A Primer on Choice of Law Provision
A choice of law provision is a clause in a contract in which the parties agree that certain laws will govern their rights and obligations under the contract. It is also sometimes called a choice of law or choice of law clause. A choice of law provision is significant legally because it may determine things such as the applicable statute of limitations or standard of care. Typically, parties include a choice of law provision because it is more convenient under the circumstances to have a particular jurisdiction’s laws apply to their contract . For example, if two parties are from different states, but frequently do business together in one of their states, it may be more efficient for them to agree on the particular state’s laws governing their interactions and obligations – and they can do this by including a choice of law provision. This also gives the parties some control over their rights under their contract because they can choose the jurisdiction’s laws that will apply – for instance, a shorter or longer statute of limitations or more stringent or lenient laws regarding tortious interference with contract.
Choice of Law Provisions – Why Do They Matter?
The importance of choice of law provisions in contracts cannot be understated. They act as signposts for not only performance of the parties, but also for dispute resolution and enforcement. For instance, if both parties know that disputes will be resolved in New York, under New York contract law, the parties may act differently than if they would otherwise suit Virginia law. The result directly impacts how the contract is performed.
In this context, the choice of law provision is important in that it provides predictable outcomes to any contract disputes. It avoids any surprise that might come about if foreign laws are applied to the contract. And, it avoids an ad hoc analysis of what law applies and how.
Additionally, a well-drafted choice of law provision may avoid jurisdictional issues. A company may not do enough business on the internet in Georgia in order to have jurisdiction there. However, if Georgia law governs the agreement, the foreign company may have had a better lawyer who was able to find a forum.
As such, choice of law provisions are important for:
As we’ve seen with other provisions, these clauses are a cost effective way to reasonably anticipate outcomes.
What Are the Examples of Choice of Law Provisions?
To illustrate the variety of choice of law provisions used in contracts, several examples are identified below:
International Conventions
Uniqlo v. Best Fit Int’l, Inc., 160 Cal.App.4th 559 (2008), The Uniform Breakdown of International Commercial Laws ("UBICL") is an example of a set of codified uniform laws that can act as a choice of law provision. In Uniqlo, the parties’ agreement provided that "UBICL" governed their contract. The California Court of Appeal held that the reference to UBICL constituted a choice of law provision, and that the parties’ agreement was governed by the various laws identified in the UBICL.
Employment Contracts
XS Telecom Inc. v. Hwang, 205 S.W.3d 574 (Tx. 2006), The parties’ labor contract (which was for the employment of Chinese residents in China) specified that Texas law governed the contract. The Chinese employees in the above case were required to employ Texas counsel in order to enforce their contract. In addition to the fact that China recognizes the validity of choice of law provisions in contracts, China also recognizes that Texas law is similar to Chinese law when it comes to determining the legality of contractual provisions.
Commercial Transactions
PaineWebber Group, Inc. v. Bybyk, 81 N.Y.2d 36 (1993), In Bybyk, a New York state court held that the parties’ contract was governed by the laws of the state where the brokerage house firm is located. Bybyk involved a dispute between a brokerage house located in New York and an employee who left the firm and began working for its competitor. New York State Courts have determined that this issue of "non-competition" is governed by public policy, and thus the "most appropriate jurisdictional forum" should determine the employment contract’s validity.
Drafting a Valid Choice of Law Provision
An effective choice of law provision should contain the following elements:
(1) A statement of what jurisdiction’s laws apply; and
(2) When applicable, a statement whether the parties agree to the application of the jurisdiction’s laws, irrespective of the conflict of law standards of that jurisdiction.
Take, for example, the following sample provision:
The terms of this contract shall be governed by the laws of the State of New York without regard to the principles of conflict of laws and without regard to the U.N. Convention on Contracts for the International Sale of Goods .
In the above example, an expressed intent not to apply a particular jurisdiction’s conflict of law principles is included. This type of language can be useful in some circumstances. If an agreement is signed by a party in one jurisdiction but performed by that party in another, then that party may raise a conflict of law issue to protect itself. As such, including language like the above may discourage one party from asserting a choice of law defense based on that foreign jurisdiction’s conflict of law rules.
Nevertheless, a typical choice of law provision may look something like the following:
This Agreement shall be governed by the laws of the Commonwealth of Massachusetts.
Potential Issues with Choice of Law Provisions
When implementing a choice of law provision, parties should determine whether the choice of law provision could conflict with mandatory legal norms of the state in which a dispute may arise. This would include consumer protection laws or (in the United States) state law rules that prohibit forum selection clauses, or forum selection, or choice of law clauses. Mandatory legal norms could be established by the general laws of the jurisdiction, specific consumer protection or trade laws in an industry, or specific laws relating to distributorships or franchise agreements. Where a mandatory legal norm exists in a given jurisdiction, a court could establish that a choice of law provision does not apply to such jurisdiction and a party seeking the application of a foreign legal system would then need to rely upon public order norms of the given jurisdiction (i.e., where no mandatory legal norm exists, a court could allow the usage of a foreign legal system if it would not offend public order).
In addition, courts may refuse to enforce a choice of law provision for reasons of substantive public policy, if application of a foreign law would be clearly prejudicial to important political, cultural, or social interests and norms of the state in which a court would have jurisdiction. (For instance, the European Court of Justice has held that consumer protection laws of a member state take precedence over the choice of law provisions in contracts made with consumers in other member states and which try to contract out of the applicable consumer protection laws of the consumer’s legal system.) In the United States, consumer protection repeat sales acts are another basis for courts to reject consumers’ choice of law provisions (for example, if there is a conflict between the states’ consumer protection laws).
Analyzing Real-World Examples Of Choice of Law Provisions
The operability of choice of law provisions in contract disputes was tested in the early days of the 20th century when cases such as The Lobaugh and Universal Adjustment Corporation worked their way through the courts. Few choice of law disputes were adjudicated between 1930 to 1970, perhaps because of the difficulty of predicting the outcomes. However, case law in the U.S. is abundant now and a brief overview of relevant cases is helpful.
In 1972 the Tennessee Supreme Court heard V.L. Nicholson Company v. Stone.
Nicholson, a Tennessee corporation, drew and delivered a series of four lease payment checks to N.M. Bradshaw in Interlaken, New York. All the checks described the same two boreas (to which Bradshaw had given the name "Aunt Millie") and were to acquire the same future benefit under Nicholson’s lease to Bradshaw. Bradshaw chose to tender the checks at the Fifth National Bank for collection. Of the four checks, three were paid by the bank but the fourth was returned because it was not accompanied by directions authorizing the collection.
The crux of the argument in this case is that under New York law, a bank can’t be held to have knowledge of restrictions regarding the use of funds deposited for collection unless those restrictions are clear on the face of the instrument. The restriction must be explicit. Bradley thus argued that the bank could not have known of the "Aunt Millie" restrictions because the checks were silent on that point. Therefore, the Tennessee contract law principles should not apply. Bradley lost his case.
The reason Tennessee contract law applied is because the evidence proved that Bradshaw accepted Nicholson’s offer to grant Aunt Millie the option to use the funds for her complete use. In his acceptance , Bradshaw became the "partner" of Aunt Millie and utilized those funds for Aunt Millie’s benefit. Under these circumstances, Bradshaw couldn’t be relieved of his promise. Applying other laws was therefore unnecessary in this case.
In 2013, the Court of Appeals for the Second Circuit, in International Flavors & Fragrances v. Eastman Chemical Company, reaffirmed the precept that a party seeking to have the Court declare a choice of law provision unenforceable bears the burden of proof for both the first and second prongs. It continued:
(1) The law of the chosen jurisdiction must bear a reasonable relationship to the parties or the transaction. (2) The application of the law of the chosen jurisdiction must not be contrary to a fundamental policy of a state that has a materially greater interest in the determination of the particular issue and whose law would otherwise govern the issue. In this instance, the Court ruled that the choice of law provision in the disputed contract, which provided that the law of the State of New York would govern the contract, was enforceable.
In 2018 the Supreme Court of North Dakota, in Graber vs. Harmon, examined the question of whether a choice of law situation could arise through the course of oral negotiation. In other words, if a governing law provision was developed orally rather than in writing, should it nevertheless hold up in court? The Court sided with Graber, the seller, who had been aware that it was negotiating an agreement under which the law of Minnesota would apply, even though there was no written provision to that effect.
There you have it. History is replete with choice of law decisions that demonstrate how important it is to properly draft such language in your contracts.