Choice of Law Ignored

    View Authors August 2019

    The Delaware Court of Chancery in the US has refused to uphold a choice of law clause because the chosen law would frustrate a fundamental policy of the “natural” law of the transaction.

    Delaware is a popular jurisdiction for the governing law of contracts. The motivations of the parties may be as benign as importing a well-developed body of commercial law into their agreement, or may be as problematic as an attempt to contract around a fundamental public policy of the jurisdiction in which they operate.

    Many of those contracts will be performed outside Delaware, within and beyond the US. Delaware courts are strongly supportive of parties’ freedom to choose the law applicable to their contract, but there are limitations. One such limitation is where Delaware law conflicts with a fundamental policy of the natural jurisdiction for the transaction and that policy outweighs Delaware policy.

    In Nuvasive, Inc. v. Miles (26 August 2019), an employer tried to enforce in the Delaware court a non-solicitation clause against its former employee. The contract chose Delaware as the governing law, but all the services were to be performed in California. Normally this would not be enough to avoid Delaware law, but California had a strong policy against non-solicitation clauses. That policy was expressed in statute, prohibiting such clauses with few exceptions, supported by judicial warnings against diluting the prohibition.

    California’s policy forbidding non-solicitation clauses had to be weighed against Delaware’s policy of parties’ freedom to contract and to choose their governing law. California’s particular, directed and strongly expressed policy “materially outweighed” Delaware’s more general interest in contractual freedom.

    Vice Chancellor Glasscock in Nuvasive, Inc. v. Miles applied a three-stage test from the Restatement (Second) of Conflict of Laws, asking:

    • What law would naturally govern the transaction absent the choice of law clause?
    • Does the chosen law frustrate a fundamental policy of the natural law?
    • Do the interests of the natural law materially outweigh those of the chosen law?

    This situation could easily arise again, particularly in international transactions and with some jurisdictions’ statutory and judicial inroads into traditional common law positions. In recent decades, some jurisdictions have been more active than others in legislating on issues that restrict parties’ freedom to contract. In other cases, jurisdictions might have taken different statutory or judicial responses to a similar issue. We have seen, for example, England and Australia take very different judicial positions on penalty clauses.

    International transactions could easily give rise to conflicts in policy between the natural and the chosen law. If the chosen law is a US jurisdiction that adopts the three-stage Restatement (Second) of Conflict of Laws approach, the foreign law might well end up governing the transaction if it has a particular policy different from and outweighing that of the chosen law.