Common Contract Clauses We Never Think Much About, But Should.

This is for all you contract nerds out there.  You know who you are.  You become aroused at the sight of a well crafted limitation of liability provision.  OK, then.  Well, me neither.

A recent case dealt with a choice of law provision that we routinely use and routinely don't think much about.

Oh, we fight over the choice of law provision.  We usually want the choice of our state with venue and jurisdiction to follow.  We haggle over New Jersey vs. New York when we probably don't have a clue as to the difference it would make on most issues.  We're just looking for some home cooking.  So, what happens when the parties agree in a contract as to the state whose law will be applied?  In Ruiz v. Affinity Logistics Corp. (9th Cir. Case No. 10-55581, Feb. 8, 2012) the issue was whether truck drivers were independent contractors or employees and the two states involved were Georgia and California.  Georgia law has a rebuttable presumption that they are independent contractors and California law would favor them being employees.  The contract in question chose Georgia law and Georgia was where the defendant had its principal place of business and was incorporated.  Ergo, slam dunk, right?  The parties were grownups and capable of making this decision.  The chosen law (Georgia) applies.  The Ninth Circuit says, 'Not so fast, my friends".

The Ninth Circuit decided that Section 187 of the Second Restatement of Conflicts of Law applies. Section 187 says in pertinent part that for things that parties can resolve by a specific provision in the agreement, the choice of law of the parties will prevail.  "In such instances, the forum will apply the applicable provisions of the law of the designated state in order to effectuate the intentions of the parties. So much has never been doubted." [Emphasis added]

Section 187 goes on to say that for matters that the parties can not resolve by a specific provision (e.g. making an illegal contract legal, agreeing that a party has capacity to contract when he doesn't), the choice of law in the contract will still be enforced unless the chosen state has no substantial relationship to the parties or the transaction, there is no other rational basis for selecting the state and the laws of the chosen state are contrary to a fundamental policy of another state and such state would be the choice of law absent the choice by the parties.

The Ninth Circuit then decides, without much discussion or explanation, that the provisions of the second part of Section 187 (the part about matters that the parties can not resolve by a specific contractual provision) should be applied and finally opines that California law should be applied instead of the state (Georgia) chosen by the parties.  The most common reading of Section 187 of the Restatement would mandate that after the court determined that the parties chose the law of a particular state and that such choice was not obtained by fraud or misrepresentation and that the parties were capable of contracting for such a provision, the discussion would be over and the consideration of the second part of Section 187 would be unnecessary.  This Ninth Circuit decision would require the consideration of all the factors listed in Section 187.

Why should we care?  Well, if we know that a particular issue is treated in a particular way in a particular state and both parties desire that treatment, there should be no reason why the parties can't agree to that.  It is common practice to chose Delaware law for corporations that have no contact with Delaware except that they are incorporated there because Delaware courts are perceived to be better at dealing with commercial and corporate issues.  This decision calls those provisions into question.

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