Choice of law clause
Encyclopedia
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.
, 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.
s 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.
. 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
).
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.
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.
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
in which the parties
Party (law)
A party is a person or group of persons that compose a single entity which can be identified as one for the purposes of the law. Parties include: plaintiff , defendant , petitioner , respondent , cross-complainant A party is a person or group of persons that compose a single entity which can be...
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 foriLex fori
Lex fori is a legal term used in the conflict of laws used to refer to the laws of the jurisdiction in which a legal action is brought...
, 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
Court
A court is a form of tribunal, often a governmental institution, with the authority to adjudicate legal disputes between parties and carry out the administration of justice in civil, criminal, and administrative matters in accordance with the rule of law...
applies, the issue of choice of law
Choice of law
Choice of law is a procedural stage in the litigation of a case involving the conflict of laws when it is necessary to reconcile the differences between the laws of different legal jurisdictions, such as sovereign states, federated states , or provinces...
becomes highly significant.
As an application of the public policy
Public policy (law)
In private international law, the public policy doctrine or ordre public concerns the body of principles that underpin the operation of legal systems in each state. This addresses the social, moral and economic values that tie a society together: values that vary in different cultures and change...
of freedom of contract
Freedom of contract
Freedom of contract is the freedom of individuals and corporations to form contracts without government restrictions. This is opposed to government restrictions such as minimum wage, competition law, or price fixing...
, 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
Proper law
The Doctrine of the Proper Law is applied in the choice of law stage of a lawsuit involving the conflict of laws.-Explanation:In a conflicts lawsuit, one or more state laws will be relevant to the decision-making process. If the laws are the same, this will cause no problems, but if there are...
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
Evasion (law)
In law, the Doctrine of Evasion is a fundamental public policy. Whereas a person may legitimately plan his or her affairs so as to avoid the incidence of obligations or liabilities imposed by the law, no-one is allowed to evade the operation of otherwise mandatory provisions once duties and...
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
Bona Fide
Bona Fide is a studio album from rock band Wishbone Ash. It is the first studio album in six years and is the only studio album to feature guitarist Ben Granfelt...
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 statuteStatute
A statute is a formal written enactment of a legislative authority that governs a state, city, or county. Typically, statutes command or prohibit something, or declare policy. The word is often used to distinguish law made by legislative bodies from case law, decided by courts, and regulations...
s and/or case law
Case law
In law, case law is the set of reported judicial decisions of selected appellate courts and other courts of first instance which make new interpretations of the law and, therefore, can be cited as precedents in a process known as stare decisis...
incorrectly. Furthermore, characterisation
Characterisation (conflict)
In conflict of laws, characterisation is the second stage in the procedure to resolve a lawsuit involving a foreign law element. This process is described in English law as classification and as qualification in French law...
problems can arise when the substance of the lawsuit
Lawsuit
A lawsuit or "suit in law" is a civil action brought in a court of law in which a plaintiff, a party who claims to have incurred loss as a result of a defendant's actions, demands a legal or equitable remedy. The defendant is required to respond to the plaintiff's complaint...
overlaps with a tort
Tort (conflict)
In conflict of laws, the choice of law rules for tort are intended to select the lex causae by which to determine the nature and scope of the judicial remedy to claim damages for loss or damage suffered.-History:...
such as fraud
Fraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
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 relationsInternational relations
International relations is the study of relationships between countries, including the roles of states, inter-governmental organizations , international nongovernmental organizations , non-governmental organizations and multinational corporations...
. In a federal system such as the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, 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
Conflict of laws in the United States
The choice of law rules in the conflict of laws in the United States have diverged from the traditional rules applied internationally. Choice of law is a procedural stage in the litigation of a case when it is necessary to reconcile the differences between the laws of different states, and in the...
).
Renvoi
In most legal systems, renvoiRenvoi
In conflict of laws, renvoi is a subset of the choice of law rules and it may be applied whenever a forum court is directed to consider the law of another state.-The procedure for conflict cases:...
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 proceduralProcedure (conflict)
In all lawsuits involving conflict of laws, questions of procedure as opposed to substance are always determined by the lex fori, i.e. the law of the state in which the case is being litigated.-What issues are 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
Font
In typography, a font is traditionally defined as a quantity of sorts composing a complete character set of a single size and style of a particular typeface...
, 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
Evidence (law)
The law of evidence encompasses the rules and legal principles that govern the proof of facts in a legal proceeding. These rules determine what evidence can be considered by the trier of fact in reaching its decision and, sometimes, the weight that may be given to that evidence...
, and statutes of limitations are procedural rather than substantive because these provisions can change the outcome of a case.
See also
- Forum selection clauseForum selection clauseA forum selection clause in a contract with a conflict of laws element allows the parties to agree that any litigation resulting from that contract will be initiated in a specific forum...
- Arbitration clauseArbitration clauseAn arbitration clause is a commonly used clause in a contract that requires the parties to resolve their disputes through an arbitration process...
- Lex loci arbitriLex loci arbitriThe lex loci arbitri is the Latin term for "law of the place where arbitration is to take place" in the conflict of Laws. Conflict is the branch of public law regulating all lawsuits involving a "foreign" law element where a difference in result will occur depending on which laws are...