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Determining Choice of Law in Business Litigation
Frequently, because business litigation can involve multiple parties in multiple states, an important issue can be determining what law applies to the claims being litigated in the lawsuit. Specifically, where the litigation has ties to multiple states, the presiding court must determine which state’s laws should be applied to the claims in the lawsuit. Determining the applicable law for the claims is called “choice of law” and the determination is frequently made early in the case. Additionally, because laws can vary significantly from state to state, the decision of which state’s laws should be applied is an important one and can have substantial effects on the outcome of the case.
In general, when making a choice of law determination, each state has its own policies and procedures for making that determination. Accordingly, courts will look to their own state’s own law for determining whether the law of another state should be applied. Put in other words, the process for determining what law should be applied is governed by the law of the state where the lawsuit was filed – that is, the “forum state.”
Common considerations for determining whether the law of another state should be applied include:
– Whether or not the parties agreed to have a particular state’s law applied;
– The contacts of the parties to a particular state;
– Which state has the most significant relationships to the transaction of the parties.
See Restatement (Second) Conflict of Laws § 187. See also Elvig v. Nintendo of America, Inc., 696 F.Supp.2d 1207, 1210 (D. Colo. 2010).
Choice of Law Provisions in Contract Claims
A frequent scenario where choice of law provisions come up in business disputes is where the lawsuit pertains to contract claims. Specifically, since there is no federal contract law, contract law is governed by state law. Moreover, because business is frequently conducted across state lines, there is ample room for issues to arise regarding which state’s laws apply.
Generally, in order to avoid any potential choice of law issues, most contracts have specific terms which indicate which state’s laws should be applied if there is a dispute under the contract. These terms are called “choice of law provisions” and are generally enforceable in a lawsuit. That is, where there is a contract dispute, courts will generally apply the law of the state indicated in the choice of law provision.
However, while choice of law provisions are generally enforceable, that does not mean they are automatically enforceable. Specifically, courts will decline to enforce a choice of law provision where another state has a more substantial relationship to the contract. See Ecurity Serv. Fed. Credit Union v. First Am. Mortg. Funding, LLC, 861 F.Supp.2d 1256, 1267 (D. Colo. 2012).
For example, if the contract provides for application of a particular state’s law, and none of the parties have any connections to that state nor does the contract require any performance in that state, a court will likely decline to enforce that choice of law provision and, instead, apply the law of the state with the most substantial contacts.
In determining the state with the most substantial relationships to the contract, courts typically consider the following factors:
– The needs of the interstate and international systems;
– The relevant policies of the forum state;
– The relevant policies of other interested states and the relative interests of those states in determination of the particular issue;
– The protection of justified expectations;
– The basic policies underlying the particular field of law;
– Certainty, predictability and uniformity of result; and
– Ease in determination and application of the law to be applied.
See id. Upon analysis of these factors, courts will enforce the choice of law provision unless “application of the [chosen state’s law] would be a contrary to a fundamental policy of a state which has a materially greater interest than the chosen state . . . .” See Rest. 2d Conf. of Laws, § 187.
Similarly, in scenarios where the contract does not contain a choice of law provision, the process for determining what law should be applied is still primarily oriented towards determining which state has the most substantial relationships with the contract. In particular, where there is not choice of law provision, factors for determining what law should be applied include:
– The place of contracting;
– The place of negotiation of the contract;
– The place of performance;
– The location of the subject matter of the contract; and
– The domicile, residence, nationality, place of incorporation and place of business of the party.
See id. Further, for service contracts that contain no choice of law provision, there is an automatic presumption that the law of the state where the services were to be performed should be applied. However, this presumption can be overcome where the factors above indicate that a different state has a more substantial relationship to the contract. See id. at 1268.
Choice of Law in Tort Lawsuits
In tort lawsuits, more commonly known as personal injury lawsuits, there can also be choice of law issues since the tort may span multiple states or involve parties from multiple states. Accordingly, many states’ choice of law rules regarding tort claims provide that the “substantive law of the state with the most significant relationship to the parties and the occurrence” should govern the action. See Elvig, 696 F.Supp.2d at 1210. That is, even though a lawsuit may have been filed in a state different from where the personal injury actually occurred, the presiding state will still apply the law of the state with the most significant relationship to the occurrence.
For tort cases, factors courts consider in determining which state has the most significant relationship to the injury include:
– The place where the injury occurred;
– The place where the conduct causing the injury occurred;
– The state of residence of the parties;
– The place where the relationship between the parties is centered;
– The relevant policies of the various jurisdictions at issue and the interests in the outcome of the case;
– The need for predictable and uniform results;
– And the policies underlying the applicable field of law.
See id. (citing Restatement (Second) Conflict of Laws § 6, 145. In considering these factors, there is a significant deference to the location of the injury. Accordingly, courts will generally apply the law of the state where the injury occurred unless some other state is determined to have a more significant relationship. See Elvig, 696 F.Supp.2d at 1210.
In the context of business law, this can have significant effects since, if a business is transacting business across state lines, the law of the state where the injury occurs, and not the law where the business is located, will likely be applied. Examples of business lawsuits where these considerations can come into play include defective products lawsuits, interference of contract lawsuits, and lawsuits involving theft of business secrets or proprietary information. See id. at 1211.
© 2016 J.D. Porter, LLC; Jordan Porter. Denver, Colorado.