Saturday, April 22, 2017

Choice of Law in Contracts

Conflict of Laws is not a subject that is tested on its own on the MEE.  It does, however, show up as a sub-issue in essays testing other subjects and so it's important to understand well how this subject applies to the other subjects that might show up on the bar exam. Different areas of substantive law have different approaches to determining choice-of-law.  This post will focus on how to apply choice-of-law if faced with a contracts issue.  To gain full credit on these issues, you should discuss the various approaches that a court might take in determining which law will apply.

The crux of the issue here is that there will be laws that conflict (for example, the laws of different states), and the court will need to decide which law to apply. Sometimes, there is an express choice-of-law provision in the contract.  If so, that provision will generally apply and the court will apply the law as directed by the contract. The provision will not apply, however, if it is contrary to public policy or if there is no reasonable basis for the parties' choice.  Further, it will not apply if consent to the provision was given as a result of fraud, mistake, duress, etc.

The First Restatement of Contracts directs us to apply the law of the state where the contract was made for issues concerning the validity of the contract and construction of the contract.  The law of the place where the contract is to be performed governs issues relating to performance of the contract.

The Second Restatement of Contracts directs us to apply the law of the state with the most significant relationship to the contract.  There are quite a lot of factors that can be used to determine which state has the most significant relationship, including the following: the place of contracting, negotiation, and performance; the location of the contract's subject matter; and the domicile, residency, nationality, place of incorporation, and place of business of the parties.  Note that specific types of contracts have specific rules (for example, life insurance contracts are controlled by the law of the insured's domicile) but all of these specific rules can be overcome if the factors point to another state having a more significant relationship which will warrant applying the law of that particular state.

Finally, there is an interest analysis.  When applying the interest analysis, it should first be assumed that the forum will apply its own law.  If the forum has no interest in the litigation but another state does have an interest then this is known as a "false conflict." The forum should apply the law of the other state. If, on the other hand, the forum and another state both have an interest then we have a "true conflict" and the forum will apply its own law if it determines that it has a legitimate interest in the litigation.


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