Optionality in Choice of Law
November 6, 2023
Image by Arek Socha from Pixabay
Choice-of-law clauses are sometimes described as tools for reducing legal uncertainty. This characterization, while correct, is incomplete. In cases where the suit is brought in a jurisdiction other than the one named in the choice-of-law clause, it is sometimes more accurate to think of the clause as an option. Either litigant may, if it so chooses, incur the costs of pleading the law of the chosen jurisdiction. Alternatively, the litigants may tacitly agree to forego these costs, ignore the clause, and brief the court on the law of the forum. (As noted in a previous post, this seems to happen a lot in China.) The choice-of-law clause gives each party the option of asking the court to apply the law of the jurisdiction named in the clause. It does not mandate that the court do so.
This option is not an all-or-nothing proposition. On the one hand, a litigant may ask the court to apply the chosen law to every legal issue presented in the case. On the other hand, a litigant may ask the court to engage in depeçage and apply foreign law to only a single issue. While the latter approach may be a rather complicated way to run a railroad, it can be done. In fact, this is exactly what happened in Makina Ve Kimya Endustrisis A.S. v. Kaya, a case decided in October 2023 by the United States District Court for the Western District of Virginia (Judge Robert S. Ballou).
Makina Ve Kimya Endustrisis A.S. v. Kaya
The plaintiff was Makina ve Kimya Endustrisi Kurumu, A.S. (MKE), a Turkish company that manufactures weapons and ammunition. The defendants were Kutlay Kaya (Kaya), a natural person, and Zenith Quest Corporation, Zenith Quest International, Inc., and Zenith Firearms, Inc. (collectively Zenith). All the defendant corporations were incorporated under the laws of Virginia.
In 2013, MKE entered an agreement with one of the Zenith entities, naming it the exclusive distributor for MKE products in the United States. This relationship was continued in a 2017 agreement and a 2019 agreement. Each of these agreements contained a choice-of-law clause selecting the laws of Turkey.
In late 2019, MKE terminated its business relationship with Kaya and Zenith following a series of disputes over payment and product quality. MKE sued Kaya and Zenith in federal court in Virginia, alleging breach of contract, unjust enrichment, defamation, trademark infringement, and unfair competition. Zenith counterclaimed for breach of contract and unjust enrichment. Both parties moved for summary judgment.
The Turkish Choice-of-Law Clause
With respect to the choice-of-law clause, the court observed that “Federal Rule of Civil Procedure 44.1 requires that a party intending to raise an issue about foreign law give notice in a pleading or other writing.” It also observed that Rule 44.1 does not oblige a court to determine foreign law on its own. Even if a contract contains a Turkish choice-of-law clause, in other words, the court is free to insist on a complete presentation by counsel.
To this end, MKE engaged an expert on Turkish law—Dr. Erdem Büyüksagis—who submitted an expert report discussing whether Zenith could obtain consequential damages for its breach of contract claim under Turkish law and the United Nations Convention on Contracts for the International Sale of Goods (CISG). Significantly, Dr. Büyüksagis did not opine on the relevance of Turkish law to the merits of the claims asserted by MKE. Nor did he offer any view as to how the counterclaims asserted against MKE would be resolved under Turkish law. His report addressed just one issue—the availability of consequential damages should Zenith prevail on its breach of contract claim against MKE.
With respect to the other issues in the case, the litigants—all of whom were represented by lawyers at U.S. law firms—tacitly agreed to apply the law of the forum (Virginia). They agreed that the applicable statute of limitations for claims of breach of contract was the one laid down in Virginia’s Uniform Commercial Code (UCC). They agreed that the merits of the breach of contract claims were governed by the Virginia UCC. And they agreed that the unjust enrichment and defamation claims were governed by the common law of Virginia. Although MKE chose to exercise its option to invoke foreign law with respect to a single issue, the parties did not otherwise brief the court on Turkish law.
Why the Option Was Declined
Under ordinary circumstances, it is understandable why U.S. lawyers might shy away from incurring the costs of briefing the court on foreign law in a complicated commercial case. It is expensive to translate and research and obtain expert testimony on the law of a foreign country. As Bill Dodge has noted, parties in China sometimes forego reliance on foreign law chosen by the contract for precisely this reason.
In this case, however, it is unlikely that cost was a major factor. The contracts in question were contracts for the sale of goods. The United States and Turkey are both parties to the CISG. It follows that the breach of contract claims would have been governed by the CISG rather than any Turkish commercial code. This is significant because the CISG is a known quantity to U.S. lawyers. It is widely available in English. There are many treatises explaining how it works. And there is a body of U.S. case law applying it. The notion that the costs of researching the CISG were significant enough to force the parties into Virginia law strains credulity.
This insight suggests that the lawyers may have preferred Virginia law simply because they were more familiar with it. When pressed to choose between a relatively familiar body of state law and a relatively unfamiliar treaty, the U.S. lawyers gravitated to the law with which they were more familiar. The end result was that the claims for unjust enrichment, defamation, and breach of contract—minus the consequential damages issue—were contested entirely on the basis of Virginia state law, even though the contracts all contained Turkish choice-of-law clauses. This case illustrates yet again the curious aversion to the CISG long exhibited by U.S. attorneys.
Interestingly, each of the agreements also contained language stating that “disputes arising from the agreements shall be settled by arbitration in the International Chamber of Commerce.” It goes without saying that the litigants also ignored this language. Instead, they tacitly agreed to resolve their dispute in federal court in Virginia. Like choice-of-law clauses, arbitration clauses may be usefully conceptualized as options. Each litigant has the choice of resolving their dispute either in arbitration or in the court where the lawsuit is filed.
The decision made by the litigants in Makina to ignore both the choice-of-law clause and the arbitration clause in their agreements is defensible. They were under no obligation to exercise either of these options. But their behavior tends to undermine the notion that the primary virtue of dispute resolution provisions is the ex ante certainty they provide to disputes arising ex post. At the time the contract was signed, the parties expressly agreed that they would resolve any disputes via international arbitration pursuant to Turkish law. When all was said and done, they would litigate their dispute in the United States under the law of Virginia (mostly).