DealLawyers.com Blog

A few years ago, John shared a blog by Glenn West on choice-of-law and choice-of-forum provisions in which Glenn noted that, “a properly-worded choice-of-law clause can, in most instances, ensure that the contractually chosen law” will be applied to two kinds of “contractually-related disputes” — “traditional breach of contract claims, as well as tort-based claims such as fraud and negligent misrepresentation.” Earlier this week, in Cytotheryx Inc v. Castle Creek Biosciences Inc. & Paragon Biosciences LLC (Del. Ch.; 11/25), the Delaware Chancery Court easily concluded that a broad choice-of-law clause contained in a merger agreement did indeed apply to tort claims, but had to look a bit closer at whether the choice-of-law provision covered the particular tort claims at issue.

The Merger Agreement’s choice-of-law provision provides that Delaware law will apply to “all claims and causes of action based upon, arising out of or in connection []with” the Merger Agreement. That language—particularly “arising out of” and “in connection []with”—is “paradigmatically broad.” Indeed, the question of whether a choice-of-law provision applies to torts has turned on whether the contract contained similar language. When the contract does not, Delaware courts have held the provision does not apply. The implication, borne out by though not always explicitly stated in the case law, is that when a choice-of-law provision does contain this broad language, it does cover tort claims. Here, the Court holds that the Merger Agreement’s choice-of-law provision is broad enough to cover at least some tort claims.

The tort at issue in the case was not fraud or negligent misrepresentation (or fraudulent inducement, which Sitting Vice Chancellor Winston gave as an example of a tort that “necessarily arises out of a contract”), but defamation. Plaintiffs contend that “extending the choice-of-law clause to defamation claims is a bridge too far.” Sitting Vice Chancellor Winston found that a defamation claim does not “necessarily” but “possibly” arises out of a contract.

She found that the claims at issue in the dispute were encompassed by the merger agreement’s broad choice-of-law provision since they concerned statements related to performance of the merger agreement — specifically about contractual obligations, “misrepresentations” during the “acquisition process” and “refus[ing] to provide payment.” But she notes: “Had Cytotheryx and Swart made statements about some other topic, the result might be different.”

– Meredith Ervine