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The In-House Advisor Published by Shepard Davidson & Renee Inomata

Choice of Law in a Contract can be Critical

Posted in Contracts, Jurisdiction, Venue and Choice of Law

Often, one of the last provisions in a contract will say:

This contract shall be governed and construed in accordance with the laws of the State of ______.”

Most courts will abide by the parties’ choice and apply the law designated by them – even if the law selected is not from the state where the case is being tried.  It is only in limited situations, such as (i) where application of the selected law would undermine a significant public policy of the jurisdiction where suit is filed, or (ii) if the locale of the law selected has no relation to the parties or the dispute, that a court is unlikely to abide by the parties’ choice of governing law.

Why should in-house counsel care about choice of law?  Well, while most states may have similar common law with respect to garden variety contract or tort claims, all states have statutory claims that only can be pursued if their own law is applicable.

In Massachusetts, for instance, it seems that virtually every business dispute involves a claim of deceptive or unfair acts or practices in violation of M.G.L. c. 93A.  While a number of other states have statutes prohibiting such conduct, unlike chapter 93A, many of those statutes either do not allow for the recovery of multiple damages and attorneys’ fees, or only allow the state Attorney General (and not a private plaintiff) to sue for deceptive or unfair conduct.

Another example of how choice of law can be important arises if your company enters into a contract with a Minnesota sales representative that has no definite end date, and the contract calls for Minnesota law to apply.  Under Minn. Stat. 325E.37., you will only be able to terminate such an agreement if you have “good cause” to do so, give written notice to the sales representative as to the good cause, and the sales representative fails to cure issues leading to the notice within 90 days.  Alternatively, if Massachusetts law were to apply, your ability to terminate the contractual relationship for any reason, or for no reason at all, would be much greater.

One of the best examples I have seen as to the importance of a choice of law provision came out of a case my firm handled last year.  Our client sought to enforce what amounted to a restrictive covenant against a California resident.  As anyone who has ever dabbled in employment law knows, California has an express and fiercely defended public policy not to enforce restrictive covenants.  In Aspect v. Barnett, however, the Federal District Court ruled that even though the defendant was a California resident who worked in California, because the restrictive covenant was contained in an agreement that was governed by Massachusetts law, it was perfectly appropriate to hold Mr. Barnett to the requirements of the restrictive covenant.  If there had been a California choice of law provision, or no choice of law provision at all in the agreement, the Court’s ruling may have been very different.

As the above examples show, choice of law can be critical and it can be costly – literally – to avoid considering what law will apply if a dispute between your company and a business partner were to arise.  Thus, in-house counsel are well-advised to talk to an attorney, particularly a litigator, who practices in a foreign jurisdiction where the law of that jurisdiction has been proposed to govern a business contract.