February/March 2010 / Features
In Some Deals, Choice of Law Could Matter a Lot
The authors pose hypothetical situations in which deals involve representations and warranties that turn out to be false.
The question is whether a claim for breach of representations and warranties is like a fraud claim, where a plaintiff needs to show that it relied on the defendant’s misrepresentations, or like a contract claim, where reliance is not an element.
In a 1990 case, CBS, Inc. v. Ziff-Davis Publishing Co., the New York Court of Appeals resolved the issue for deals that apply New York law. The Court explained that a claim for breach of representations and warranties is just like any other breach of contract claim, and not like a tort claim. To prove a breach of contract, a party only has to show three things: the existence of a contract supported by adequate consideration, breach of a material term and damages. The element of reliance is nowhere to be found.
Texas has adopted the Ziff-Davis ruling. Other jurisdictions take the opposite point of view. In Delaware, cases go both ways.
Some states permit parties to contract into, or out of, Ziff-Davis. This question is unsettled in many jurisdictions, depending on whether they view breach claims as torts or contracts, but courts often are willing to enforce choice of law provisions. The authors advise keeping this in mind when negotiating.