Published on:

‘Choice of Law’ Provision in Commercial Contract Allows LLC to Maintain Fraudulent Inducement Case

jetWithin any contract, there are probably several clauses that are carefully analyzed and extensively negotiated. Regardless of the amount of time negotiating any given paragraph, all of the provisions in your contract are important, since any one could be the key to your being able to protect your interests (or not). In the case of one LLC’s breach of contract and fraudulent inducement case, it was the agreement’s “choice of law” provision that provided the key to the LLC’s success in the 11th Circuit Court of Appeals.

The contract at the heart of this case was one in which an LLC agreed to purchase an airplane from a seller upon the express condition that the seller’s subsidiary would manage the jet for five years. This management service included renting the plane out during that five-year period.

Three years into the deal, though, the seller and the subsidiary stopped offering the management service. Stuck with extremely expensive maintenance and storage costs, the buyer sold the jet for just over $5 million. This presented an additional problem, since the buyer had paid $7.2 million for the jet, and the seller had promised, as part of the inducement for the buyer to purchase the plane, that the jet would retain 90% of its value for five years.

All of this led the buyer to sue for breach of contract and fraudulent inducement. The federal district court for the Southern District of Florida dismissed all of the buyer’s claims, concluding that the allegations and support the buyer had did not amount to a viable breach of contract or viable fraudulent inducement case under Florida law.

The buyer appealed to the 11th Circuit and won. The key to the buyer’s success was a provision that the two sides had inserted in the original purchase agreement. That paragraph in the contract said that Kansas law governed the agreement and that the contract should be interpreted in accordance with Kansas’ laws. The 11th Circuit explained that even in a case in which the plaintiff has alleged that the defendant fraudulently induced the plaintiff into entering the agreement, the “choice of law” paragraph remains valid and enforceable as long as the plaintiff had “affirmed” the agreement.

The buyer in this case had affirmed the agreement and had “implicated the agreement’s choice of law provision” by making a claim in court for money damages. The lower court should have used Kansas law, rather than Florida law, to determine whether the buyer had a viable claim or not. Kansas recognizes as potentially viable grounds for a fraud case “promises regarding future income and earnings.” This buyer made assertions in its lawsuit that the seller made specific statements about the jet’s cash flow and its residual value. Since Kansas, unlike Florida, allows a plaintiff to use these types of statements as proof, the buyer’s assertions, if proven, could make the basis of a viable fraud claim under Kansas law, the 11th Circuit decided.

The key to the outcome of this appeal was the parties’ decision to name Kansas as the state whose laws would serve as the standard for resolving disputes between the parties. This case’s result serves as a useful reminder that any part of a contract can be vitally important to you, and all parts are worth contemplating carefully in the contract negotiation and creation process. For advice and representation upon which you can rely, throughout every step of the contracting process, contact the knowledgeable South Florida commercial litigation attorneys at Stok Folk + Kon. Our team has been helping businesses for many years with constructing and completing contracts that will meet their business goals.

Contact us online or by calling (305) 935-4440 to schedule your consultation and find out how this firm can help you protect your needs.

More blog posts:

South Florida Real Estate Agent Wins Appeal in Contract Breach Dispute with Broker, Florida Business Lawyers Blog, June 23, 2017

What Does (and Doesn’t) Trigger a Waiver of Your Right to Compel Arbitration in Your Florida Commercial Contract Dispute, Florida Business Lawyers Blog, May 19, 2017