Drafting Choice-of-Law Provisions

By: Timothy Murray, Murray, Hogue & Lannis

ONE TIME I FOUND MYSELF ON THE SET OF A HOLLYWOOD soundstage for a popular television show about a lawyer. In the law library of the fake TV law firm, I noticed something that viewers at home couldn’t see: the case reporters containing judicial decisions were all out of order—the volumes were shelved randomly, not according to number. That, of course, would have made the books useless if this were a real law library.

I was amused. of course, if it had been Corbin On Contracts out of order, I would have been aghast and appalled.

But then it occurred to me: a fair number of attorneys who draft contracts would feel right at home in such a library—for too many attorneys, judicial decisions have little to no bearing on what we do, and the law library might as well be a fake Hollywood set. That is unfortunate. We ignore the judicial decisions at our clients’ peril because the courts tell us how to draft.

Perhaps nowhere is this more evident than with choice-of-law provisions. Nothing screams boilerplate more than these, and if the dictionary had a picture of the word afterthought next to it, it might well be a choice-of-law provision. But a jaw-dropping number of judicial decisions hold that choice-of-law provisions are entirely or partly unenforceable because the drafters failed to pay attention to the caselaw. That ought to be unacceptable.

The subject of choice-of-law provisions is exceedingly complex— there is no possibility of covering everything important in a short article. But when you are considering drafting a choice-of-law provision, the following should help you get started. Here are things to keep in mind.

You Have to Know the Law

I’ve done a lot of contract law seminars with Steven M. Richman, a really smart friend of mine. When we get together, we don’t waste time talking sports or politics—we debate important things, like which provision of the contract is the most important. Mr. Richman makes a compelling case for choice-of-law provisions: “Leaving choice-of-law to the end of a contract negotiation,” he says, “is like leaving the blueprint until after the building is finished.”

That’s a point that can’t be disputed. Lawyers drafting contracts often have well-informed reasons for insisting on the law of a certain jurisdiction in their choice-of-law provisions. But, then again, often they don’t. Too often, they select the law of the jurisdiction where they practice and where their clients have their principal places of business based on nothing more than a general feeling that they are comfortable with that law—that if there was something weird or awful about that state’s law, they would know about it. When pressed for specifics about what makes them so comfortable, they often can’t articulate any.

Although it is said that “contract law is not at its core ‘diverse, nonuniform, and confusing,’”¹ there are important differences in the law from state to state. The judicial decisions demonstrate that these differences can have a critical impact on disputes. By way of example, consider the following fundamental contract law principles where the law differs depending on the state. In each of these, the selection of a state’s law in the choice-of-law provision could have a significant impact on a dispute:

• Does the drafter’s preferred law regard merger clauses as conclusive?²
• What test for integration (as opposed to interpretation) does the law follow?³
• What about time is of the essence clauses—are they regarded as conclusive?⁴
• What does the law of the state say about the enforceability of no oral modification clauses?⁵
• For anti-assignment clauses, does the court require magic words to remove the power (not just the right) to assign?⁶
• Do broadly drafted indemnity clauses apply to first-party claims—that is, breach of contract claims between the contracting parties? (That can be important if, for example, the indemnity clause awards attorney’s fees to the party to be indemnified).⁷

On and on it goes—the examples are innumerable—these are just a few with respect to common clauses. To the extent attorneys who draft contracts can’t answer these fundamental questions, that probably accounts for why choice-of-law provisions are often afterthoughts—the drafters themselves aren’t convinced that they matter very much.

All in all, the practicing bar can do better than it does in making informed choice-of-law decisions. For starters, we ought to know what our state says about the sort of boilerplate clauses that pop up in contract after contract. We need to have a healthier respect for the daunting complexities of the caselaw.

Your Client Doesn’t Think About These Provisions the Way You Do

When it comes to drafting choice-of-law provisions, you are on your own—don’t expect any help from the client. Clients primarily care about what the late, great Karl Llewellyn called the “dickered” terms—the immediate commercial terms of the deal: description of the product, quantity, price, and delivery terms. Lawyers have to care about those, too—but lawyers also have to worry about the terms that deal with “what if something goes wrong?” The traditional boilerplate terms in contracts largely address that question. Choice-of-law provisions—like a lot of boilerplate provisions—generally won’t be an issue unless something goes wrong. Clients rely on us to get these provisions right.

Unless they’ve had prior experience with the issue, clients likely don’t even know that a contract can select the law to be applied. Why would they? And even if they know, they would rely on the lawyers to tell them which state’s law is most advantageous. Clients may actually care more about choice-of-forum than choice-of-law provisions—but they may not understand the difference between the two unless it is explained to them. If the contract goes bad and the dispute ends up in trial, the client may not care much if the law to be applied is some other state’s, but the client is much more likely to be unhappy if the litigation has to occur in some far-away place, with all the attendant inconvenience and costs (including retaining local counsel).

Freedom of Contract Is Not Absolute

Although parties generally have freedom of contract to draft contracts in whatever manner they choose, that’s not always true. Courts do not always respect the choice-of-law provision selected by the parties. It is important to know in advance if a choice-of-law provision likely will not be enforced so that the contract can be drafted accordingly.

In most states, “the chosen jurisdiction must have some reasonable relation to the parties, transaction, or dispute.”⁸ New York and Delaware have notable exceptions for certain contracts.⁹ In most states, a court might well ignore altogether a choice-of-law provision that selects a state with no relation to the parties or the transaction in dispute. The choice-of-law provision will also be ignored if it contravenes the forum state’s public policy.¹⁰

For certain types of contracts, the state legislature might mandate that a statute overrides the parties’ choice-of-law provision.¹¹

Presumption: Choice-of-Law Provisions Refer to the Chosen State’s Local Laws

There is a simple and widely followed presumption that every drafter ought to know. “The most widely held view on this issue, that of the Restatement (Second) of Conflict of Laws, is that, absent contrary language in a choice-of-law provision, the ‘laws’ selected are the local or internal laws of the chosen state, exclusive of its conflict-of-laws rules.”¹² To hold otherwise could require application of the law of another state despite the choice-of-law clause, which would undermine the salutary goals of certainty and predictability that such provisions are intended to foster.

To ensure that the presumption is followed with respect to a given contract, it doesn’t hurt to draft the choice-of-law provision to make it clear that the chosen law means only the internal or local laws of the state.

Presumption: Choice-of-Law Provisions Refer to the Chosen State’s Substantive Law

For the sake of achieving certainty and uniformity, parties may want the law they select in a choice-of-law provision to apply to every aspect of the parties’ relationship, including the statutes of limitations. But choice-of-law provisions generally apply only to substantive and not procedural law. In many states, statutes of limitations are regarded as procedural matters,¹³ and in those states, garden-variety choice-of-law provisions may have no bearing on limitations periods. Instead, the law of the forum generally will dictate the statute of limitations to be applied.¹⁴ If the drafter wants certainty, this presumption can be overcome—the choice-of-law provision can control the statute of limitations if it expressly says so.¹⁵

Other states hold that statutes of limitations are substantive, “and so the statute of limitations of the parties’ chosen forum applies where there exists a contractual choice-of-law provision.”¹⁶

Things can get complicated if the state has a “borrowing statute” designed to curb forum shopping. For example:

For a claim that accrued in a foreign jurisdiction, . . . Pennsylvania courts turn to the state’s “borrowing statute” to resolve statuteof-limitations disputes. . . . The borrowing statute directs that the “period of limitation applicable to a claim accruing outside [Pennsylvania] shall be either that provided or prescribed by the law of the place where the claim accrued or by the law of [Pennsylvania], whichever bars the claim first.” 42 Pa. Cons. Stat. § 5521(b) (emphasis added). Courts applying the borrowing statute have abided by the statute’s sometimes harsh result of barring claims that may have been timely under the accrual state’s longer limitations period.¹⁷

New York’s borrowing statute mandates that if suit is filed in New York by a nonresident based on a cause of action that accrued in a state other than New York, the claim must be timely under the statute of limitations for both New York and the other state.¹⁸

Drafting Choice-of-Law Provisions to Cover Extra-Contractual Claims

In disputes between contracting parties, the plaintiff often doesn’t limit its claims to breach of contract. It is common for plaintiffs to tack on tort and statutory claims along with breach of contract. If the contract contains a choice-of-law provision, it may—or may not—be construed to cover the extra-contractual claims, depending on the jurisdiction and the way it is worded.

When drafting a choice-of-law provision, for the sake of achieving certainty and uniformity, parties usually want the law they select to apply to every aspect of their dealings that stems from the contract. But note that if the parties have other dealings, those other dealings might be covered by a different choice-of-law provision. If the parties desire to keep their various transactions (and the choice of laws) separate, they need to ensure that the choice-of-law provision cannot be read too broadly.

But generally, parties to contracts want to ensure that the choice-of-law provision covers extra-contractual claims relating to or arising out of the present contract. Yet, in case after case, even though the parties have agreed upon a choice-of-law provision, they find themselves embroiled in a resource-draining court battle over whether some claims are covered by that provision. Those are disputes that often can be avoided.

Scope test. In deciding whether extra-contractual claims are covered by the contract’s choice-of-law provision, many courts focus on the scope of the provision. Where, for example, a choice-of-law provision stated that “Ohio law ‘appl[ied] to this [financing agreement],’” the court construed the provision as narrow and held that it applied only “to this contract,” not to statutory and tort claims.¹⁹ A provision stating that “[t]his Agreement shall be construed in accordance with, and be governed by, the laws of the State of New York” was held to be a narrow provision that did not cover extra-contractual claims.²⁰

But a choice-of-law provision that covers any disputes “arising out of or relating to the contract” has been held to be a broad provision covering extra-contractual claims.²¹ A clause that encompasses the entirety of the parties’ relationship has been held to be a broad provision. For example: “Delaware law ‘govern[s] this user agreement and any claim or dispute that has arisen or may arise between you and PayPal.’”²²

Even courts that follow the scope test do not always agree on the language that is broad or narrow.

Relatedness test. Many other courts eschew the scope test. Instead of focusing on the words of the choice-of-law clause, they start from the premise that when parties have agreed upon a generic choice-of-law provision, they intend for the clause to cover related tort claims. Many states hold that “torts that are ‘related’ to a contract claim are generally governed by the same law set forth in the contract’s choice-of-law clause.” But “[a] number of courts” hold “that only those claims ‘closely related to the interpretation of the contracts’ may be encompassed by a generic choice-of-law provision.”²³ This raises the issue of how closely related the tort claim must be?²⁴

Presumption: Choice-of-Law Provisions Incorporate Federal Law, Including the United Nations Convention on Contracts for the International Sale of Goods (CISG)

Arbitration. When a contract designates the law of a state in a choice-of-law provision, that designation includes federal law.²⁵ This principle is important where a party seeks to argue that a choice-of-law provision excuses it from the default rules of the Federal Arbitrations Act (FAA). Many courts hold that a garden-variety choice-of-law provision is insufficient to opt out of the FAA’s default rules.²⁶ If the parties intend to apply state arbitration laws where the matter otherwise would be covered by the FAA, the parties must expressly incorporate those laws in the contract.²⁷

CISG. The same principle is important when it comes to the interaction of choice-of-law provisions and the CISG.

The CISG is a treaty adopted by most of the major trading nations of the world, including the United States. It is roughly analogous to Article 2 of the Uniform Commercial Code (UCC) with many similarities but some important differences. “[I]t applies to most of the international contracts for the sale of goods made by parties with their principal places of business in different CISG countries.”²⁸ For contracts where the CISG applies, the CISG applies and the UCC does not.

The parties may opt out of the CISG per Article 6. Attorneys steeped in the traditions of American commercial law often do just that because they feel uncomfortable with some of CISG’s provisions—most notably the absence of a parol evidence rule per Article 8. Why is the absence of a parol evidence rule important? Because it means that where the CISG is applicable, courts may, as a matter of course, allow the admission of evidence of the parties’ prior negotiations to interpret the parties’ intentions.

But in some situations, the CISG might be preferable to the UCC. For example, in a battle-of-the-forms scenario, the CISG is probably preferable for sellers in most cases.²⁹

The parties to a contract cannot opt out of the CISG merely by relying on a garden-variety choice-of-law provision. “[A] number of American courts have held that simply selecting a particular forum’s laws is not enough to opt out of the CISG when the CISG is itself part of the laws of that forum.”³⁰ For example, if the parties to a contract under the CISG provided that the contract would be governed and construed according to the laws of the state of New York, that alone is not enough to opt out of the CISG because the CISG, itself, is part of the law of New York. To opt out of the CISG via a choice-of-law provision, the provision must expressly state that the parties exclude the application of the CISG.

Putting It All Together

This short article has just scratched the surface—by necessity, much has been left out. The law in this area is complex, even chaotic, and the rules change from jurisdiction to jurisdiction. In drafting a choice-of-law provision, it will be necessary to consult the judicial decisions in the states that might be applicable. The draft provision below is merely to help you get started—drafting-by-formbook alone is never a good idea. The language below contains the principles discussed above, and it is designed for one party—and it is not even a party to the contract—it is designed for a judge who might be called upon to decide what it means.

The draft language is a broad choice-of-law provision designed to include within its scope all claims, contractual and extra-contractual, between the parties. It seeks to have essentially the entirety of the parties’ relationship governed by Pennsylvania law, including Pennsylvania’s statute of limitations. If the parties have other dealings governed by other choice-of-law provisions, this language is too broad—it will have to be tailored to ensure that the present provision doesn’t override the others. The clause does not incorporate Pennsylvania’s arbitration laws to override the FAA—any decision to do that would be unusual, and would need to be made by weighing the merits of the federal and state laws, a matter that is beyond the scope of this short article. The provision makes clear that it does not include Pennsylvania’s conflict-of-laws rules. The reference to CISG at the end would only be necessary if the contract possibly involved the sale of goods and if the parties wanted the UCC, not the CISG, to apply.

The draft language:

This agreement and all matters arising out of or relating to this agreement, and all claims, causes of action, controversies, or matters in dispute between the parties to this agreement—whether sounding in contract, tort, statute, regulation, or otherwise, and including but not limited to those arising out of or relating to this agreement—shall be governed by, construed, interpreted, and enforced in accordance with the substantive and procedural laws of the Commonwealth of Pennsylvania, including its statutes of limitations, without giving effect to any choice of law or conflict of laws rules or provisions, whether of the Commonwealth of Pennsylvania or any other jurisdiction, that would cause the application of the laws of any jurisdiction other than the Commonwealth of Pennsylvania. The parties exclude application of the United Nations Convention on Contracts for the International Sale of Goods.

Timothy Murray, a partner in the Pittsburgh, PA law firm Murray, Hogue & Lannis, writes the biannual supplements to Corbin on Contracts, is author of Volume 1, Corbin on Contracts (rev. ed. 2018), and is co-author of the Corbin on Contracts Desk Edition (2019).

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1. Am. Airlines v. Wolens, 513 U.S. 219, 233, n. 8 (1995), citation omitted. 2. This one might be enough to impact my choice-of-law preference. “Merger clauses are not everywhere deemed to be conclusive on the issue of whether the writing is a completely integrated agreement—it depends on the jurisdiction.” John E. Murray, Jr. & Timothy Murray, 1 Corbin on Contracts Desk Edition, § 25.05. E.g., Bonner v. City of New Haven, 2018 Conn. Super. LEXIS 1285, *11 (June 22, 2018) (merger clause conclusive); Posephny v. AMN Healthcare Inc., 2019 U.S. Dist. LEXIS 18593 (N.D. Cal. Feb. 5, 2019) (merger clause a persuasive but not controlling factor). 3. For example, some states follow the “natural omission test” where “an oral agreement is not superseded by a subsequent writing if the agreement is not inconsistent with the writing and ‘is such an agreement as might naturally be made as a separate agreement by parties situated as were the parties to the written contract.’ First Restatement of Contracts § 240(b).” John E. Murray, Jr. & Timothy Murray, 1 Corbin on Contracts Desk Edition, § 25.06. See, e.g., Dugan v. Towers, 2012 U.S. Dist. LEXIS 175599 (E.D. Pa. Dec. 12, 2012). Others follow the appearance test. See J&B Steel Contractors v. C. Iber & Sons, 162 Ill. 2d 265 (1994) (a judge must decide integration questions solely by looking at the four corners of the last writing). Some courts have expressed allegiance to both tests, even though the tests might lead to inconsistent results. E.g., Gianni v. R. Russell & Co., 281 Pa. 320 (1924). 4. 184 Joralemon, LLC v. Brklyn Hts Condos, LLC, 117 A.D.3d 699, 985 N.Y.S.2d 588, 2014 NY Slip Op 3245 (2014) (conclusive); Handler v. Anderson, 2018 IL App (1st) 170338-U (2018) (not conclusive). 5. Compare Pennsylvania (Wagner v. Graziano Constr. Co., 390 Pa. 445, 448 (1957) holds that a contract can be orally modified despite such a clause) with New York (N.Y. Gen. Oblig. Law § 15-301(1) provides: “A written agreement or other written instrument which contains a provision to the effect that it cannot be changed orally, cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement of the change is sought or by his agent.”) 6. Some courts hold that “unless the contractual provision eliminates both the power and the right to assign, an assignment may give rise to damages for breach but will not render the assignment ineffective” while other courts “are less insistent on the use of any particular phraseology and simply uphold anti-assignment provisions if the prohibitive language utilized is clear and unambiguous . . . .” In re Kaufman, 2001 OK 88, 9-10, 37 P.3d 845, 851-52 (2001). 7. Only “some states allow attorneys’ fees to be recovered in first-party actions (that is, direct actions between the parties to the contract where no third party is involved).” John E. Murray, Jr. & Timothy Murray, 1 Corbin on Contracts Desk Edition, § 57.05. Not all courts agree. Two courts interpreting the same contract language and applying the law of the same state reached different conclusions about whether an indemnity provision allows recovery for first-party claims. See GMFS, LLC v. Cenlar FSB, 2019 U.S. Dist. LEXIS 4527 (M.D. La. Jan. 9, 2019) (language envisions first-party claims); myCUmortgage, LLC v. Cenlar FSB, 2019 U.S. Dist. LEXIS 53184 (S. D. Ohio Mar. 28, 2019) (first-party claims not encompassed by language). 8. John E. Murray, Jr. & Timothy Murray, 1 Corbin on Contracts Desk Edition, § 83.04. 9. New York: N.Y. Gen. Oblig. Law § 5-1401 (“[t]he parties to any contract . . . arising out of a transaction covering in the aggregate not less than two hundred fifty thousand dollars . . . may agree that the law of this state shall govern their rights and duties in whole or in part, whether or not such contract, agreement or undertaking bears a reasonable relation to this state.”). Delaware: For contracts involving $100,000 or more, “a choice-of-law provision designating Delaware law ‘shall conclusively be presumed to be a significant, material, and reasonable relationship with [Delaware] and shall be enforced whether or not there are other relationships with [Delaware].’ See Del. Code Ann. tit. 6, § 2708(a) (2018).” Capstone Logistics Holdings, Inc. v. Navarrete, 2018 U.S. Dist. LEXIS 216940, at *69 (S.D.N.Y. Oct. 25, 2018). 10. “When application of a choice-of-law provision would result in the contravention of California’s public policy, the contract provision can be ignored to the extent necessary to preserve public policy.” Roadrunner Intermodal Servs., LLC v. T.G.S. Transp., Inc., 2019 U.S. Dist. LEXIS 53278, *14 (E.D. Cal. Mar. 28, 2019). 11. For example, in Texas, a claim by a motor vehicle manufacturer against a franchised dealer must be brought in Texas “[n]otwithstanding the terms of any franchise . . . ” Tex. Occ. Code § 2301.478. 12. Volvo Grp. N. Am., LLC v. Forja De Monterrey S.A. de C.V., 2019 U.S. Dist. LEXIS 172435, *6-7 (M.D. N.C. Oct. 4, 2019). 13. E.g.: “Under New York law, a choice-of-law provision typically applies to only substantive issues and not to statutes of limitations, which are considered procedural.” Keurig Green Mt., Inc. v. Global Barstas U.S., LLC, 2018 U.S. Dist. LEXIS 175499, *9 (S.D.N.Y. Oct. 8, 2018). 14. Reclaimant Corp. v. Deutsch, 332 Conn. 590 (2019) (Florida law). 15. See, e.g., Integrity Global Sec., LLC v. Dell Mktg. L.P., 579 S.W.3d 577, 587 ( Tex. App. 2019). 16. CDG Int’l Corp. v. Q Capital Strategies, LLC, 2018 U.S. Dist. LEXIS 832, *15 (S.D. Fla. Jan. 3, 2018). 17. Goellner-Grant v. JLG Indus., 2019 U.S. Dist. LEXIS 191353, *8 (M.D. Pa. Nov. 5, 2019). 18. N.Y. C.P.L.R. § 202; Deutsche Bank Nat’l Tr. Co. v. Barclays Bank PLC, 2019 N.Y. LEXIS 3251 (Nov. 25, 2019). 19. McDonald v. Wells Fargo Bank, N.A., 338 F. Supp. 3d 458 (W.D. Pa. 2018). 20. DelMonaco v. Albert Kemperle, Inc., 2014 Conn. Super. LEXIS 2965 (Conn. Super. Ct. Nov. 26, 2014). 21. Grey Mt. Partners, LLC v. Insurity, Inc., 2017 Conn. Super. LEXIS 4721 (Oct. 18, 2017). See also Barnes v. StubHub, Inc., 2019 U.S. Dist. LEXIS 172846 (S.D. Fla. Oct. 3, 2019). 22. Maynard v. PayPal, Inc., 2019 U.S. Dist. LEXIS 130240, *10 (N.D. Tex. Aug. 5, 2019). 23. Volvo Grp. N. Am., LLC v. Forja De Monterrey S.A. de C.V., 2019 U.S. Dist. LEXIS 172435, *11-12 (M.D. N.C. Oct. 4, 2019). 24. See, e.g., Volvo Grp. N. Am., LLC v. Forja De Monterrey S.A. de C.V., 2019 U.S. Dist. LEXIS 172435 (M.D. N.C. Oct. 4, 2019) (fraudulent inducement claim was “closely related” to breach of contract, so the claim was covered by a choice-of-law provision). 25. World Fuel Servs. Trading v. Hebei Prince Shipping Co., 783 F.3d 507 (4th Cir. 2015). 26. Berryman v. Newalta Envtl. Servs., 2018 U.S. Dist. LEXIS 186789 (W.D. Pa. Nov. 1, 2018). 27. MegaForce v. Eng, 2019 U.S. Dist. LEXIS 16495 (D. Minn. Feb. 1, 2019). 28. John E. Murray, Jr. & Timothy Murray, 1 Corbin on Contracts Desk Edition, § 1.01. 29. Timothy Murray, 1 Corbin on Contracts § 3.37. 30. Orica Austl. Pty. Ltd. v. Aston Evaporative Servs., LLC, 2015 U.S. Dist. LEXIS 98248, *9 (D. Colo. July 28, 2015). See Metso Minerals Indus. v. JTL Mach., Ltd., 2016 U.S. Dist. LEXIS 9113 (M.D. Pa. Jan. 27, 2016); It’s Intoxicating, Inc. v. Maritim Hotelgesellschaft mbH, 2013 U.S. Dist. LEXIS 107149 (M.D. Pa. July 31, 2013); Topp Paper Co. v. ETI Converting Equip., 2013 U.S. Dist. LEXIS 193161 (S.D. Fla. May 6, 2013).