Anaya Nolan
A choice-of-law clause, also known as a governing law clause, is a provision in a contract that determines which laws will be applied to interpret the agreement and settle disputes. It is a term of a contract in which the parties specify that any dispute arising under the contract shall be determined in accordance with the law of a particular jurisdiction. The purpose of a choice-of-law clause is to provide certainty about what laws will govern in the event of a dispute and to reduce legal uncertainty. These clauses are found in most contracts and are particularly important in real estate transactions for buyers and sellers.
| Characteristics | Values |
|---|---|
| Purpose | To provide certainty about what laws will govern in case there is a dispute or issue in the future |
| To reduce | Legal uncertainty and the cost of dispute resolution |
| To facilitate | Settlement |
| To identify | The law that will be applied to resolve any potential dispute |
| To determine | The controlling law and the choice of forum |
| To be upheld | By courts if bona fide, legal, and not contrary to public policy |
| To add | Predictability about the law to be applied |
| To be bona fide | The parties must not have intended to use that law to evade the legal system that the contract has the most substantial connection with |
| To be enforceable | The contract must be legal and there must be no reason to avoid the choice of law on public policy grounds |
| To be refused | Courts may refuse to enforce choice-of-law clauses in consumer contracts where the plaintiff demonstrates strong cause |
| To be interpreted | May vary by forum |
| To be selected | Parties may consider the types of disputes that could arise, whether the law will be from a common or civil law jurisdiction, how friendly or hostile a jurisdiction would be to their claim, and whether sufficient precedent exists in that jurisdiction |
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What You'll Learn
Reducing legal uncertainty
A choice-of-law clause, also known as a governing law clause, is a provision in a contract that determines which laws apply to the adjudication if a question or dispute arises. It is a term of a contract in which the parties specify that any dispute arising under the contract shall be determined in accordance with the law of a particular jurisdiction.
The purpose of a choice-of-law clause is to reduce legal uncertainty by providing a level of certainty about what laws will govern in case there is a dispute or issue in the future. It prospectively selects a law to govern the agreement between the parties and identifies the law that will be applied to resolve any potential dispute. This facilitates settlement and reduces the cost of dispute resolution by eliminating the need for the court to conduct a choice-of-law analysis if the dispute ends up in litigation.
To be enforceable, the choice-of-law clause must be bona fide, the contract must be legal, and there must be no reason to avoid the choice of law on public policy grounds. For example, in Canada, gambling debts incurred in foreign countries were not enforced on public policy grounds as gambling was once considered contrary to public policy.
Courts may refuse to enforce choice-of-law clauses in consumer contracts where the plaintiff demonstrates strong cause, such as an inequality in bargaining power. Additionally, courts will generally enforce a choice-of-law provision as long as the chosen law bears a reasonable relationship to the parties or the transaction. When determining the choice of law, parties may consider the types of disputes that could arise, whether the law will be from a common or civil law jurisdiction, and whether sufficient precedent exists in that jurisdiction.
Choice-of-law clauses are found in almost every contract and are particularly critical in real estate transactions for both sellers and buyers. They can also be strategically used by businesses, such as setting the choice of law in the state where the business is headquartered, even if they conduct business in other states.
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Facilitating settlement
A choice-of-law clause is a provision in a contract that determines which laws will govern the contract and any claims or disputes relating to it. It is a term of a contract in which the parties specify that any dispute arising under the contract will be resolved according to the law of a particular jurisdiction. Choice-of-law clauses facilitate settlement by providing clarity and predictability about the law to be applied in the event of a dispute. They help reduce legal uncertainty and the cost of dispute resolution by eliminating the need for a court to conduct a choice-of-law analysis if the matter goes to litigation.
When drafting a contract, it is common for parties to include a choice-of-law clause to establish the governing law. This is particularly important when contracting across state or country lines, as it ensures that the laws of the chosen jurisdiction will govern the transaction and any potential issues. The clause can be as simple as stating the jurisdiction whose laws will govern, such as "This Agreement shall be governed by the laws of the State of Delaware, USA". However, it is important to carefully structure the clause to prevent conflict-of-law situations, which can complicate contract adjudication.
In determining the choice of law, parties may consider the types of disputes that could arise, whether the law will be from a common or civil law jurisdiction, the friendliness or hostility of the jurisdiction towards their claim, and the existence of sufficient precedent in that jurisdiction. Parties often seek a neutral jurisdiction, but a party with more bargaining power may impose their jurisdiction's law or choose a more favourable one. While courts generally uphold choice-of-law clauses, they may disregard them for public policy reasons or in consumer contracts where there is an inequality in bargaining power.
Choice-of-law clauses can be combined with forum selection clauses to specify not only the governing law but also the forum or court that will preside over contract adjudication proceedings. This combination ensures that the chosen law and forum will govern any disputes arising under the agreement. Additionally, contracts may provide for arbitration instead of judicial litigation to resolve disputes. When drafting choice-of-law clauses, it is important to consider the nuances as they can significantly impact the outcome, and seeking legal advice is recommended.
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Choice of forum
A choice-of-law clause is a provision in a contract that determines which laws will govern the contract and any disputes that may arise from it. This clause is included to reduce legal uncertainty and facilitate settlement by identifying the applicable law in case of a dispute.
The choice-of-forum, or forum selection clause, identifies which courts will preside over contract adjudication proceedings. This clause seeks to establish "personal jurisdiction" and "venue". Personal jurisdiction refers to the court's authority over the parties involved, while venue refers to the physical location where the court exercises its power.
Forum selection clauses have been criticised by some courts as attempts to divest them of personal jurisdiction over the parties. Despite this, most jurisdictions enforce these clauses as long as they are selected in good faith and are not deemed against public policy.
In the United States, the Supreme Court has upheld forum selection clauses on several occasions, indicating they should generally be enforced. However, courts will exercise selectivity in choosing whether to enforce them, as demonstrated in the case of Global Seafood Inc. v. Bantry Bay, where the Second Circuit Court found that the phrase "is governed by Irish law and the Irish courts" did not clearly impart an exclusive jurisdiction to Irish courts.
To summarise, while the choice of law clause determines the governing body under which the contract falls, the choice of forum identifies the specific court and location that will preside over any disputes.
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Contract interpretation
A choice-of-law clause, also known as a governing law clause, is a provision in a contract that determines which laws will govern the contract and any claims or disputes arising from it. It is a term of a contract in which the parties specify that any dispute arising under the contract will be resolved according to the law of a particular jurisdiction. The purpose of a choice-of-law clause is to reduce legal uncertainty and facilitate settlement by identifying the law that will govern the agreement and any potential disputes. This allows parties to know in advance which laws will apply and helps to avoid conflict-of-law situations that can complicate contract adjudication.
When drafting a contract, it is common for parties to include a choice-of-law provision. These provisions typically state that a particular state's law will apply, regardless of conflict-of-law principles or the location of the dispute. For example, a contract might specify that it is to be "governed by, and construed in accordance with, the law of the State of New York". This choice-of-law clause would determine that New York law governs the contract and any disputes arising from it.
The interpretation of choice-of-law clauses can vary by forum, and courts may interpret them differently depending on the jurisdiction. In some cases, the specific wording of the clause can impact its interpretation. For example, a clause might state that the agreement shall be "interpreted", "construed", or "governed" by the law of the chosen jurisdiction, and courts may interpret these terms differently. Additionally, the choice of law must be bona fide and not contrary to public policy. For example, a court may disregard a choice-of-law clause if it finds that it was included to evade the legal system that the contract has the most substantial connection with.
In some situations, a court may find that there are public policy reasons to disregard a choice-of-law clause and interpret the contract under the laws of the jurisdiction in which a lawsuit is filed. For example, in the case of Morplay Management Inc. v. Castro, the court was asked to decide whether to apply New York law as specified in the contract or Florida law, where the parties resided and the contract was entered. The court ultimately upheld the choice-of-law provision and applied New York law, as it found no countervailing public policy concerns and a reasonable relationship between the chosen law and the parties or transaction.
It is important to carefully draft choice-of-law clauses to ensure enforceability and avoid potential conflicts. Parties should consider the types of disputes that could arise, the jurisdiction's approach to similar claims, and whether sufficient precedent exists in that jurisdiction. Additionally, the choice of law should not be included to evade the legal system with which the contract has the most substantial connection. By carefully considering these factors, parties can ensure that their choice-of-law clause is effective and enforceable.
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Bona fide and legality
A choice-of-law clause, also known as a governing law clause, is a provision in a contract that determines which laws will be applied to the adjudication if a question or dispute arises. In other words, it specifies the jurisdiction whose laws will govern the contract and any potential disputes. This clause is included in a contract to reduce legal uncertainty and facilitate settlement by identifying the applicable law in advance.
When including a choice-of-law clause, it is essential to ensure that it is bona fide and legal to be enforceable. A bona fide choice-of-law clause is one where the parties do not intend to use the chosen law to evade the legal system with which the contract has the most substantial connection. In other words, the chosen law should bear a reasonable relationship to the parties or the transaction. For example, if two parties from Florida enter into a contract in Florida, using Idaho law might not be considered bona fide unless there is some other connection between the chosen state and the transaction or the parties.
The legality of a choice-of-law clause depends on whether the contract itself is legal. If a contract or its performance is illegal, it will not be treated as a legal contract. For example, a contract for an unlicensed talent agency would be illegal in Florida and New York, and a court could refuse to enforce such a contract. Additionally, a choice-of-law clause should not be contrary to public policy. Gambling debts, for instance, were once considered contrary to public policy in Canada, and foreign gambling debts were not enforced.
Courts may also refuse to enforce a choice-of-law clause if there are strong causes, such as demonstrating an inequality in bargaining power. In some cases, a court may find public policy reasons to disregard a choice-of-law clause and interpret the contract under the laws of the jurisdiction in which a lawsuit is filed. Therefore, when drafting a contract, it is crucial to carefully structure the choice-of-law clause to ensure its enforceability and prevent conflict-of-law situations.
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Frequently asked questions
A choice-of-law clause, also known as a governing law clause, is a provision in a contract that determines which laws apply to the adjudication if a question or dispute arises. It reduces legal uncertainty by selecting a law to govern the agreement between the parties.
The purpose of a choice-of-law clause is to provide certainty about what laws will govern in the case of a dispute or issue in the future. It also facilitates settlement and reduces the cost of dispute resolution by removing the need for a choice-of-law analysis.
A choice-of-law clause impacts a contract by determining the governing body under which the contract falls. It also strengthens the enforceability of the contract and helps to handle disputes.
