PROTECTING THE ‘CHOICE’ IN YOUR CHOICE-OF-LAW CLAUSE
Choice-of-law clauses are ubiquitous in modern business contracts. Yet, when negotiating and drafting a business contract, such as a purchase agreement or a services agreement, companies too often do not afford choice-of-law clauses the same care and attention as other provisions. This can pose risks to you and your client. As explained below, different jurisdictions take different approaches in interpreting and applying contractual choice-of-law provisions. As a result, a hastily drafted choice-of-law provision may not provide the certainty and uniformity that you or your client expects. This can not only cause confusion and potentially increase litigation costs, it can have potentially case-dispositive consequences in future litigation.
This article briefly explores two ways in which courts take different approaches with respect to the scope and application of contractual choice-of-law provisions. It then provides a few tips on how to increase the likelihood that your choice-of-law provision will be consistently applied, regardless of the jurisdiction in which you are litigating.
The forum state’s choice-of-law rules determine how a contractual choice-of-law provision is interpreted
Typically, a court applies the choice-of-law rules of the forum state to determine how to apply and enforce a contractual choice-of-law provision. Take, for example, a professional services firm (Firm A) that operates nationwide. Firm A uses an engagement agreement that contains the following choice-of-law provision: “This agreement is governed by and construed in accordance with Illinois law”. If Firm A is sued in California state court, the California court will typically apply California’s choice-of-law rules in determining the scope and application of the contractual Illinois choice-of-law provision. If, on the other hand, Firm A is sued in New York state court, the New York court will apply New York’s choice-of law rules in interpreting the Illinois choice-of-law provision. Because different jurisdictions have different choice-of-law rules, Firm A’s Illinois choice-of-law provision may be applied differently depending on where Firm A gets sued.
Apr-Jun 2020 issue
Skadden, Arps, Slate, Meagher & Flom LLP