It is rare today to see a contract that does not contain a choice of law clause. Today’s blog covers choice of law for those transactions that exceed $50,000 but are less than $1,000,000 and do not have a specific statute that determines choice of law. Transactions under $50,000 must meet the additional requirements set out in Texas Civil Practice and Remedies Code Section 35.53 and transactions that are at least a $1,000,000 and meet the definition of a qualified transaction are governed by Chapter 271 of the Texas Civil Practice and Remedies Code. Now a short discussion about those general run-of-the-mill choice of law clauses seen in other transactions and how to analyze whether the choice of law can be enforced.
The Texas Uniform Commercial Code § 1.301(a) allows parties, with certain specific exceptions, to agree that the law of Texas or another state or nation shall govern their rights and duties. See Tex. Bus. & Comm. Code ann. § 1.301(a). Section 1.301(a) imposes a reasonable relationship test for determining which state law applies. Tex. Bus. Comm. Code ann. § 1.301(a). Section 4.102(b) of the Texas U.C.C. dealing with bank deposits and collections supports the application of a different state’s law to promote uniformity and states that the liability of a bank for action or non-action with respect to an item handled by it for purposes of presentment, payment and collection is governed by the law of the place where the bank is located. Moreover, Section 4.103 of the Texas U.C.C. expressly allows parties to change the provisions of Article 4 by agreement so as to change the choice of law clause.
The parties’ contractual choice of law will be given effect if the contract bears a reasonable relationship to the chosen state and no countervailing public policy of the forum demands otherwise. The state in which a company has its principal place of business has been found to have a reasonable relationship to the parties and the transaction. My Café CCC, Ltd. v. Lunchstop, Inc., 107 S.W.3d 860, 865 (Tex. App. 2003, no pet.).
The policy of the State of Texas is to allow parties to contract for the choice of law they want to govern if the transaction bears a reasonable relationship to the chosen state. See Tex. Bus. & Comm. Code ann. 1.301(a). In the multi-jurisdictional context, Texas law also allows parties to resolve uncertainty as to the choice of law by including a choice of law provision in their agreement. Chase Manhatten Bank, N.A. v. Greenbriar N. Section II, 835 S.W.2d 720, 723 (Tex. App.-Houston [1st Dist.] 1992, no writ). Where the parties contract includes a choice-of-law provision that selects the law of a jurisdiction bearing a substantial relationship to the parties or their transaction, the parties contractual obligations are governed by the law chosen by the parties unless:
(1) there is a state with a more significant relationship to the transaction,
(2) applying the chosen law would contravene a fundamental policy of the state, and
(3) the state has a materially greater interest in the determination of the particular issue.
See Chesapeake Operating, Inc. v. Nabors Drilling USA, Inc., 94 S.W.3d 163, 169-170 & n.11 (Tex. App.-Houston [14th Dist.] 2002, no pet.) (citing Restatement (Second) Conflict of Laws §187(1)(2), 188).
A trial court’s determination of choice of law is a question of law and is reviewed de novo. Cudd Pressure Control v. Sonat Exploration, 202 S.W.3d 901, 904 (Tex. App.-Texarkana 2006), affirmed, 271 S.W.3d 228 (Tex. 2008). The underlying principal in any choice of law analysis is to protect the parties’ expectations. Id. at 904. Texas has applied Section 187 of the Restatement (Second) of Conflict of Laws to contractual choice of law provisions to determine the law that applies. Section 187 of the Restatement (Second) of Conflict of Laws states as follows:
“(1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.
(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either
(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or
(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of section 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.
(3) In the absence of a contrary indication of intention, the reference is to the local law of the state of the chosen law.”
See DeSantis v. Wachenhut Corporation, 793 S.W.2d 670, 677-78 (Tex. 1990).
As stated by the Supreme Court of Texas in the DeSantis opinion, parties may agree as to the law of the state to apply to avoid uncertainty as to which law will govern the rights, obligations and construction of the parties’ contract because an understanding of those rights and obligations depends in part upon the certainty with which they may predict how the law will interpret and enforce the agreement. See DeSantis v. Wachenhut Corporation, 793 S.W.2d 670, 677-78 (Tex. 1990), citing, E. Scoles & P. Hay, CONFLICT OF LAWS 632 (1984); Reese, Choice of Law in Torts and Contracts and Directions for the Future, 16 COLUM. J. TRANSNAT’L L. 1, 21 (1977). Judicial respect for the parties’ choice advances the policy of protecting their expectations and the concept is referred to as the “party autonomy” rule. See DeSantis v. Wachenhut Corporation, 793 S.W.2d 670, 677-78 (Tex. 1990), citing, R. WEINTTAUB, COMMENTARY ON THE CONFLICT OF LAWS 269-271 (1971). However, the Supreme Court of Texas recognized (and the Texas Legislature has adopted) limits on the freedom of choice by stating that parties cannot require that a contract be governed by the law of a jurisdiction which has no relation whatever to them or their agreement nor can they by agreement circumvent public policy of the state law of which ought to otherwise to apply. See DeSantis v. Wachenhut Corporation, 793 S.W.2d 670, 677-78 (Tex. 1990); Texas U.C.C. 1.301. However, when a contract bears a reasonable relation to the laws of a given state, the application of that state’s law agreed to by the parties should be enforced. See Chase Manhattan Bank, N.A. v. Greenbriar North Section II, 835 S.W.2d 720, 724 (Tex. App.-Houston 1st Dist.] 1992, no writ); First Commerce Realty Investors v. K-F Land Co., 617 S.W.2d 806, 808-809 (Tex. Civ. App.-Houston [14th Dist.] 1981, writ ref’d n.r.e.) (citing Restatement (Second) 187). Both the Court in Chase Manhattan Bank and First Commerce Realty have held that the reasonable relationship test is satisfied where a party’s principle place of business and the place of negotiation, execution, and performance of a contract coincide in the state whose law is contractually chosen by the parties.
The opinions in this blog are the author’s. Comments, replies and suggestions can be made by sending an email to John@jrjoneslaw.com.