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Make Sure Your Contract Contains Enforceable Choice of Law Provisions
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Make Sure Your Contracts Contain Enforceable Choice of Law Provisions

Choice of law provisions allow parties to negotiate which forum and law will apply to future contract disputes, if necessary, and are as important as clear payment terms when it comes to enforcing your contract.  Choice of law provisions are generally upheld in California if they meet two requirements:

(1)   the contract bears a reasonable relationship to the state whose law is chosen to govern; and

(2)   application of the chosen law does not violate a strong public policy that would otherwise protect a party.

These requirements may sound easy enough to manage, but it is critical to be sure that your choice of law provision legally meets both requirements.  Otherwise, you may find yourself prosecuting or defending a claim in a far flung state with less than favorable contract law, regulations, or court interpretations. 

Reasonable Relationship Test

Whether the contract bears a reasonable relationship to the state whose law is chosen to govern has been liberally interpreted.  This test can be satisfied by the fact that one of the parties to a contract is incorporated in the chosen state, or that one of the parties resides in the chosen state.  Alternatively, the parties may choose another state altogether because the contract bears a reasonable connection to the chosen state, such as where the contract is to be performed.

Does Not Violate Public Policy

Whether the application of the chosen state law violates a strong public policy that would otherwise protect a party is not an easily defined test.  One way to assess whether a matter invokes public policy concerns is to consider whether the choice of law provision requires one of the parties to essentially waive the benefit of a particular statutory right granted to him by the state that would naturally govern the contract.  If enforcement of the choice of law provision would act as a waiver of the party’s statutory right in the natural forum state, then it is more likely that a judge will refuse to enforce the choice of law provision.

An example of a strong public policy codified into state law is California’s Code of Civil Procedure section 580b, which prohibits lenders from pursuing deficiency judgments after foreclosure of residential mortgages.  The people of California disfavor deficiency judgments against foreclosed homeowners so much that they enacted a law proscribing deficiency judgments in such cases.  

Recognizing California’s antideficiency statute, in a situation where a residential mortgage contract would be subject to California law but for a choice of law provision favoring another state, it is not likely that a court would enforce the choice of law provision where the chosen state law was less favorable to the homeowner than California law.   Doing so would violate the strong public policy of California, the natural forum state.

Don’t wait for a dispute to arise to measure the enforceability of the choice of law provisions in your contracts.  Be fully informed about of these and other nuances of California contract law.  The attorneys at Glass & Goldberg provide high quality and cost-effective legal services and advice for clients in all aspects of business litigation and transactional law.  Call us at (818) 888-2220, email us at info@glassgoldberg.com, or visit us on the web at www.glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

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