CHOICE OF WHAT? THE NEW YORK COURT OF APPEALS DEFINES THE PARAMETERS OF CHOICE-OF-LAW CLAUSES IN MULTIJURISDICTIONAL CASES.

Author:Reyhan, Patricia Youngblood
 
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  1. INTRODUCTION

    Party autonomy (1) in contracts has been described as "[p]erhaps the most widely accepted private international rule of our time." (2) The power of parties to contract regarding choice of law is now widely recognized throughout the United States as well as in most developed legal systems. (3) The legal ability to choose the law that is generally to be applied to contractual rights and obligations is arguably essential to the contractual ability of the parties to shape all aspects of those rights and obligations. (4) Without knowing at the time of contracting whether terms of the contract and the process of its formation will be valid, how such terms will be interpreted, and what shall be the available remedies for breach, a central goal of contracting parties, girding the certainty and predictability surrounding their contractual relations, is significantly undermined. (5) Thus, for parties to multijurisdictional contracts, (6) especially transnational contracts, (7) the protection of party autonomy regarding choice-of-law clauses is highly valued. (8) The globalization of trade has made such contracts far more common, more complicated and significantly more financially consequential. (9) While the growth in multijurisdictional contracts may be good for business; it has been challenging for law. (10)

    The contacts of the parties and the transaction with multiple states or nations have led commercial actors in multijurisdictional contracts to seek to define from the beginning the source of law to govern the contractual obligations they are undertaking. (11) This has led to the widespread use of choice-of-law and choice-of forum clauses in multijurisdictional contracts. (12) But the inclusion of such clauses is effective only to the extent that courts in the jurisdiction where suit is brought will recognize and enforce them. (13) Acknowledging that parties to large multinational contracts are incentivized to choose laws and legal systems likely to respect their contractual autonomy, a number of states, led by New York, have competed to provide receptive laws and venues in order to entice international commercial actors to choose their states for the resolution of contractual disputes, particularly those of high monetary value. (14)

    This Article examines the current state of New York's status as a center for the litigation of multijurisdictional commercial disputes and the New York Court of Appeals' recent jurisprudence regarding that status. It begins by examining precisely why choice-of-law and choice-of-forum clauses are so important to commercial actors, especially those who execute multijurisdictional contracts. (15) The Article then examines efforts by New York to solidify its status as the center of international commerce and finance through initiatives to make its law and courts more attractive to commercial parties outside New York. (16) The particular focus of this section is on the adoption in 1984 of New York General Obligations Law section 5-1401 and section 5-1402. (17) After detailing the general treatment of choice-of-law clauses under New York's common and statutory law, the Article turns to examination of four New York Court of Appeals cases, decided in the last decade, that give particular guidance on exactly how New York interprets the significant question of precisely what law is chosen in a choice-of-law clause. (18) The Article concludes with a critique of the reasoning of the final case and observations on the extent to which that reasoning undermines the certainty and predictability that New York and the Court of Appeals have endeavored to assure to parties to multijurisdictional contracts. (19)

  2. THE ATTRACTIVENESS OF CHOICE-OF-LAW AND CHOICE-OF-FORUM CLAUSES IN MULTIJURISDICTIONAL CONTRACTS

    The best vantage point for viewing the attractiveness of choice-of-law and choice-of-forum clauses in multijurisdictional contracts is through an examination of the legal landscape in the absence of such clauses. In any civil suit, the presence of parties or transactions that are connected to more than one state or nation (20) introduces the prospect that the law of one of multiple states or nations may be applied to determine the rights and liabilities of the parties. (21) If the laws of the states or nations with which the parties or transaction are connected would compel the same resolution of an issue or outcome of a case, there exists a choice of law but not a conflict of law. (22) In such a circumstance, neither the parties' nor states' interests are significantly affected by the choice of one polity's law over another. (23) Where, however, the connected states or nations have different rules that would lead to different resolutions of significant issues before the court or the outcome of the case as a whole, a conflict of law is presented and the choice of governing rules takes on substantial importance for the parties and occasionally for the states whose laws are in conflict. (24) While this is true across nearly every legal subject matter, (25) the uncertainty regarding the source of law to govern the legal relationship of the parties is particularly acute in situations where the parties are creating between themselves contractual rights and obligations. (26) Two parties, one incorporated in Nation A and one incorporated in Nation B, who expend time and treasure to formalize a multimillion dollar commercial contract to be performed in Nation C would presumably like to know under which nation's laws the sufficiency of their consideration, the adequacy of their performance, and the scope of their remedies are to be measured. Each of these issues involves at the least a choice of law and often, more importantly, a conflict of law.

    Where a conflict of law is presented, the parties desire to know how the court will make the choice between conflicting rules. Before they can know that, they need to know what court is making the choice. The answer to that question is often unknowable until the forum has been selected, either by the plaintiff at the time suit is filed or by the parties' contractual selection of the forum before the cause of action arises. (27)

    Even to know the identity of the forum, however, is not necessarily to know the law that will govern the litigation. Every state and every developed nation has adopted not only its own substantive and procedural rules to govern cases in which there are no multistate or multinational contacts, so called "local" rules, (28) but also rules to govern the question of which sovereign legal system, when there are multijurisdictional contacts, is to provide the law to govern the case being heard by the forum court. (29) These are the forum's "choice-of-law" rules. (30) There are a myriad of such rules available to states and nations and they have collectively availed themselves of all of them. In some legal areas, the rules are remarkably consistent. (31) The menu of choice-of-law rules for other legal areas--contracts and torts particularly--is ample and varied. States have chosen "interest" analysis, (32) "Restatement" or "most significant relationship analysis," (33) "grouping of contacts" analysis, (34) "choice influencing factors" analysis, (35) and state-specific variations of these as their governing choice-of-law method. (36) There are few constraints on a state's decision as to which method it deems appropriate. (37)

    Choice-of-law rules mean that a plaintiff who has chosen to sue in a state with favorable 'local' laws may find its strategy thwarted by that state's decision to apply the law of another state less favorable to the plaintiff's interests. (38) Where plaintiff has understood this from the beginning, plaintiff's choice of a forum may essentially predetermine that a law less favorable to the defendant will be applied. (39)

    Exposure to a forum's choice-of-law rules would not be significantly problematic to the parties if those rules were easy to identify and the outcome of their application easy to predict. For the most part, the content of the choice of law rules is relatively easy to determine. (40) The devil is in the detail of the choice that content will make. This much is certain, the choice is often anything but certain. In some areas of law, torts particularly, that uncertainty is not as problematic as it is in other areas. The parties to a tort action often do not establish a legal relationship until the moment the tort is committed and therefore do not enter into that relationship with an expectation of the source of law that would govern it. (41) In other areas, contracts particularly, just the opposite is true. The parties intend to establish a legal relationship through contract and presumably have expectations regarding the legal consequences of the actions they take with regard to each other. (42) And yet, as the New York Court of Appeals stated in Auten v. Auten, "[c]hoosing the law to be applied to a contractual transaction with elements in different jurisdictions is a matter not free from difficulty." (43) The Restatement (Second) introduces its chapter on Contracts with the observation that "[c]ontracts is one of the most complex and most confused areas of choice of law." (44)

    To the extent that party expectations are undermined by the uncertainty surrounding the choice of law that will govern their relationship and the contracts that grow out of it, the parties' efforts to structure and define their contractual rights and duties are undermined. (45) This is especially so of financially-significant commercial contracts involving parties from different nations. (46) Here, more than in most legal relationships, the parties desire certainty around their contractual undertakings ab initio. (47) As the Restatement (Second) notes, "Prime objectives of contract law are to protect the justified expectations of the parties and to make it possible for them to foretell with accuracy what will be...

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