Governing Law

• Jurisdiction: Maryland

II. Governing Law

Maryland courts have steadfastly adhered to the rule of lex loci contractus as the default rule with respect to determining the appropriate governing law for settling contract disputes.¹ In applying this rule, the court is required to determine where the last act necessary to make the agreement a binding contract was performed.²

Modern commerce, of course, makes application of the lex loci contractus rule difficult. When a buyer in Maryland agrees with a seller in California as to contract terms on the telephone, where is the contract made? If the parties exchange written contract documents by fax, each countersigned by one party, where is the contract made? If a Maryland party emails a contract to a California party which passes through a server in New York, where is the contract made?

The lex loci contractus approach, easily enough applied in the days when most contracts were formed face to face, has become outdated. The modern approach to establishing a default rule for the governing law with respect to contract disputes was adopted by the Restatement (Second) of Contracts in 1971 and is referred to as the "significant relationship" test.³ This section of the Restatement provides that: "The rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties. . . ." Under the modern approach, therefore, it is no longer necessary to determine the situs of the last act necessary to form a binding contract; instead, a facts and circumstances test is employed to determine the closest nexus between the transaction, the parties, and the proposed governing law jurisdiction.

Nonetheless, no Maryland appellate court has yet opted to adopt the modern approach. The Court of Appeals refused to do so in American Motorist Insurance Co. v. ARTRA Group, Inc.,⁴ Of course, regardless of whether the modern approach or lex loci contractus is applied, drafters would prefer not to subject their clients to the vagaries and uncertainty of either approach. The Court of Special Appeals has explicitly stated that parties to a contract may agree as to the jurisdiction that will provide the governing law of their agreement unless there is no reasonable basis for the choice, or the choice of jurisdiction violates a fundamental policy of the state.⁵

Some possible governing law provisions follow:

This Agreement was made in the State of Maryland, and shall be governed by, construed, interpreted and enforced in accordance with the laws of the State of Maryland.

This is a standard, straight forward choice-of-law clause of the type found in many contracts. Note that this example provides that the agreement was "made in the State of Maryland." If both parties are in Maryland and the contract is to be performed in Maryland, such language is clearly appropriate. If the other party is in a different state, the drafter may want to include this statement as a way of expressing the parties' respective acknowledgment as to where the contract has been "made." The drafter may want to take the matter a step further, as in:

This Agreement is made and entered into and is to be performed in, and shall be governed by and construed in accordance with, the laws of the State of Maryland.

Other alternatives not referencing where the agreement was made or will be performed include:

• It is the intent of the parties hereto that all questions with respect to the construction of this Agreement and the rights, duties, obligations and liabilities of the parties shall be determined in accordance with the applicable provisions of the laws of the State of Maryland.

• This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Maryland.

• This Agreement is made pursuant to and shall be governed, construed and enforced in all respects and for all purposes by and in accordance with the laws of the State of Maryland.

Perhaps the most straight-forward example follows:

This Agreement shall be interpreted and construed under the laws of the State of Maryland.

But what about cases where the courts of the selected jurisdiction would apply the law of a foreign jurisdiction? The so-called doctrine of renvoi is a principle by which a court, in looking to foreign law pursuant to a governing law provision, adopts all of the rules of the foreign jurisdiction, including the foreign jurisdiction's conflict of law rules. As a result, the application of the governing law provision may refer the court back to the law of the forum state. For example, suppose two Pennsylvania residents execute a contract to be performed in Pennsylvania, but which includes a governing law provision designating the law of Maryland...