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Berg Chilling Systems, Inc. v. Hull Corporation

435 F. 3d 455 (3rd. Cir. 2006)

CONTRACTS; FORUM—A contract’s choice of law provision governs the relationship between the parties, but is not binding on a court doing a conflicts of law analysis.

A Canadian company agreed to provide a Chinese company with an industrial freeze-drying system. The Canadian company then entered into a subcontract with a Pennsylvania company to design, engineer, and manufacture two freeze dryers to be used at part of the freeze-drying system. The freeze dryers failed preliminary tests. In order to salvage the contract, representatives of all three companies negotiated a compromise. The Pennsylvania company then entered into an asset purchase agreement with a Delaware company, in which the Delaware company agreed to purchase the entire freeze-drying division from the Pennsylvania company. The asset purchase agreement provided that New Jersey law would control the terms of the agreement. It also provided that the Delaware company would repair defective products shipped by the seller prior to the closing date of the purchase, but that it would not assume any liability to third-parties. The freeze dryers again failed, and the Chinese company filed an arbitration claim against all three companies. The Chinese company won its arbitration claim against the Canadian company, and they reached a settlement. The Canadian company then sued the subcontractor, the Pennsylvania company, as well as the Delaware company that purchased its freeze-drying division.

The lower court found all the entities equally at fault and apportioned the settlement equally among them. The Delaware company appealed and the Court of Appeals reversed, finding that the terms of the asset purchase agreement, the Delaware company was not liable to third-parties. The Court remanded the matter to the U.S. District Court to determine whether the Delaware company was liable under the successor liability doctrine.

The lower court first determined that it was not, and the Canadian company appealed, but the Court of Appeals affirmed. It began its analysis by determining which law was to be applied, New Jersey law or Pennsylvania law. If New Jersey law applied, the Delaware company could have been deemed a “mere continuation” of the Pennsylvania company, and thus liable under the doctrine of successor liability, since the Delaware company purchased the entire freeze-drying unit. If Pennsylvania law applied, the Delaware company would not have been deemed a successor, since Pennsylvania courts have held that a de facto merger cannot exist unless the shareholders of the selling company become shareholders in the purchasing company (which did not occur in this case). Therefore, the Court needed to determine which state had an overriding interest in the matter to determine which law prevailed, New Jersey’s or Pennsylvania’s. The Canadian company argued that, since the asset purchase agreement provided that New Jersey law controlled, New Jersey law should also control the question of successor liability. The Court disagreed, finding that the choice of law provision in the asset purchase agreement was intended to govern only the relationship between the two parties to that agreement, and not govern their relationship with the rest of the world. The Court then looked at several factors to determine which state had an overriding interest in having its law apply. The factors it considered were: (1) place of performance; (2) location of the subject matter of the contract; and (3) place of incorporation and place of business of the parties. The Court found that the most relevant location was Pennsylvania, since the freeze-drying division was located there and the freeze dryers were manufactured there. After determining that Pennsylvania law, and not New Jersey law, applied, the Court found that the Delaware company was not liable to the Canadian company under the theory of successor liability. It noted that the shareholders of the Pennsylvania company did not become shareholders of the Delaware company, and that management did not move over to the Delaware company after the sale was completed. It also noted that the Delaware company continued to exist as an entity for many years after the sale of the freeze dryer division.

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