Almost all well-drafted contracts contain clauses that specify which law will apply if an issue arises relating to that contract. Most of those clauses also specify the place where any lawsuits relating to the contract must be brought. Such “choice of law” and “forum selection” clauses are particularly important where the parties to the agreement are located in different states or countries. Yet despite being so prevalent, and despite having been used for centuries, problems can still arise as to precisely what a choice of law clause means. One such problem was the subject of the New York Court of Appeal’s decision in 2138747 Ontario, Inc. v. Samsung C&T Corporation(June 12, 2018).
The issue in Ontario Inc.highlighted an often-overlooked issue with choice of law clauses. While such clauses typically determine the “substantive law” that is applicable to a dispute, they typically do not determine the “procedural law” that will apply. Indeed, in the absence of express language to the contrary, the law of the forum will apply its own “procedural” rules notwithstanding the chosen “substantive” law. In other words, while the choice of law clause might determine what law applies to, for example, how the contract is interpreted, the court will typically apply its own law as to, for example, who bears the burden of proof on a particular point. But as Ontarioshows, procedural rules can, on occasion, make just as much of a difference as to who wins and who loses as the substantive law does.
In Ontario, the contract stated: “This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of New York.” The plaintiff had filed a lawsuit in New York in October 2014 seeking damages for an alleged breach of contract that occurred in Ontario in September 2009. Under New York law, claims for breach of contract generally had to be brought within six years of the alleged breach. Under the law of Ontario, however, breach of contract claims had to be brought within two years of the breach. The parties naturally disagreed as to whether the case had been brought within the applicable deadline.
The outcome of the case turned on whether or not New York’s “borrowing” statute (CPLR 202) applied. Under that statute, a party claiming a breach of contract that occurred outside of New York had to show that the claim is timely under bothNew York law and the law of the place where the breach occurred (in this case, Ontario). The plaintiff argued that since the choice of law clause stated that the agreement had to be “enforced” pursuant to New York law, the six year limitations period applied and the borrowing statute should be ignored.
The New York Court of Appeals had little difficulty rejecting that proposition. The parties had agreed that the term “enforced” was intended to ensure that New York’s substantive and procedural law applied. Because the Court had held in previous cases that the borrowing statute was procedural, the statute applied in this case and, as such, the action had to be timely under both New York and Ontario law. There was nothing to support the proposition that “enforced” was meant to exclude the operation of the borrowing statute. Accordingly, because the case had been brought five years after the breach, the plaintiff’s case was time barred and had to be dismissed.
The lesson from Ontariois two-fold. First, drafters of forum selection clauses must consider not only the convenience and the general nature of dispute resolution proceed of the chosen forum but also other procedural rules that might limit or expand substantive rights. Second, litigators handling cross-border litigation must carefully consider whether, notwithstanding a choice of law clause, the rules of another jurisdiction might nonetheless have some application.
If you have any questions about the drafting of choice of law or forum selection clauses, or are involved in cross-jurisdiction litigation, please contact Andrew Horne at email@example.com (212) 374-9791.
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