Cecily Zamora
Choice-of-law clauses are an important part of a written agreement, providing certainty about the legal framework that will govern the contract. They are commonly found in international business agreements, cross-state agreements, commercial agreements, and service agreements. When drafting a choice-of-law clause, it is crucial to choose the governing law wisely and thoroughly, paying close attention to the specific language used. This is because there can be meaningful differences between the laws of various jurisdictions, and the choice-of-law clause aims to avoid uncertainty in the event of disputes. While courts generally enforce the chosen law as long as it bears a reasonable relationship to the parties or the transaction, they may also consider whether the chosen law violates public policy or conflicts with certain types of contracts. Choice-of-law clauses can be particularly significant in cases involving secured transactions, corporate behavior, and unique characteristics of contracts.
| Characteristics | Values |
|---|---|
| Purpose | To avoid uncertainty over the law that would govern disputes arising out of the relationship created as a result of an agreement |
| Parties involved | Deal professionals and their counsel |
| Importance | To choose the governing law wisely and thoroughly |
| Importance of language | To pay attention to the actual language used in the choice-of-law clause |
| Choice of jurisdiction | To specify the jurisdiction whose laws will govern the contract |
| Choice of venue | To specify the predetermined location or jurisdiction where any legal proceedings related to the contract will be conducted |
| Choice of substantive law | To choose the law governing the creation of rights |
| Choice of procedural law | To choose the law governing the enforcement of rights |
| Choice of forum law | To apply the law with which the judges are most familiar |
| Choice of governing law | To indicate which state's law will be used to decide a dispute |
| Choice of jurisdiction for dispute resolution | To specify where a dispute will be resolved |
| Choice of law in case of contract termination | To continue to bind the parties even after the underlying contract terminates |
| Choice of law in case of conflict with other laws | To ensure that the choice-of-law provision does not violate public policy |
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What You'll Learn
Choice-of-law clauses in contracts
Choice-of-law clauses, also known as governing law clauses, are provisions in contracts that determine which laws will be used to interpret the agreement and govern the contract. They are usually very brief and to the point, but virtually every word in the choice-of-law clause has a hidden meaning. They are important because they provide certainty about what laws will govern in the event of a dispute or issue, especially when parties contract across state or country lines.
The primary purpose of a choice-of-law clause is to avoid uncertainty over the law that would govern disputes arising from the relationship created by the agreement. They also facilitate settlement by identifying the law that will be applied to resolve any potential dispute, and they reduce the cost of dispute resolution by eliminating the need for the court to conduct a choice-of-law analysis.
However, it is important to choose the governing law wisely and thoroughly, paying close attention to the actual language used in the clause. Failure to do so can result in unintended consequences that threaten the certainty sought by choosing a particular jurisdiction. For example, a standard choice-of-law clause may only choose the substantive law of the chosen jurisdiction, which governs the creation of rights, rather than its procedural law, which governs the enforcement of those rights.
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. However, not every jurisdiction will enforce such provisions. For example, some states want to ensure that their consumer protection laws relating to insurance apply to their citizens.
When drafting a contract, it is common for parties to include a choice-of-law provision. However, it is important to carefully structure these clauses to prevent conflict-of-law situations, which can make contract adjudication more challenging.
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Choice of law in litigation
Choice-of-law clauses are an important part of contracts and agreements, designed to provide certainty about the deal between the parties. They are particularly useful in the case of civil litigation, which can involve multiple parties in multiple states, and are generally enforceable in a lawsuit. When drafting a contract, it is common for parties to include a choice-of-law provision, which typically provides that a particular state's law will apply, regardless of conflict-of-law principles.
The purpose of a choice-of-law clause is to reduce legal uncertainty by selecting a law to govern the agreement between the parties. These clauses facilitate settlement by identifying the law that will be applied to resolve any potential dispute, and they also reduce the cost of dispute resolution. This is because, with a choice-of-law clause in place, it is not necessary for a court to conduct a choice-of-law analysis if the dispute ends up in litigation.
When a contract dispute arises, it is the court's role to enforce the agreement rather than reform it. To do this, the court must interpret the contract in accordance with the intent of the parties, as evidenced by the contract itself and the terms contained therein. In the case of Morplay Management Inc. v. Castro, for example, the Court was asked to decide whether the law of New York or Florida should apply. The Court held that it would enforce the choice-of-law provision in the contract, which stated that New York law should apply, as there was no violation of public policy.
However, while choice-of-law provisions are generally enforceable, this does not mean they always are. Courts will decline to enforce a choice-of-law provision if another state has a more substantial relationship to the contract. For example, if the contract provides for the application of a particular state's law, but none of the parties have any connections to that state, a court will likely apply the law of the state with the most substantial contacts instead.
It is important to give appropriate attention to the language used in a choice-of-law clause, as failure to do so can result in unintended consequences. For instance, there is a distinction between choosing the substantive law of a jurisdiction and choosing its procedural law, and many deal professionals are surprised to learn that a standard choice-of-law clause only chooses the substantive law.
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Choice of law in secured transactions
Choice-of-law rules for secured transactions are an important aspect of contract law, addressing the creation, perfection, priority, and enforcement of security interests. These rules are particularly relevant in situations involving multiple jurisdictions, where conflicting laws may come into play.
When drafting a contract, it is common for parties to include a choice-of-law provision, selecting a particular state's law to govern their agreement. This choice is significant as it determines which legal framework will be applied to resolve disputes and interpret the contract's terms. However, it is crucial to carefully consider the chosen jurisdiction's laws and ensure that the chosen law bears a reasonable relationship to the parties or the transaction.
In the United States, the Uniform Commercial Code (UCC), specifically Article 9, provides choice-of-law rules for secured transactions. Article 9 governs the creation, attachment, perfection, priority, and enforcement of security interests in personal property. The UCC's choice-of-law rules aim to provide a consistent framework for determining the applicable law in secured transactions, ensuring predictability and uniformity across different states.
However, it's important to note that the choice-of-law clause may not always be determinative. Courts have the discretion to evaluate the chosen law and may consider factors such as public policy, the intent of the parties, and the relationship between the chosen law and the transaction. In some cases, courts may even invalidate the choice-of-law provision if it conflicts with public policy or causes an unreasonable outcome.
Additionally, the choice-of-law analysis can become more complex when dealing with international transactions or unique contractual obligations. For example, the Rome I Regulation in the EU constrains the choice of law for special types of contracts, particularly those involving consumers, employees, and insurants. Therefore, it is essential to thoroughly research and carefully construct the choice-of-law clause to ensure it aligns with the intentions and interests of all parties involved.
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Choice of law in corporate behaviour
Choice-of-law clauses are an important part of corporate contracts. They are designed to provide certainty about the law that will govern the contract, thereby reducing legal uncertainty and the costs of dispute resolution. In the context of corporate behaviour, the choice of law in a contract usually depends on the law of the state of incorporation. This is because the law of incorporation (the lex incorporationis) governs all matters of capacity, validity, shareholders' rights, etc.
However, this is not always the case. For example, in the case of Morplay Management Inc. v. Castro, the Court was asked to decide whether to apply the law of New York, as specified in the contract, or the law of Florida, where the contract was entered and where the parties resided and worked. The Court ultimately decided to apply New York law, as there was no violation of public policy and both parties had freely chosen to have New York law govern any disputes.
When drafting a choice-of-law clause, it is important to choose the governing law wisely and thoroughly. This includes paying close attention to the language used in the clause to ensure that it accurately reflects the parties' intent. Failure to do so can result in unintended consequences, such as only choosing the substantive law of the chosen jurisdiction instead of its procedural law.
Additionally, it is important to consider the relationship between the chosen law and the parties or the transaction. Courts will generally enforce a choice-of-law clause as long as the chosen law bears a reasonable relationship to the contract and does not violate public policy or statutory protections. This includes ensuring that the clause does not attempt to circumvent consumer protections or statutory requirements, particularly in insurance contracts, franchise and employment contracts, and consumer protection laws.
In summary, the choice of law in corporate behaviour contracts is typically the law of the state of incorporation. However, parties have some flexibility to choose the law that will govern their contract, as long as it has a reasonable relationship to the parties or the transaction and does not violate public policy. Care must be taken to draft choice-of-law clauses precisely and thoroughly to avoid unintended consequences and ensure enforceability.
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Choice of law in boilerplate provisions
Choice-of-law clauses are an important part of boilerplate provisions in a contract. They are designed to provide certainty about the agreed deal between the parties and avoid uncertainty over the law that would govern disputes arising from the contract. These clauses specify which state or country's law will be used for the contract's interpretation and enforcement, ensuring that all claims or causes of action related to the agreement are governed by the chosen jurisdiction's laws.
When drafting a contract, it is common for parties to include a choice-of-law provision. This provision typically states that a particular state's law will apply, regardless of conflict-of-laws principles. For example, in the case of Morplay Management Inc. v. Castro, the Court was asked to decide between applying the law of New York as specified in the contract or the law of Florida, where the parties resided and worked and where the contract was entered. The Court upheld the choice-of-law provision, stating that people are generally free to enter contracts and make whatever agreements they wish.
However, it is important to note that not all jurisdictions will enforce choice-of-law provisions. The chosen law must bear a reasonable relationship to the parties or the transaction for a court to enforce it. Additionally, the specific language used in the choice-of-law clause is crucial. Deal professionals and their counsel must carefully consider the distinction between choosing the substantive law of the chosen jurisdiction and its procedural law. The standard choice-of-law clause typically selects the substantive law, which governs the creation of rights, rather than the procedural law, which governs the enforcement of those rights.
Furthermore, there are different types of jurisdiction clauses within the choice-of-law provision. Non-exclusive jurisdiction clauses state where the parties may litigate but do not bind them to a single place, while exclusive jurisdiction clauses specify where they must litigate. It is essential to discuss these clauses with a lawyer to determine the best option for your specific circumstances. Overall, choice-of-law clauses in boilerplate provisions play a crucial role in ensuring certainty and clarity in the event of disputes related to the contract.
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Frequently asked questions
A choice-of-law clause specifies which jurisdiction's laws will govern the interpretation and enforcement of a contract. It provides clarity and predictability by pre-determining the legal framework that will be applied in case of disputes.
A choice-of-law clause is important as it provides certainty about the agreed deal between the parties. It helps to avoid uncertainty over the law that would govern disputes arising out of the relationship created as a result of the agreement.
When drafting a choice-of-law clause, it is important to consider your negotiating position and the specific jurisdiction whose laws will govern the contract. Ensure that all parties agree to the clause and understand its implications. The language used in the clause should be clear and thorough to avoid unintended consequences.
A choice-of-law clause can generally not be ignored, as courts will enforce it as long as it does not violate law or public policy. However, it can be challenged on grounds of violation of law, public policy concerns, or if it conflicts with the laws of the chosen jurisdiction.
