Introduction
As used herein, the term “enforceability” refers to any special rules that address the question of whether a choice-of-law clause should be given effect for reasons having nothing to do with whether the clause is valid under the applicable law of contracts. The rules relating to enforceability are rules that apply to choice-of-law clauses and no other contract provision. An enforceable choice-of-law clause is one that shall be given effect under conflict-of-laws doctrine. An unenforceable choice-of-law clause is one that shall not be given effect under conflict-of-laws doctrine.
Choice of Law
The prevailing view among courts is that the enforceability of a choice-of-law clause must be determined by the law of the forum. This outcome follows logically from the fact that clause enforceability is part of the broader doctrine of conflict of laws and a court must always apply the conflicts rules of the forum. As a practical matter, the choice-of-law issue rarely arises because most U.S. states—including those that follow the traditional rules for conflict of laws in other areas—apply the same common-law test to determine whether a clause is enforceable. This test is the one set forth in Section 187 of the Second Restatement of Conflict of Laws.
Common Law – Restatement 187
When a court in the United States is asked to determine whether a choice-of-law clause is enforceable, it must first inquire as to whether there is any conflict between the laws of the interested jurisdictions. If there is no conflict, then there is no need to assess the enforceability of the clause. If there is a conflict, the court should next inquire as to whether the conflict relates to a default rule or a mandatory rule. If the conflict relates to a default rule—a rule that the parties could have changed by revising their agreement—then the clause should be given effect. If the conflict relates to a mandatory rule—a rule the parties could not have changed by revising their agreement—then the court must look embark on a more searching inquiry to determine whether the clause may be given effect.
First, the court will seek to ascertain whether the chosen jurisdiction has a reasonable connection to the parties or the transaction or there was a reasonable basis for the parties’ choice. The chosen jurisdiction will generally be deemed to have a reasonable connection to the parties or the transaction if one of the parties is domiciled, incorporated, or headquartered in that jurisdiction, if the contract was to be performed in that jurisdiction, or if the contract was made in that jurisdiction. Even if there is no connection between the contract and the chosen jurisdiction, however, the clause will be given effect if there was a reasonable basis for the parties’ choice. The courts have held that there is a reasonable basis for the parties’ choice if the chosen jurisdiction is a state with a well-developed body of law in a given area. A clause selecting New York, for example, is likely to be enforced because that state has wealth of precedents in the area of commercial law. The same is true for Delaware in the area of corporate law. So long as there is either a reasonable connection or a reasonable basis, the clause will survive step one of the enforceability inquiry set forth in Section 187.
Second, the court will consider whether the clause is unenforceable on policy grounds. As part of this inquiry, the court must first consider whether there is a state that has a materially greater interest in the determination of the issue than the state named in the choice-of-law clause. If such a state exists, then the court must consider whether that state’s law would be applied if the choice-of-law clause didn’t exist. If that state’s law would be applied in the absence of the clause, the court must then inquire whether application of the law of the state named in the clause would be contrary to a “fundamental policy” of the state whose law would otherwise apply. If a clause would be contrary to a fundamental policy, then it is unenforceable. Conversely, if there is no state with a materially greater interest, or if that state’s law would not apply absent the clause, or if enforcement would not offend any fundamental policy of this other state, then the choice-of-law clause is enforceable.
Statutory Law – State Statutes
Even if a choice-of-law clause survives the Section 187 inquiry, it will not be given effect if a statute enacted by the forum state voids the clause. All fifty states have passed laws providing that choice-of-law clauses will not be enforced when they are written into certain types of contracts. Some of these statutes are directed to franchise and construction agreements. Others apply to consumer contracts. Still others are aimed at employment agreements or insurance contracts. The page here contains a partial list of these statutes.
It is important to remember that the only state statutes that have any bearing on the enforceability of the choice-of-law clause are statutes that have been enacted by the legislature in the forum state. Statutes that void choice-of-law clauses are a type of choice-of-law rule. The courts should always apply the choice-of-law rules of the forum to determine the enforceability of a choice-of-law clause. It follows that the only statutes that may render a choice-of-law clause unenforceable are those that have been enacted by the legislature in the forum state.
Extraterritoriality
When one party invokes a choice-of-law clause in an attempt to assert rights under the statutory law of the chosen jurisdiction, the courts will consider whether that statutory law may be applied extraterritorially. Consider a scenario where an individual domiciled in Nevada enters into an employment contract with a California company for work performed in Nevada. The contract contains a choice-of-law clause selecting the law of California for all disputes relating to the agreement. The Nevada-based employee subsequently sues her California employer in California court and relies on the choice-of-law clause to assert a claim for violation of the California Wage and Hour Law. The employer responds by arguing that the California Wage and Hour Law by its terms does not apply extraterritorially. The statute, in other words, does not regulate conduct outside of the State of California. To resolve the dispute, the court must decide whether to give effect to the intent of the parties to choose California law (as expressed in the choice-of-law clause) or the intent of the California legislature (as expressed in the geographic scope limitation written into the statute).
To date, most courts to have considered this question have prioritized the intent of the legislature, disregarded the choice-of-law clause, and refused to apply the statutory law of the chosen jurisdiction when that law contains a geographic scope limitation. This course of action is entirely justifiable. It does, however, present to the possibility that an employee (or franchisee or consumer) may find themselves adrift in a “law free” zone. Several courts have held that a plaintiff in one of these scenarios was unable to assert rights under the law of the chosen jurisdiction (because that law was subject to a geographic limitation) or their home jurisdiction (because the choice-of-law clause selected the law of a different jurisdiction). This outcome is deeply unfair. Thankfully, there is a straightforward solution. When a court concludes that a choice-of-law clause is not enforceable because it has selected a scope-limited law, the court should disregard the choice-of-law clause entirely for that issue. It should then perform a choice-of-law analysis in order to determine the law to apply to that issue. In many instances, this analysis will result in the application of a statute in the plaintiff’s home jurisdiction, thereby removing the plaintiff from the “law free” zone in which she may otherwise become trapped.
In cases where the statute does not contain any express territorial limitation, by comparison, the resolution of the case is straightforward. The court should enforce the choice-of-law clause and apply the law selected by the parties. This issue arises most frequently when the courts in the chosen jurisdiction have adopted a presumption against extraterritoriality with respect to state statutes. In such cases, the courts must decide whether to prioritize the known intent of the parties or the presumed intent of the legislature. The better approach is to apply the known intent of the parties because this helps to promote certainty and predictability in commercial transactions.
Boilerterms 