Choice of Law and Time, Part Ii: Choice of Law Clauses and Changing Law
| Publication year | 2023 |
Choice of Law and Time, Part II: Choice of Law Clauses and Changing Law
Jeffrey L. Rensberger
South Texas College of Law Houston, jrensberger@stcl.edu
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Modern choice of law analysis usually honors the parties' contractual choice of governing law. But what happens when the law selected by the parties changes between the time of their contracting and the time of litigation? Or what if the law of the state whose law would otherwise apply changes so that its policy is now offended by the choice of law clause although its policy was not violated when the parties contracted? These questions raise the often-overlooked temporal aspect of choice of law analysis. Should courts regard the law to be applied as fixed to the time of the transaction or as changeable over time? The answers to these problems are influenced by several factors: the proper concern for current state policy; the parties' expectations; and whether the new law invalidates a previously valid transaction or, alternatively, makes a previously invalid transaction valid.
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Introduction.................................................................................403
I. The Enforceability of Choice of Law Clauses...................405
II. Explicit Choice of Time Clauses and Their Enforceability ..................................................................................................408
A. Examples of Choice of Time Clauses................................408
B. Parties Should Use and Courts Should Enforce Choice of Time Clauses......................................................................414
III. Changed Default Contract Rules....................................416
A. Changed Common Law Rules............................................416
B. Changed Statutory Law.....................................................435
IV. Changed Mandatory Contract Rules..............................438
A. Courts Should Honor Explicit Choice of Time Clauses for Mandatory Rules................................................................440
B. When the Law of the State Whose Law Would Otherwise Apply Has Changed...........................................................441
C. When the Law of the Chosen State Has Changed.............457
Conclusion....................................................................................473
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The issues explored by this Article flow from a simple fact pattern. Suppose that parties from Texas and Florida enter a real estate lease in 2017, the subject matter of which is in New York. The parties use a choice of law clause selecting New York law to govern their transaction. Something goes awry and one sues the other in a Texas court in 2021. The Texas court would, in most circumstances, honor the parties' choice of law clause and apply New York law.1 But what if after the parties entered the contract New York changes its law? The Texas court will apply New York law, but which New York law? The law subsisting at the time of the contract or the law as it exists at the time of the litigation?
Choice of law is usually concerned with geography.2 On this fact pattern, the usual choice of law issue is whether the Texas court applies Texas, Florida, or New York law. But the hypothetical adds a time dimension to the facts, raising a temporal choice of law problem. I have previously explored the temporal dimension of choice of law when the law is determined by a choice of law rule.3 The somewhat different context considered here is how time—or more precisely, law changing over time4 —affects the law applied pursuant to a contractual choice of law clause.
Although it would be possible for parties to address the time issue in their contract, choice of law clauses that include a time delimiter are
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rare in the general commercial contract context.5 The necessary question, then, is how courts should address the time question in the absence of such a provision.
This Article proceeds as follows: Part I overviews the general enforceability of choice of law clauses. Parties sometimes answer the temporal question in their contract using an explicit temporal choice of law clause directing that the law as it exists at a particular time is to be applied to their agreement.6 Part II gives examples of such contracts and concludes that courts should generally enforce them. Part III addresses what courts should do when there is no such specification and a default contract rule—one the parties could have explicitly agreed to—of the state chosen by the parties has changed. Part IV addresses the same question in the context of a mandatory contract rule—one the parties are not empowered to contract around—changing. An added wrinkle appears here. Because courts will decline to enforce a choice of law clause as to a mandatory rule if the chosen law violates a fundamental public policy of the state whose law would otherwise apply, there are now two possible states whose law might change: the state chosen by the parties and the state whose law would apply were there no choice of law clause.7 These subcategories are considered in turn.
It is possible to reach a reasonably broad conclusion for the application of default rules. Courts should apply the law as it existed at the time of the contract. There are exceptions to this when the circumstances show that applying older law would frustrate the parties' expectations or when the new law falls in the category of curative legislation, which is designed to rectify a mistake in previous
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legislation.8 For mandatory contract rules, the matter is more complex and nuanced. But in general, courts should apply whichever version of the law validates the transaction and upholds the parties' expectations. The countervailing concern here is to uphold current state policy even though it may conflict with the parties' desires and sometimes be of sufficient importance to override the parties' expectations.
The Second Restatement's treatment of choice of law clauses accurately summarizes American case law.9 Choice of law clauses are generally favored under § 187 of the Second Restatement.10 Section 187 divides choice of law clauses into two categories depending on the nature of the underlying contract rule at issue.11 "[I]f the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue," then, categorically, the clause "will be applied."12 On the other hand, "if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement," the clause will still be applied subject to two exceptions.13 The clause will not be enforced if "the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice."14 Second, even if the chosen state is connected to the parties, its law will not be applied if it is "contrary to a fundamental policy of a state which has a materially greater interest than the chosen state" as to that issue and "would be the state of the applicable law in the absence of an effective
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choice of law by the parties."15 This last exception contains a three-part test: Is the chosen law contrary to the fundamental public policy of another state? Does that state have a "materially greater" interest? And finally, would that state be the one whose law applied under normal Second Restatement analysis?16
The distinction between mandatory and default rules is the axis running through § 187.17 Default contract rules—rules "which the parties could have resolved by an explicit provision"18 —are "freely breakable"19 in that the parties can either accept such rules by failing to express a contrary intent or can avoid them by "expressly agree[ing] on different terms in their relationships."20 Many of the rules in the Uniform Commercial Code, for example, are default rules.21 Mandatory rules, on the other hand, are rules that the parties "are obliged to obey, irrespective of their wishes upon the matter."22 Laws protecting consumers, rules on capacity to contract based on age, usury limits, and the obligation of good faith are examples of mandatory rules.23 These rules often impede the intent of the contracting parties rather than facilitate it.24
The Second Restatement's provision for categorical enforcement of a choice of law clause for default rules simply effectuates the parties' intentions.25 Since the underlying rule is not mandatory, the parties could "spell out these terms in the contract" or, as an alternative, "may
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incorporate into the contract by reference extrinsic material" such as "the provisions of some foreign law."26 By selecting the law of a particular state, the parties have used a shorthand reference for the content of that law.27 Using a choice of law clause to incorporate a state's law by reference is nicely illustrated by Burns v. Burns.28 In that case, a New York decedent had contracted with an Ohio mutual aid association for life insurance, designating his "heirs" as the beneficiaries.29 His children and his widow disputed whether the widow was entitled to share in the proceeds as an heir.30 Under the law of New York, where the insured and all possible beneficiaries resided, the widow was not entitled to a share, but under Ohio law, she was.31 Because the contract specified that it was to be governed by Ohio law, the court concluded that the widow was entitled to a share.32 The court noted that "[a] person insuring his life ordinarily has the right to enter into any contract with respect to the risk that he pleases."33 Thus, the decedent could have specified as beneficiaries his widow, his children, or any subset of them.34 And he could have done so by description...
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