"Internal Affairs Doctrine" vs. Choice of Law Clauses
The Internal Affairs Doctrine is a choice of law principle that has long been recognized in Tennessee. The doctrine holds that matters involving the internal affairs of a foreign corporation should be deemed substantive in nature and should therefore be resolved in accordance with the law of the state of incorporation.
However, what it is the role of the doctrine when the litigation involves a contract claim and the contract specifically provides for application of Tennessee law? In particular, when the plaintiff makes an alter ego allegation against the foreign parent of the alleged breaching party, what law governs the alter ego allegation?
This was the specific question addressed by the Middle District of Tennessee, and later by the 6th Circuit Court of Appeals, in Southeast Texas Inns v. Prime Hospitality Corp. The Middle District held that while Tennessee law would apply to the breach of contract claim pursuant to the choice of law clause, Delaware law would govern the alter ego allegation, despite the choice of law provision, since the allegation concerned the internal affairs of a foreign corporation. When this issue was appealed to the 6th Circuit, a majority of the Court concluded that the issue was functionally moot in that Tennessee and Delaware law were consistent with regard to the elements necessary to pierce the corporate veil under an alter ego theory. Accordingly, the Court did not rule on whether the Internal Affairs Doctrine had been properly applied by the District Court.
While the issue was not reached by the Sixth Circuit, this case nonetheless highlights an important point. Choice of law clauses, even if enforceable, may not govern the disposition of all legal issues in a contract case. As underscored by the forgoing, attorneys should not simply assume that such clauses are dispositive.
Read the full opinion here.