ChoiceofLaw and Forum Clauses

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Choice-of-Law and Forum Clauses

• Louise Martin-Valiquette, Esq.
• 1 Rockledge Avenue
• Ossining, NY 10562
• [phone]
• E-mail lmvaliquette_at_worldnet.att.net

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Basic Principle Parties Autonomy and Freedom
to Choose

• In the US, choice-of-law clauses were recognized
  by the courts as early as the 19th century.
• Opposition by scholars
• Same movement in Europe, and in both cases, the
  parties autonomy prevailed.

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Limitations to Parties Autonomy

• In the US as in Europe, choice-of-law clauses
  do not allow parties to escape mandatory or
  public policy provisions.
• Further, there must be a reasonable
  relationship between the transaction and the
  jurisdiction of the chosen law.

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Basic Provisions in the United States

• Section 187 of Restatement (Second) of Conflict
  of Laws
• 187(1) The law of the state chosen by the parties
  to govern their contractual rights and duties
  will be applied if the particular issue is one
  which the parties could have resolved by an
  explicit provision in their agreement directed to
  that issue.
• 187(2) The law of the state chosen by the parties
  to govern their contractual rights and duties
  will be applied, even if the particular issue is
  one which the parties could not have resolved by
  an explicit provision in their agreement directed
  to that issue, unless either
• (a) the chosen state has no substantial
  relationship to the parties or the transaction
  and there is no other reasonable basis for the
  parties choice, or
• (b) the application of the law of the chosen
  state would be contrary to a fundamental policy
  of a state which has a materially greater
  interest than the chosen state in the
  determination of the particular issue and which,
  under the rule of section 188, would be the state
  of the applicable law in the absence of an
  effective choice of law by the parties.

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Basic Provisions in the United States

• Section 1-105 of the Uniform Commercial Code
• Except as provided hereafter in this section,
  when a transaction bears a reasonable relation to
  this state and also to another state or nation,
  the parties may agree that the law either of this
  state or of such other state shall govern their
  rights or duties. Failing such agreement, this
  Act applies to transactions bearing an
  appropriate relation to this state.

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New Yorks Liberal Approach

• New York State General Obligations Law
• Section 5-1401 (1)
• The parties to any contract, agreement, or
  undertaking in consideration of, or relating to
  any obligation arising out of a transaction
  covering in the aggregate not less than 250,000,
  including a transaction otherwise covered by
  section 1-105 of the UCC, may agree that the law
  of this state shall govern their rights and
  duties in whole or in part, whether or not such
  contract, agreement or undertaking bears a
  reasonable relation to this state.

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Basic Provisions in Europe

• Convention on the Law Applicable to Contractual
  Obligations ( Rome Convention )
• Article 3
• A contract shall be governed by the law chosen by
  the parties. The choice must be expressed or
  demonstrated with reasonable certainty by the
  terms of the contract or the circumstances of the
  case. By their choice the parties can select the
  law applicable to the whole or part only of the
  contract.
• 3. The fact that the parties have chosen a
  foreign law, whether or not accompanied by the
  choice of a foreign tribunal, shall not, where
  all other elements relevant to the situation at
  the time of the choice are connected with one
  country only, prejudice the application of the
  rules of the law of that country which cannot be
  derogated from by contract, hereinafter called
   mandatory rules .

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Difference between US and European approaches

• US approach is more restrictive
• The law chosen must be related to the contract.
  The UCC talks of a  reasonable relation .
• European approach is more tolerant Chosen law
  will be disallowed only if completely unrelated.

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Rationale for Acceptance ofLaw and Forum
Selection Clauses

• Promotes greater certainty in international trade
• If the parties neglect to do so, applicable law
  will be chosen by a third party.
• Reduces litigation duration and costs
• Reduces the overall risk of the transaction

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Selecting and Negotiating Choice- of-Law and
Forum Clauses

• Issue left to final stage of negotiations
• Sensitive issues when parties try to collaborate.
• To the contrary, the applicable law should be
  chosen first. Impact on substantive clauses of
  contract
• Freedom of that choice can be limited by
  mandatory laws.

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Selecting and Negotiating Choice- of-Law Clauses

• Imposition of  Calvo   clauses in Latin America
• Imposition of law and forum in joint ventures and
  foreign investment in certain countries
• Commodities contracts
• Not always advantageous for a contracting party
  to propose its own law

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Selecting and Negotiating Choice-of-Law Clauses

• Selecting multiple laws
• Selecting international law, e.g., CISG

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Enforcement of Choice-of-Law Clauses

• Uncertainty as to selected law
• Example  This agreement shall be governed by
  the law of the State of California.  
• What is covered?
• Both procedural and substantive law of that
  State?
• Also California rules on conflicts of laws
  pointing to another state?

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Volt Information Sciences, Inc.v. Board of
Trustees of Leland Stanford Junior University

• 1989 decision by the Supreme Court
• Involved a construction contract with California
  chosen as applicable law and an agreement to
  arbitrate
• The Supreme Court rules that choice of law also
  includes the California arbitration law, with
  unexpected results.

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Enforcement of Choice-of-Law Clauses

• The parties choice may be denied if the right
  relationship between the state or country and the
  transaction is not there
• - Examples UCC, CISG
• The application of the law would violate a
  fundamental policy of a state which has a
  materially greater interest than the chosen state
  in the determination of the issue at hand.

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Mandatory Rules of Law

• Examples
• Competition laws
• Currency control laws
• Environmental protection laws
• Measures of embargo, blockade or boycott
• Laws falling into the category of legislation
  designed to protect parties presumed to be in an
  inferior position such as wage earners and
  commercial agents

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Enforcement of Forum-Selection Clauses

• Also leading to uncertain results
• Citro Florida, Inc. v. Citrovate, SA
• Selection clause in those terms  Place of
  jurisdiction is Sao Paulo, Brazil.  

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Judicial Interpretation of Forum-Selection Clauses

• Courts want to see that the designated forum is
  exclusive.
• Courts want mandatory language, so that it is
  clear that the contracting parties are not merely
  consenting to a jurisdiction.