A Costly Drafting Mistake

Image by Steve Buissinne from Pixabay

When I teach Conflict of Laws, I spend a lot of time showing my class how to draft a good choice-of-law clause. It’s not hard. Everything you need to know is laid out in the Primer on Choice-of-Law Clauses. Unfortunately, these instructions are not always followed. In one recent case, Pool Scouts Franchising LLC v. Stuart Road Corporation, the omission of a key phrase generated negative—and wholly avoidable—consequences for the contract drafter.

The plaintiff, Pool Scouts Franchising LLC (“Pool”), was a franchisor based in Virginia. The defendant, Stuart Road Corporation (“Stuart”) was a franchisee based in Texas. Pool sued Stuart in federal district court in Virginia, seeking damages for breach of contract and violation of Virginia’s Defend Trade Secrets Act. Stuart, in turn, asserted a counterclaim against Pool for violations of the Texas Deceptive Trade Practices Act (“TDTPA”).

The contract between the parties contained the following choice-of-law clause:

This Agreement shall be interpreted and construed exclusively under the laws of the Commonwealth of Virginia, which laws shall prevail in the event of any conflict of law (emphasis added).

The question presented to the court was whether this clause swept broadly enough to cover statutory claims in addition to common law claims for breach of contract. If the clause covered statutory claims, as Pool argued, then Stuart’s counterclaims arising under the TDTPA would be dismissed because they were not based on Virginia law. If the clause did not cover statutory claims, as Stuart argued, then the court would have to perform a choice-of-law analysis to determine whether Stuart could assert its claims under the TDTPA.

As the drafter of the contract, Pool could have written a clause that expressly selected the law of Virginia to govern all claims—whether based on contract, tort, or statute—with some connection to the contract. Such a clause might have looked like this:

This Agreement and all claims relating thereto shall be interpreted and construed exclusively under the laws of the Commonwealth of Virginia, which laws shall prevail in the event of any conflict of law.

Unfortunately for Pool, the clause in its agreement omitted the italicized language. It merely stated that the agreement would be “interpreted and construed” in accordance with Virginia law. This omission opened the door for Stuart to argue that the clause, as drafted, applied only to claims for breach of contract. And the court sided with Stuart. It held that:

The disputed choice of law provision requires only that the “agreement” be “interpreted and construed” under Virginia law. The provision does not explicitly address causes of action generally, or tort claims specifically. This language is narrower than the choice of law provisions that Virginia courts have declined to apply to tort claims. Nonetheless, Pool Scouts argues that the Court should place great weight on the provision’s use of the word “exclusively.” But “exclusively” only modifies “interpreted and construed,” meaning that only Virginia law will be used to interpret and construe the Agreements. Such a statement cannot be construed to extend beyond the interpretation and construction of the Agreements.

After concluding that the choice-of-law clause did not sweep broadly enough to cover Stuart’s statutory claims, the court performed a choice-of-law analysis using Virginia’s choice-of-law rules. It found that Stuart had been injured in Texas. Accordingly, the court held that Stuart’s claims based on the TDTPA could proceed because Virginia is a lex loci delicti state.

This drafting mistake has the potential to expose Pool to damages above and beyond those available under Virginia law. One hopes that anyone reading this case—or this blog post—will take the necessary steps to draft future choice-of-law clauses in the broadest possible manner to ensure that the law of their home jurisdiction applies to all claims asserted against them… as opposed to drafting a narrow clause that only covers claims for breach of contract.