Monday, May 23, 2011

Would Puerto Rico Law 75 override a Delaware choice of law clause?

A series of published federal cases hold that Puerto Rico Law 75 displaces contractual choice of law clauses of certain common law jurisdictions in distribution agreements, notably New York (among others). Many of those cases have applied the Restatement of Conflict of Laws to conclude that Law 75 is vested with public policy and Puerto Rico has a significantly greater interest in applying its laws over the transaction. Would the result be the same in all common law jurisdictions?

When drafting distribution agreements one should consider the possibility that not all States would necessarily enforce Law 75 and override a freely-executed choice of law clause. There are States which hold themselves out as having a body of fair and efficient substantive commercial laws that offer uniformity and predictability to business actors. The State of Delaware is one of those jurisdictions with a choice of law enactment that values the parties’ freedom of contract. 6 Del. C. Sec. 2708 (a)(2005) provides that: “[t]he parties to any contract, agreement or other undertaking, contingent or otherwise, may agree in writing that the contract, agreement or other undertaking shall be governed by or construed under the laws of this State, without regard to principles of conflict of laws, or that the laws of this State shall govern, in whole or in part, any or all of their rights, remedies, liabilities, powers and duties if the parties, either as provided by law or in the manner specified in such writing are, (i) subject to the jurisdiction of the courts of, or arbitration in, Delaware and, (ii) may be served with legal process. The foregoing shall conclusively be presumed to be a significant, material and reasonable relationship with this State and shall be enforced whether or not there are other relationships with this State.”

While Section 2708 has not been interpreted in the context of either Law 75 or franchise or distribution agreements, it applies to contracts of $100,000 or more as a matter of public policy where Delaware law has a material relationship to the transaction. As Delaware’s Court of Chancery noted in Abry Partners v. F&W Acquisition LLC, 891 A. 2d 1032, 1050 (Del. Ch. 2006), when enforcing a Delaware choice of law provision in a stock purchase agreement, “[t]o enter into a contract under Delaware law and then tell the other contracting party that the contract is unenforceable due to the public policy of another state is neither a position that tugs at the heartstrings of equity nor is it commercially reasonable.”