Choice of law clause

A choice of law clause or proper law clause 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.

Explanation

If all the parties and the relevant factual elements affecting formation, validity, and performance are geographically located in the same state, it will be obvious that, if the contract is silent on the point, the local municipal law (usually called the lex loci contractus, i.e. the law of the place where the contract was made) will be applied as the law governing substantive issues. The lex fori, i.e. the law of the local forum court, will be applied to procedural matters (such as evidentiary rules, etc). But, as people and transactions now more frequently cross state lines both physically and electronically, it becomes necessary to consider which law will be applied in the event of a dispute. Should the laws be the same, the question will be academic. But, if the laws are sufficiently different that the judgment will change depending on which law the court applies, the issue of choice of law becomes highly significant.

As an application of the public policy of freedom of contract, the parties have autonomy to make whatever bargain they want. Thus, in principle, the parties are free to nominate any law as the proper law of their contract even though there may be no other connection between the substance of the obligations and the law selected. However, such clauses could be used as a device to evade the application of a mandatory provision of law within a relevant legal system. Consequently, most states will not honour choice of law clauses unless they are seen to have been included on a bona fide basis. If the clause is recognised as a good faith term, the 'forum state' must apply the nominated proper law to resolve the dispute.

Problems

This may lead to problems as the courts of the forum state will not usually be familiar with the detail of the proper law and, even after hearing expert evidence, may apply the relevant statutes and/or case law incorrectly. Furthermore, characterisation problems can arise when the substance of the lawsuit overlaps with a tort such as fraud or breach of fiduciary duty, instead of a simple breach of the contract itself. The choice of law provisions for tort or trust issues may lead to the application of different laws as the lex causae (the law of the issue).

Legal scholars have criticised many forum state judges for their parochialism in finding ways to apply the lex fori instead of the foreign law nominated in the contract. While judges are always more proficient when applying their own law, such an advantage does not outweigh the policy breach in failing to give effect to the reasonable expectation of the parties. A number of legal devices purportedly allow judges to rely on their own sense of a fair outcome based on the facts of the case at hand, rather than strictly interpreting the terms of the contract. While the exercise of some judicial discretion might lead to some fairer outcomes, the actions of individual judges can undermine the general certainty and predictability of the local legal system: a result that also breaches a major public policy.

The avoidance strategies adopted by judges

The arguments adopted by judges to apply the lex fori include:

Public policy

States will not apply a 'foreign' law that violates the deeply-held convictions of the forum state's legal system, but classifying commercial policies in contractual disputes as sufficiently mandatory will often be seen to be unrealistic. Further, elevating policy concerns at a local level may actually breach a more significant policy which is that judges should not damage the friendly relations between states. Self-evidently, if a judge is seen to be manipulating the policies to make the law of another state seem unjust in some material way, this might be damaging to international relations. In a federal system such as the United States, however, judges have been less constrained and feel more free to circumvent another US state's laws (see Conflict of laws in the United States).

Renvoi

In most legal systems, renvoi does not apply in commercial disputes but, in the U.S., some courts have looked for a provision in the proper law that permits the court to use the lex fori; most states frown upon this practice, insisting that the only law to be looked at is the substantive law of contract, and not the provisions governing choice of law. This problem can be avoided by fine-tuning the choice of law provision in the lex fori to expressly exclude the power to apply the proper law's choice of law provisions.

Procedure as law

Characterising laws as procedural rules of the court rather than substantive laws of the state allows a court to use the lex fori. In some cases, this makes sense: after all, if the forum state requires legal documents to be printed in a twelve-point font, and the choice of law state requires the same documents to be printed in a fourteen-point font, it makes little sense to require the court to determine which font size should be used in a choice of law dispute. However, many contentious cases have centred on findings that issues such as burdens of proof, admissibility of evidence, and statutes of limitations are procedural rather than substantive because these provisions can change the outcome of a case.

References

• Lea Brilmayer and Jack Goldsmith, Conflicts of Law: Cases and Materials, Fifth Edition (2002), p. 280-303.

See also

• Forum selection clause
• Arbitration clause
• Lex loci arbitri
• Choice of law cheat sheet for contract negotiators: An informal, community-based resource with links and summaries of selected provisions in the laws of various U.S. states that may be of interest to contract drafters.