Introduction
The first issue relating to choice-of-law clauses is the clause’s validity. The term “validity” refers to contract rules of general application and includes such rules as offer and acceptance, consideration, and defenses to formation, that determine whether a choice-of-law clause should be given effect as a matter of general contract law.
The issues that arise with respect to validity are familiar to anybody versed in contract law. Accordingly, the discussion of validity here will be limited. There are, however, two recurring issues that warrant attention. First, what law should be applied to determine the validity of choice-of-law clause? Second, under what circumstances may a choice-of-law clause be deemed invalid?
Choice of Law
The threshold choice-of-law law inquiry into whether a choice-of-law clause is valid presents a chicken-or-the-egg problem. On the one hand, the courts should apply the law chosen by the parties to determine the validity of the clause. On the other hand, the courts should not apply the law chosen by the parties if the choice-of-law clause is invalid. In many cases, of course, the law of all interested jurisdictions will be the same and there will be no need to conduct a formal choice-of-law inquiry. In cases where there is a conflict between the laws of two or more interested states, the courts must undertake a choice-of-law inquiry to determine what law to apply to determine the validity of the clause.
Some courts apply the law of the forum to determine whether the choice-of-law clause is valid on the theory that it is inappropriate to give effect to a choice-of-law clause until one has first determined that a contract exists under the contract law of the forum. Other courts apply the law of the jurisdiction named in the choice-of-law clause to determine whether the clause is valid. This is the approach suggested by Section 198 to 203 of the Restatement (Second) of Conflict of Laws.
The good news is that the law relating to contract formation, capacity, and defenses is broadly similar across the United States. Accordingly, it is the rare case where there will be a conflict of laws with respect to the issue of clause validity. In such cases, however, the court must first decide the threshold question of whether to apply the law of the forum or the law of the state named in the clause to determine whether the contract—and the clause—is valid as a matter of state contract law.
Reasons for Invalidity
There are many reasons why a choice-of-law clause may be deemed invalid. If the party seeking to escape the clause can show that the contract lacks consideration, for example, then the clause is invalid. If the party seeking to escape the clause can show that there exists a viable contract defense, such as minority or mental incapacity, then the clause is likewise invalid. Since none of these bases for invalidating a clause are unique to choice-of-law clauses—they would apply with equal force to an attempt to invalidate a different part of the contract—they are not discussed here at any length.
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