Choosing Delaware Law Does Not Mean You Can Litigate In Delaware – The Sequel
In our August 2017 alert, we cautioned that Delaware choice-of-law provisions standing alone will not confer jurisdiction in Delaware. To best support an argument for litigating in Delaware, we advised that a combination of contractual provisions distinctly establishing consent to Delaware law, forum and jurisdiction should be incorporated into the parties’ agreement. A pair of recent decisions ratify this advice, and serve as further reminder that failure to expressly cover selection of venue and consent to jurisdiction, in addition to choice of governing law, could frustrate a party’s ability to litigate in Delaware.
In Economical Steel Building Technologies, LLC v. E. West Construction, Inc., decided April 14, 2020, the plaintiff alleged breaches of contract and a variety of business torts arising from a series of material supply agreements with the defendant. Several of the agreements contained Delaware choice-of-law and forum selection clauses – but none included consent to jurisdiction in Delaware. The performance of the agreements occurred in California, where the parties were physically located. Importantly, the defendant, a California corporation, had no ties to Delaware whatsoever. The only Delaware link within this dispute was the plaintiff’s formation as a Delaware limited liability company (LLC).
The defendant moved for dismissal for inconvenient forum and lack of personal jurisdiction. Although the court questioned the wisdom of California-centric parties electing a Delaware forum, the defendant could not genuinely claim the forum to which it had contractually agreed was too inconvenient: “[t]heir choice, their inconvenience,” reasoned the court. Nevertheless, when disputes involve external corporate affairs, Delaware law subjects forum selection and choice-of-law provisions to fundamental due process limitations. The relevant inquiry is whether the defendant has sufficient minimal contacts with Delaware to warrant compelling it to defend itself there “consistent with the traditional notions of fair play and substantial justice.”
The court held that “in the very unusual circumstances of this case” it lacked jurisdiction over the defendant because it had no ties to Delaware and the parties’ dispute was centered in California. The court’s rationale was two-fold. First, Delaware “should not be so benevolent as to protect a Delaware LLC from its performance or failures which occur completely outside our jurisdiction.” Second, because California has determined that the forum selection and choice-of-law provisions at issue violate its law, principles of federalism and full faith and credit compel the honoring of California law in this matter. As such, the parties could not circumvent fundamental due process rights – even by mutually agreeable contract terms.
In Highway to Health, Inc. v. Bohn, decided April 15, 2020, a Delaware corporation sought a declaratory judgment that its board had not violated fiduciary duties owed to holders of stock appreciation rights (SARs), and that the holders were bound by the company’s valuation of the SARs. A third party based in England and Wales had acquired a 49% interest in the Delaware company in a stock purchase agreement, certain of the company’s employees sold their company stock in that transaction although they were not parties to the stock purchase agreement, and to incentivize those employees they were provided with the SARs as third-party beneficiaries to the stock purchase agreement. The SARs were issued pursuant to a SARs Plan and award agreements. The value of the SARs (which provide holders with the benefit of appreciation in the underlying equity to which they are tied but are not actual ownership of equity) was tied to the annual appraisal of the company’s common stock, and under the SARs Plan and award agreements the company agreed that the company’s board owed fiduciary duties to the SARs holders as though they remained stockholders.
The company changed appraisers in 2016, and the new appraiser valued the SARs considerably lower than its predecessor, resulting in loss of value to the holders. This prompted counsel for several of the SARs holders to send correspondence to the company questioning the changed appraisal, reminding the board of its fiduciary obligations, and requesting that the parties mediate their dispute. Shortly after receipt of this correspondence the company commenced its declaratory judgment action, and the SARs holder defendants moved to dismiss for lack of jurisdiction.
The company claimed Delaware jurisdiction was appropriate based upon the Delaware long-arm statute (not discussed here) and the forum selection provision of the stock purchase agreement. The court noted that “it is well-established that a party may consent to jurisdiction through a contract containing a forum selection clause.” Since the SARs holders were non-signatories to the stock purchase agreement, they could be bound by its forum selection and related consent to jurisdiction provisions only where: (i) the contractual provision is valid; (ii) they are third party beneficiaries of the agreement; and (iii) the claim against them arises from the agreement. The court found the third factor was lacking because the company’s declaratory judgment action did not seek relief under the stock purchase agreement, which was the agreement that contained the forum selection provision. Hence, there was not jurisdiction over the SARs holders in Delaware.
These decisions highlight the distinctions between choice-of-law, forum selection and consent to jurisdiction provisions. Each such provision has a unique purpose, and a combination of all three is necessary to support an argument for hailing a non-resident into Delaware courts. Although these provisions are often considered “boilerplate” in many agreements, parties should not discount their individual distinctions and importance.
If you have questions or would like more information, please contact Marc Casarino (firstname.lastname@example.org; 302.467.4520), Lori Smith (email@example.com; 212.714.3075) or another member of the Corporate and Securities Group.
 C.A. No. S19C-07-040 CAK (Del. Super.).
 C.A. No. 2018-0707 AGB (Del. Ch.).