This article, written by Edward M. McNally, was originally published on Delaware Business Court Insider | published. 20 July 2011 It is striking how often the authors do not consider which law applies to the contract they have drawn up. This also applies to large contracts. For example, directors` and officers` insurance policies often do not choose the applicable law, so the choice of law depends on where the policy is written or where the insured company is located. But ignoring the choice of law means giving up many of the possible benefits that the right choice can offer. This article discusses these benefits in the context of two recent decisions whose outcome was the choice of Delaware law. Choosing the right law for your client is always the right choice versus ignoring the problem. First of all, at least the choice can avoid costly arguments later. People are arguing over which law applies because it can make a real difference. These arguments cost real money. Second, if you choose wisely, you will vote in favour of predictability.
Trying to decipher the law of certain jurisdictions (such as Saudi Arabia) can be very difficult. If you don`t know for sure what the applicable law provides, then you don`t know if what you wrote in your contract actually works the way you thought it would. Third, you can often simplify a contract by choosing the applicable law. This alone saves money in the design process. So, which law should you choose? It`s better to choose the law you know than to guess what might be the right of another jurisdiction. It`s just common sense. However, two recent decisions illustrate why you should consider Delaware law for your next contract. In fact, Delaware law is now the preferred law in most merger and acquisition documents, even for those in which no Delaware company has an interest. In this area, Delaware law is considered a neutral compromise if the parties come from different jurisdictions whose laws might otherwise apply without Delaware`s contractual choice.
Delaware`s mergers and acquisitions law is also well developed and therefore more predictable than the law of any other jurisdiction. With open source contracts, you have a lot more leeway in choosing your state because there`s not really a place to do business – unlike other IT agreements where if you choose Delaware but have no connection to the state, the courts may ignore your choice. So what should you do in terms of choice of law and courts? First of all, in most offers, you need to choose the same state for both. That way, if you ever go to court, your judges and litigants will look at the laws they know best. As far as the state is concerned, I recommend the one that has the closest connection with the agreement. If you build computer systems in Georgia – or if you install software or anything else – you choose the law and courts of Georgia. If your transaction involves work in multiple states, choose one of them: ideally, the one where most of the work is done. The state`s laws will be most familiar to businessmen and lawyers involved in the deal, and its courts will be closest to witnesses and evidence. You should only consider another state if one or both parties are based elsewhere. (And I mean based.
In computer transactions, where someone is registered rarely matters.) A base of operations in Texas could mean that employees know the texas law best, and in the event of a legal dispute, that`s where most of the evidence and witnesses can be found. Also, some companies insist on their territory, and there`s nothing wrong with that (although the other party doesn`t necessarily have to agree). So why choose Delaware Law for your contract? If you choose Delaware law, you have a good chance that your choice will be respected first. The June 6 decision of the 3rd U.S. Circuit Court of Appeals in Coface Collections v. Newton shows why this is important. Many states have laws that cancel contracts that restrict former employees` competition against their former employer. In these states, an employee with years of important information can go out to join a competitor. This is the case in Louisiana, where Coface bought Newton`s business and then tried to apply a non-compete clause to prevent it from competing with Coface later. The District Court of Delaware upheld the non-compete clause because it contained a Delaware choice of law provision and allowed Delaware`s non-compete clauses. The Court of Appeals upheld the Delaware choice of law and the competition injunction that supported the Delaware law.
This was true even if the Louisiana Treaty had been signed by a Louisiana resident and Louisiana law would have repealed this provision of the treaty. By choosing the Law of Delaware, Coface thus obtained substantial benefits that were not available to it under louisiana law, which would otherwise have been applied. This decision was in part opposed to a new delaware single law, 6 Del.C § 2708. Under section 2708, a Delaware choice of law provision in itself provides evidence of a „material and reasonable relationship with [Delaware] and is enforced whether or not there is another relationship with that State.“ This provision then provides the justification for the application of Delaware law, which was previously found only when an act or business actually took place in Delaware. In short, under the law, Delaware now provides for the application of Delaware`s choice of law provision. In addition to ensuring that your choice of law is upheld, Delaware law also has other advantages. .