POSSIBLE INCONSISTENT RESULTS / CAN BE TIED TO CARVE-

OUTS AS PART OF CONDITIONALITY •  Domestically – Louisiana – civil code state •  Internationally – Civil Code Jurisdictions •  Internationally – Countries which Are Not Parties to the Same Conventions •  Internationally – Countries which Support Different Public Policies

INTERNATIONAL CIVIL CODE COUNTRIES

European systems of laws – France – Germany – Switzerland - can be based more on codes and not very much on precedent

•  Determinations are based on what codes say •  Not as much if any precedent available for determining guidance on issues outside of the codes •  Not as Much Certainty as to Freedom to Contract

Louisiana –

•  US States – mostly common law based – involve interpretation of statutes but give great authority to case law interpretation / legal precedent which serves as a basis for guidance

•  As a Civil code state - determinations in Louisiana derive primarily from direct interpretation of the law/ codes

•  Leads to inconsistencies with other states – for example – Louisiana didn’t even pass the UCC but even then didn’t pass Article Sale of Goods

International Counterparts in Certain Countries –

•  Consider if Signatory to Applicable Treaties / Conventions

•  For example – US is a signatory to the United Nations Convention on Contracts for the International Sale of Goods- in contracts for the purchase and sale of goods this would govern over the application of the UCC

–  However some countries –UK, India, (Hong Kong)– are not signatories – so a contract with counterparties from these countries could cause a conflict scenario

–  Also there are some elements relating to the application of this law which some US companies might find troublesome –must be addressed under a gap-filling analysis and a review as to what law applies – leads to uncertainty

–  As a result – may consider a proviso / condition carving out the application of these treaties

Examples of Conditionality in International Counterparts– •  International financing contracts - the borrower is bound to a particular choice of forum and

consents to jurisdiction but the bank can sue in any court of competent jurisdiction •  International physical trading contracts, international credit agreements –clauses providing for

a jurisdiction for dispute resolution via court proceeding but then one party only also retained a right to force arbitration in a designated forum.

•  In essence – a condition based on a unilateral option

CHOICE OF LAW FOR INTERNATIONAL CONTRACTS – EUROPE / ASIA / MIDDLE EAST

•  As US Practitioners – We are Most Familiar with Common Law Practice •  Our legal system and concepts have developed from English jurisprudence •  As to contracts – based on a principle of freedom to contract and to establish agreement as to whatever

the parties intend to cover – so long as not illegal or an improper purpose / against public policy

CHOICE OF LAW FOR INTERNATIONAL CONTRACTS – EUROPE / ASIA / MIDDLE EAST

•  Most Similar to English / Common Law based legal systems – •  UK •  Hong Kong •  Singapore •  These jurisdictions honor freedom to contract and are flexible in enforcing the parties choice •  Some Differences Exist – good faith, penalties, litigation costs, etc.

CHOICE OF LAW FOR INTERNATIONAL CONTRACTS – EUROPE / ASIA / MIDDLE EAST

•  English law is recognized as persuasive authority in international trade, finance and banking and as a result is honored in many civil code jurisdictions

•  English law is an enforceable choice to govern contracts in some Middle Eastern and even African contracts – Egypt, Democratic Republic of Congo, Sierra Leone, South Africa

•  European systems of laws – France – Germany – Switzerland - can be based more on codes and not very much on precedent

•  Determinations are based on what codes say -

•  Codes tend to be restrictive and not guided by freedom to contract as the principal objective - can incorporate public policy objectives and not look to just the mutual interest of the contracting parties

UNIQUE CONSIDERATIONS FOR CERTAIN TRANSACTIONS

PRC

• contract law is based more on codes and even the form of contract can be very strict • PRC law requires that the text include Chinese – • US counterparts can meet great resistance for any variation from standards • In many situations – for example – a contract for sale or performance only within the PRC – may be forced to accept PRC law • If structured to have any offshore component – then more likely to have some success in getting non-PRC law applied • As many Chinese counterparties may have a significant state owned component –may need to include or be supplemented by waivers of immunity from suit or claims • The PRC does not recognize judgments from the US or UK for enforcement – but will recognize arbitration awards for enforcement

UNIQUE CONSIDERATIONS FOR CERTAIN TRANSACTIONS

Middle Eastern Kingdoms –

•  As a matter of public policy – countries such as Saudi Arabia – may be able to assert a claim of sovereign immunity – as like the PRC – for commercial enterprises engaged in commercial activities

•  so any choice of law clause should include or refer to a carve-out as to any basis for immunity – whether sovereign or commercial

•  the waiver should be mutual –– mutuality of obligations and rights is a focus in enforcement of international disputes

•  Separately in some countries such as Saudi Arabia – a choice of any law or waiver of immunity to govern a contract with an entity that has any government stake is not enforceable without express advance approval from the Saudi Government Legal Department

•  Need to petition the government for approval as to choice of law

SPECIFIC RISKS AND BENEFITS TO BE CONSIDERED

•  Understand the Interplay With Choice of Forum and Dispute Resolution

•  Understand the Scope of What Choice of Forum and Dispute Resolution Clauses Address

•  Choice of Law Generally Applies to Substantive Law – Not Procedural Rules

•  The forum will apply its own procedural rules

SPECIFIC RISKS AND BENEFITS TO BE CONSIDERED

•  Choice Of Law Relates To Substantive Law – Not Procedural Rules •  forum will apply its own local law to procedural issues •  Procedural Rules Include –

o  Pleading & Notice rules o  Whether an issue shall be tried by the court or a jury; o  Rules of Evidence & Statutory Rates of Interest o  Statutes of Limitations – can be differences between the states o  Attorney Client Privilege – a major issue in international transactions as most jurisdictions outside

of the US do not recognize privilege for in house lawyers

SPECIFIC RISKS AND BENEFITS TO BE CONSIDERED

•  Understand restrictions on your client’s legal capacity to sue or defend an action •  Is your client transacting business in the state without registering to do business? •  In most states can defend even if not registered or in good standing

o  If not – may be precluded from prosecuting a claim or counterclaim until registered – could influence choice of forum

•  The question of whether or not other activities constitute "transacting business" is determined under law of the forum and on a case-by-case basis.

•  If your client is registered to do business – are they in good standing? o  If so – may be precluded from prosecuting a claim or counterclaim until in good standing

SPECIFIC RISKS AND BENEFITS TO BE CONSIDERED

Understand possible inconsistencies or logistics concerns •  Is there any benefit in splitting what applies – for example – governing law from one state but dispute

resolution in a second state? •  If dispute resolution is in a court of competent jurisdiction in a state – is there any reason to designate

any particular court •  If arbitration is chosen for dispute resolution - o What entity will serve as the arbitration forum? o What rules will apply? o Where will the arbitration take place?

UNDERSTAND UNIQUE INTERESTS AND TRENDS

•  Jurisdiction Over Property Affects Law Applicable o  General Rule – the law in which property resides governs claims and dispositions o  Security Interests – same rule – a strong policy in favor of local law governing

•  Some States Have More Well Developed Law in Certain Areas That Can Be More Beneficial for

Certainty of Interpretation & Dispute Resolution o  NY – Finance / Banking / Commercial / Investment

o  Delaware – Corporate / Shareholder /Officers and Directors o  California – Intellectual Property o  Illinois – Disputes relating to agricultural commodities

SOME STATES HAVE SPECIFIC POLICIES, STATUTES, INTERPRETATIONS OR CODES

California –

• doesn’t enforce non-competes • Has specific rules regarding to the enforceability of waivers/ releases of rights • as of September 2015 enacted a new law relating to choice of law and forum for employment disputes

CA SECTION 925 ADDED TO THE LABOR CODE, TO READ:

(a) An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following: (1) Require the employee to adjudicate outside of California a claim arising in California. (2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California. (b) Any provision of a contract that violates subdivision (a) is voidable by the employee, and if a provision is rendered void at the request of the employee, the matter shall be adjudicated in California and California law shall govern the dispute. (c) In addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing his or her rights under this section reasonable attorney’s fees. (d) For purposes of this section, adjudication includes litigation and arbitration. (e) This section shall not apply to a contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied. (f) This section shall apply to a contract entered into, modified, or extended on or after January 1, 2017.

PRACTICE TIPS –

Be aware of trends in general nationally / internationally– i.e. – growing focus on mandatory choice of arbitration for employment disputes / class action waivers Understand if there is a particular state interest – for example – is a regulated industry involve in the transaction – insurance, utility services, franchise transactions, etc. Understand the scope of what a choice of law clause can accomplish and what may not be included - • Substantive law v. procedural rules • The difference and interplay between choice of law and dispute resolution / jurisdiction • Contract Disputes v. Non-Contract Theory Disputes (i.e. – fraudulent inducement, misrepresentation) – is the type of claim covered by the choice of law clause? If it is – is it enforceable?

SAMPLE CLAUSES –

Miscellaneous. The validity, interpretation and performance of this Contract and any related dispute shall be governed and construed in accordance with the laws of Colorado without reference to its rules regarding conflicts of law.

SAMPLE CLAUSES –

Governing Law; Jurisdiction. This Agreement shall be governed by the laws of the state of New Jersey in the United States of America, excluding (i) its conflicts of law provisions; (ii) the United Nations Convention on Contracts for the International Sale of Goods; (iii) the 1974 Convention on the Limitation Period in the International Sale of Goods (the "1974 Convention"); and (iv) the Protocol amending the 1974 Convention, done at Vienna April 11, 1980. The parties agree that process may be served in the manner provided herein for giving of notice or otherwise as allowed by federal law. The Uniform Computer Information Transaction Act, as enacted, shall not apply to this Agreement. The parties agree that, in the event that the Uniform Computer Information Transaction Act, any version thereof or a substantially similar law (collectively "UCITA") is enacted as to be applicable to a party's performance under the Agreement, said statute shall not govern any aspect of the Agreement, any license granted hereunder, nor any of the parties' rights and obligations arising pursuant to the Agreement. The applicable law shall be the law as it existed prior to the enactment of UCITA.

SAMPLE CLAUSES –

Governing Law. The laws of the State of [JURISDICTION STATE] shall govern this Agreement and the interpretation of the terms and conditions herein without reference to its choice of law rules. Customer consents to the venue and jurisdiction of [JURISDICTION STATE], [XXXXXXXXX] being the exclusive venue and jurisdiction for any disputes arising hereunder.

SAMPLE CLAUSES –

Governing Law. The interpretation and construction of this Agreement and all matters related hereto shall be governed by the laws of the State of [JURISDICTION STATE]. Any judicial proceeding brought against any of the parties to this Agreement, on any dispute arising out of this Agreement, or any matter related hereto or thereto shall be brought in the United States Bankruptcy Court for the [XXXXX] District of [JURISDICTION STATE], and by execution and delivery of this Agreement, each of the parties to this Agreement accepts the exclusive jurisdiction of such courts, and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement.

SAMPLE CLAUSES –

Governing Law; Jurisdiction; Service of Process. The parties hereby irrevocably declare and agree as follows: This Agreement is deemed to have been signed in the [STATE OF INCORPORATION]. This Agreement shall be governed by and construed in accordance with the laws of the [STATE OF INCORPORATION], regardless of the conflict or choice of laws principles thereof. Any legal action, suit, or other proceeding arising out of or in any way connected with, this Agreement must be brought in the courts of the State of [STATE OF INCORPORATION], or in the United States court for the District of [STATE OF INCORPORATION]. With respect to any such proceeding in any such court: (a) each Party generally and unconditionally submits itself and its property to the exclusive jurisdiction of such court; (b) each Party waives, to the fullest extent permitted by law, any objection it has or hereafter may have to the venue of such proceeding, as well as any claim it has or may have that such proceeding is in an inconvenient forum; and (c) process may be served on a Party anywhere in the world, by the same methods as are required for notice under this Agreement.

SAMPLE CLAUSES –

Governing Law / Disputes. This Contract shall be governed by and construed in accordance with the laws of [TBD] without giving effect to the choice of law rules thereof. Any dispute, controversy or claim arising out of or in connection with this Contract, or the breach, termination or invalidity thereof, (‘Disputes’) except for Disputes as set forth in Clause “Claims for Weight, Quality and Condition” shall be submitted to, and the parties irrevocably submit to, the jurisdiction of the High Court of Justice in [TBD]. For the avoidance of doubt, it is agreed that this arbitration clause that follows shall also be governed by and construed in accordance with the laws of [TBD] (as its applicable law). In the alternative, Buyer may elect to bring arbitration proceedings in respect of the Disputes in London, England by arbitration according to the rules and regulations of the London Court of International Arbitration. The language of the arbitration shall be the English language. The Seller hereby agrees to accept and be bound by the Buyer’s choice of arbitration. Unless otherwise determined in the arbitration award, the costs of arbitration shall be borne by the party against whom the arbitration award is made. Any arbitration award shall be enforceable by either party at any court(s) having jurisdiction over the party against whom the award has been made or having jurisdiction at the place where any assets of the party against whom the award has been made are located. Judgment upon the award rendered by the arbitrators may be entered in any competent court. Furthermore, and for the avoidance of any doubt, it is agreed that, unless and until the Buyer makes any of the elections as described above , all and any Disputes shall be submitted to the jurisdiction of the [ High Court ] which shall be deemed as the agreed venue for resolution of Dispute(s). In any legal proceeding to enforce a judgment or an arbitration award and in any legal action between the parties pursuant to or relating to this Contract, each party expressly waives any defense of sovereign immunity and any other defense or exemption from suit, judgment or execution based on the fact or allegation that it is a party, agency or instrumentality of, or representing a government.