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Volvo Group North America, LLC v. Forja de Monterrey S.A. de C.V.

United States District Court, M.D. North Carolina

October 4, 2019

VOLVO GROUP NORTH AMERICA, LLC d/b/a VOLVO TRUCKS NORTH AMERICA, a Delaware limited liability company, Plaintiff,
FORJA DE MONTERREY S.A. de C.V., A Mexican company, Defendant.



         Plaintiff, Volvo Group North America, LLC (“Volvo”), initiated this breach of contract action against Defendant, Forja de Monterrey S.A. de C.V. (“Forja”), on February 15, 2016. (ECF No. 1.) In response, Forja alleged counterclaims for breach of contract and fraudulent inducement. (ECF No. 25 at 23.) Volvo thereafter moved to dismiss Forja's fraudulent inducement counterclaim. (ECF No. 27.) In a March 31, 2018 Order, this Court denied Volvo's motion, without prejudice, due to the parties' failure to adequately brief a threshold conflict-of-laws issue: whether Forja's fraudulent inducement claim should, like Volvo's breach of contract claim, be adjudicated under the law of New York, or, instead, the law of either North Carolina or Forja's home country of Mexico. (See ECF No. 31 at 1-3.)

         Following this Court's Order, on August 22, 2018, the parties entered into a Joint Stipulation providing that “New York law will govern Forja's Fraud Counterclaim without regard to conflict-of-laws principles under New York law.” (See ECF No. 61-1 at 3.) By letter that same day, the parties requested that this Court “So Order” the Joint Stipulation and formalize its effect. (See ECF No. 62 at 6.) This Court agreed to entertain the parties' request upon submission of a formal motion and accompanying brief. (Id.) Accordingly, on November 5, 2018, the parties filed a joint motion and accompanying memorandum, pursuant to Federal Rule of Civil Procedure 7(b)(1), asking this Court to enter the August 22, 2018 Joint Stipulation and apply New York law to Forja's counterclaim for fraudulent inducement. (ECF No. 61.)

         Having considered the Joint Stipulation and accompanying memorandum as evidence in evaluating the conflict-of-laws issue, the Court concludes that New York substantive law should apply to Forja's fraudulent inducement counterclaim.

         I. DISCUSSION

         The business relationship between Volvo and Forja is governed, in part, by a Purchase Agreement (the “Purchase Agreement”). (ECF No. 20-2.) The Purchase Agreement contains a short, generic choice-of-law provision (the “choice-of-law clause”), which reads “[t]his Purchase Agreement shall be governed by and construed in accordance with the laws of the State of New York.” (See Id. ¶ 6.1.11.)

         From the outset of this case, the parties and this Court have agreed that, pursuant to the choice-of-law clause, New York substantive law should apply to Volvo's breach of contract claim. (See ECF No. 23 at 3 n.2.) However, there was initial disagreement between the parties as to whether the scope of the choice-of-law clause was broad enough to also encompass Forja's counterclaim for fraudulent inducement. In briefing its motion to dismiss that claim, Volvo asserted, without explanation or support, that New York law should govern. (See ECF No. 28 at 10.) Forja responded that the Purchase Agreement's choice-of-law clause was “drafted narrowly” and took the position that, as a general matter, “tort claims are outside the scope of contractual choice-of-law provisions that specify what law governs construction of the terms of the contract.” (ECF 29 at 12-13 (citing Fin. One Pub. Co. Ltd. v. Lehman Bros. Special Fin., Inc., 414 F.3d 325, 335 (2d Cir. 2005).) Nevertheless, Forja suggested that this Court “need not decide at this juncture” whether the law of New York (the choice-of-law clause's selection) or North Carolina (the forum state) should apply because its fraudulent inducement claim would survive dismissal “under the law of either state.” (Id. at 13.)

         The parties' thin discussion of this important threshold issue-whether Forja's fraudulent inducement claim should fall within the ambit of the choice-of-law clause-raised more questions than it answered. (See ECF No. 31 at 3 (pointing out, for instance, that neither party had appeared to consider whether North Carolina conflict-of-laws rules might dictate that Mexican tort law should apply to Forja's counterclaim).) This Court, therefore, denied Volvo's motion to dismiss but kept open the possibility of further briefing and discussion. (Id.) As explained above, the parties took the Court's Order as an opportunity to confer, and Forja now agrees with Volvo that New York law should apply to its counterclaim for fraudulent inducement. (See ECF No. 61-1 at 3.)

         This Court has some reservations about allowing the parties to stipulate to governing law long after a cause of action has arisen and litigation has commenced, and where, as here, the parties initially disagreed over the scope of the relevant choice-of-law provision.[1] Moreover, as a federal court sitting in diversity, this Court has a duty to apply North Carolina's conflict-of-laws rules. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). Thus, further discussion of those rules is warranted to ensure that the Joint Stipulation comports with North Carolina law.

         A. Which Law Determines the Scope of the Choice-of-Law Clause

         As is sometimes the case, to properly answer one conflict-of-laws question, this Court must first answer another. The choice-of-law clause states that the Purchase Agreement shall be “governed by and construed in accordance with the laws of the state of New York, ” but does not specify whether the term “laws” includes New York's conflict-of-laws rules.[2] (ECF No. 20-2 ¶ 6.1.11.) When confronted with such ambiguity, “[the] question is itself a matter of the choice-of-law rules of the forum state.” See Pyott-Boone Elecs., Inc. v. IRR Tr. For Donald L. Fetterolf Dated Dec. 9, 1997, 918 F.Supp.2d 532, 542 (W.D. Va. 2013). As far as this Court can tell, North Carolina courts have not addressed the precise question of whether, absent express language, the conflict-of-laws rules of the state selected in a choice-of-law clause should apply. Thus, this Court must forecast how the North Carolina Supreme Court would rule, if given the chance. See Wells v. Liddy, 186 F.3d 505, 527-28 (4th Cir. 1999) (“To forecast a decision of the state's highest court we can consider, inter alia: canons of construction, restatements of the law, treatises, recent pronouncements of general rules or policies by the state's highest court, well considered dicta, and the state's trial court decisions.”).

         When, as here, a choice-of-law clause provides that an agreement will be governed by the “laws” of a particular state, it may be unclear whether the parties intended the whole law of that state-including the state's conflict-of-laws rules-to apply. See John F. Coyle, The Canons of Construction for Choice-of-Law Clauses, 92 Wash.L.Rev. 631, 643 (2017). The most widely held view on this issue, that of the Restatement (Second) of Conflict of Laws, is that, absent contrary language in a choice-of-law provision, the “laws” selected are the local or internal laws of the chosen state, exclusive of its conflict-of-laws rules. See Restatement (Second) of Conflict of Laws § 186(b) (Am. Law Inst. 1971); see also Schwan's Sales Enters., Inc. v. SIG Pack, Inc., 476 F.3d 594, 597 (8th Cir. 2007) (reasoning that, to apply the whole law of the selected state “would basically give effect to that provision before the court's analytical determination of what effect it should have”). As Professor John F. Coyle explains, if “the purpose of a choice-of-law clause is to ensure a uniform choice of law, irrespective of forum, ” then that purpose is furthered by “interpreting the term ‘law' or ‘laws' to refer to a body of laws that cannot redirect the parties to the law of still another jurisdiction.” See 92 Wash.L.Rev. at 643 (citing Restatement (Second) Conflict of Laws § 187(3) cmt. h). In sum, the goals underlying choice-of-law provisions are certainty and uniformity, and courts should embrace an interpretive method that fosters these goals.

         Under North Carolina law, “where parties to a contract have agreed that a given jurisdiction's substantive law shall govern the interpretation of the contract, such a contractual provision will be given effect.” Tanglewood Land Co., Inc. v. Byrd, 261 S.E.2d 655, 656 ( N.C. 1980). The best way to give “effect” to a choice-of-law clause is to ensure, where possible, that its “basic objectives, namely those of certainty and predictability, ” are achieved. See Restatement (Second) Conflict of Laws § 187(3) cmt. h; Bueltel v. Lumber Mut. Ins. Co., 518 S.E.2d 205, 209 ( N.C. Ct. App. 1999) (explaining that, when confronted with a choice-of-law clause, “the parties' intent must rule”). Moreover, the North Carolina Court of Appeals, “following the logic of [the North Carolina Supreme Court], ” has reasoned that “it is apparent that when a choice of law provision is included in a contract, the parties intend to make an exception to the presumptive rule that the contract is governed by the law of the place where it was made.” Bueltel, 518 S.E.2d at 209 (citing Tanglewood, 261 S.E.2d 655). Construing the term “laws” in a choice-of-law clause to include the selected state's conflict-of-laws rules- which may themselves instruct that the law of a wholly different forum should govern-risks thwarting that intent.

         For these reasons, this Court forecasts that the North Carolina Supreme Court would likely interpret a choice-of-law clause which provides that a contract “shall be governed by and construed in accordance with the laws of the State of New York” as referring only to the internal law of New York, exclusive of that state's conflict-of-laws rules. Accordingly, this Court will apply North Carolina's, rather than New York's ...

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