|
You could be managing construction of a high-rise project
in New York City, a power plant in India or a paper mill
in Brazil, and on any of those projects your legal disputes
could be subject to resolution under New York law. While
it is common to provide that domestic construction project
disputes are to be governed by the law of the place where
the project is located, often on large, international projects
and on project-financed jobs, the contracts are subject
to the law of New York, where the financing parties and
their legal counsel often are located.
Decisions
from New York courts on construction-industry-related topics
will be summarized here periodically. This time, a special
report is presented on enforcement of New York choice of
law clauses in contracts.
(This article is reprinted with permission from the
January 18, 2001, edition of the New York Law Journal)
Thelen Reid Brown Raysman & Steiner LLP
When
parties to a commercial contract involving at least $250,000
select New York law to govern their agreement, which otherwise
has no relationship with New York State, will a federal
court sitting in diversity in New York honor their choice
of law?
Under
§5-1401 of the New York General Obligations Law, the
parties' governing law clause must be enforced, regardless
whether the underlying transaction bears a reasonable relationship
to New York State. Despite this statutory mandate, several
federal courts have persisted in requiring a sufficient
connection between the agreement at issue and New York before
upholding a contractual stipulation of New York law.
In
a recent opinion, Lehman Brothers Commercial Corp. v.
Minmetals International Non-Ferrous Metals Trading Co.,
the U.S. District Court for the Southern District of New
York explained why such contacts remain relevant to the
enforceability of a governing law clause. 1/ Although
§5-1401 supersedes New York common law conflicts principles,
it still must remain within the bounds of the U.S. Constitution.
In Lehman Brothers, the Southern District described
the nature of the constitutional limits on governing law
clauses in both interstate and international agreements.
The court's opinion, however, expressly leaves open the
question whether a contractual choice of New York law will
satisfy constitutional requirements absent any connection
between the transaction and New York other than the governing
law clause itself, thereby perpetuating the very uncertainty
over the enforceability of such clauses that §5-1401
was meant to eliminate.
At
common law, New York state courts generally enforced an
express choice-of-law clause, provided the underlying transaction
had some reasonable relationship with the state named in
the clause. In determining the sufficiency of this relationship,
courts have applied a variety of tests, some more stringent
than others but all requiring at least some contacts between
the agreement and New York. 2/
Federal
courts sitting in diversity in New York traditionally applied
these choice of law rules in determining the enforceability
of a contractual provision of New York law to govern an
agreement, as required under a Supreme Court decision. 3/
Many federal courts also looked to the common-law
principles set forth in the Restatement (Second) Conflict
of Laws §187 (2), which limit the effect of a choice-of-law
clause not only where a substantial relationship between
the contract and the law of the chosen state is lacking
but also where the application of the chosen state's law
would offend a fundamental policy of the state bearing a
materially greater interest in the issue. 4/
In
1984, the New York Legislature enacted §5-1401, which
modifies New York's common law conflicts-of-law doctrine
by abandoning the reasonable relationship test for major
commercial contracts. Section 5-1401 requires enforcement
of a clause selecting New York law to govern a commercial
contract involving at least $250,000 "whether or not
such contract… bears a reasonable relation to this
state." 5/ The statute excludes only contracts
for "labor or personal services" or relating to
"personal, family or household services," as well
as certain agreements specified under UCC §1-105 (2).
6/
The
purpose of §5-1401, according to its legislative history,
is to enhance New York's position as one of the world's
major financial and commercial centers. 7/
Proponents of the statute hoped that it would encourage
parties to select New York law to govern major commercial
contracts by requiring enforcement of their choice regardless
of the contract's relationship with the state. 8/
Section 5-1401 thereby would afford parties the certainty
and predictability that are essential to international commerce.
Or so the legislators thought.
Federal
courts in New York have been the primary forum for choice-of-law
disputes involving §5-1401. In the decade and a half
since the statute's enactment, these courts in most cases
have continued to require an adequate relationship between
an agreement and New York before honoring a choice of New
York law to govern the agreement.
The
Eastern District, for example, repeatedly has indicated
that §5-1401 will not control if the transaction at
issue lacks a reasonable relationship with New York. 9/ The
court has stated that despite §5-1401, a choice of
law clause is enforceable only "so long as there is
a reasonable basis for the choice or the state whose law
is selected has sufficient contacts with the transaction."
10/
Other
federal courts have not read this limitation into §5-1401
so bluntly, but they have implied that it exists by performing
a contacts analysis even in the face of the statute. 11/
In several cases, these courts have upheld contractual selections
of New York law on the alternative grounds that §5-1401
mandates enforcement of such a clause and that New York
state has the most significant relationship with the transaction.
12/ Such reasoning intimates that absent such
a relationship, the statute alone may be an insufficient
basis on which to obtain a New York choice of law.
In
Lehman Brothers, the Southern District explained
the basis of the limits on §5-1401. At issue was the
enforceability of a contractual selection of New York law.
Plaintiffs, affiliates of a global investment bank headquartered
in New York, had entered into a foreign exchange agreement
with defendant, an international trading company headquartered
in China. Plaintiffs sued defendants for breach of the parties'
agreement, and defendants moved to dismiss the complaint,
arguing that the court should set aside the parties' selection
of New York law in favor of China's licensing requirements.
Defendants
contended that under the common law principle set forth
in Restatement §187 (2) (b), the agreement's governing
law clause was unenforceable because application of New
York law would offend China's interest in regulating its
foreign exchange. The court rejected this argument, reasoning
that §5-1401 contains no exceptions for violations
of another jurisdiction's public policy. The court ruled
specifically that "Section 5-1401 is not limited by
Restatement §187 (2)." 13/
In
rejecting defendant's public policy argument under the Restatement,
the Lehman Brothers court cautioned that although §5-1401
supersedes common-law conflicts principles, "it must
still remain within constitutional bounds." 14/
In the context of an interstate agreement, a court's
application of its own state's law to transactions affecting
another U.S. state is limited, in particular, by both the
Due Process Clause and the Full Faith and Credit Clause.
15/
Earlier
federal court decisions construing §5-1401 indicate
that enforcement of a contractual selection of New York
law will satisfy these constitutional restrictions when
the contract bears at least some relationship to New York.
Courts have found sufficient contacts, for example, when
a party was domiciled in New York and the agreement at issue
was executed in this state and, alternatively, when New
York was both the site of the contract's negotiation and
the location of one party's principal place of business.
16/
The
remaining question, equally important, is whether such a
governing law clause comports with the Constitution absent
any connection between the agreement and New York state
other than the parties' choice of New York law. Section
5-1401's drafters presumed that the very selection of New
York law to govern a contract, by virtue of the contracting
parties' mutual consent, provided a sufficient relationship
between New York state and the transaction to satisfy constitutional
requirements. 17/
The
Lehman Brothers court declined to address this issue,
however. Instead, it found that the parties' contract had
sufficient contacts with New York as a result of plaintiff's
New York headquarters and the occurrence of at least some
payments and transactions in New York. While it speculated
that the parties' choice of New York law alone "might"
provide enough contacts to satisfy the Constitution, the
court ultimately left the question for another day, stating
that "[i]t remains to be seen whether a state with
no connection to either the parties or the transactions
could apply its own law, consonant with the Full Faith and
Credit Clause, when doing so would violate the important
public policy of a more interested state." 18/
When
a court applies the law of its own state to transactions
that affect foreign nations, constitutional limits are "less
clear, but perhaps more controversial," according to
the Lehman Brothers court. The constitutional boundaries
on choice-of-law clauses in international agreements, like
the one at issue in Lehman Brothers, derive from
the doctrine of comity. 19/
The
U.S. Supreme Court has defined comity as "the recognition
which one nation allows within its territory to the legislative,
executive or judicial acts of another nation…."
20/ It is a traditional but rather vague concept
that "lies somewhere in between an absolute international
obligation and a mere courtesy. 21/ According
to the New York Court of Appeals, comity "is not a
rule of law, but one of practice, convenience and expediency
[which expresses] one State's entirely voluntary decision
to defer to the policy of another." 22/
Federal
courts in New York have set aside contractual selections
of New York law in favor of a foreign state's law based
upon comity. For example, in Allstate Life Insurance
Co. v. Linter Group Ltd., the U.S. Court of Appeals
for the Second Circuit affirmed the dismissal of securities
actions in New York on the grounds of comity in recognition
of liquidation proceedings in Australia despite the presence
of a clause in the parties' agreement that identified New
York as a forum and provided for New York law to govern
the agreement. 23/ The court stated that "the
presence of such clauses… does not preclude a court
from granting comity where it is otherwise warranted."
24/ The Allstate opinion made no reference
to §5-1401, leaving the effect of the comity doctrine
on this statute uncertain.
The
Lehman Brothers opinion suggests that §5-1401
mandates enforcement of a contractual selection of New York
law without deference to foreign public policy - at least
where there is some connection between the underlying transaction
and New York. The court recognized a potential conflict
between China's interest in regulating its foreign exchange
and New York's interest, as well as that of the international
community, in the orderliness and predictability afforded
by a choice-of-law clause. The court concluded that it "need
not choose" from among these competing interests, however,
"for the New York State Legislature has already done
so by enacting §5-1401." 25/ As a
result, the court enforced the parties' governing law clause
without weighing the state and foreign policies at stake.
The
Lehman Brothers court did not go so far as to hold
that §5-1401 altogether forecloses a court from setting
aside a contractual selection of New York law based on comity,
however. To its conclusion that §5-1401 required enforcement
of the parties' governing law clause, the court added the
qualifying language "absent any constitutional restrictions
on that enforcement." 26/ The court found
that no such restrictions were apparent in this case, noting
that the parties and transactions bore at least some connection
to New York. It remains open to debate, however, whether
a federal court would enforce a contractual selection of
New York law under §5-1401 without regard to comity
when no such contacts exist.
Conclusion
Despite
§5-1401's requirement that a contractual provision
for New York law as governing law be enforced regardless
of whether the agreement bears a reasonable relationship
to this state, a federal court sitting in diversity in New
York still may set aside the parties' choice when such a
relationship is lacking. In Lehman Brothers, the
Southern District explains that these contacts are necessary
to satisfy constitutional requirements, but it leaves future
contracting parties to guess whether their selection of
New York law will be enforced when the agreement's only
connection with New York is the parties' choice of governing
law.
If you would like to receive legal reports and updates
more quickly, by e-mail, click
here and fill out the mailing list form.
For more information about the issues covered in this report, please contact Richard P. Dyer in our New York office at 212-895-2117 or at rpdyer@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
ENDNOTES
1/
No. 94 Civ. 8301, 2000 WL 1702039 (S.D.N.Y. Nov. 13,
2000).
2/
See, e.g., Intercontinental Planning, Ltd. V. Daystrom,
24 N.Y.2d 372, 248 N.E.2d 576, 300 N.Y.S.2d 817 (1969) ["paramount
interest"]; Haag v. Barnes, 9 N.Y.2d 554, 175
N.E.2d 441, 216 N.Y.S.2d 65 (1961) ["most significant
contacts"]; A.S. Rampell, Inc. v. Hyster Co.,
3 N.Y.2d 369, 144 N.E.2d 371, 165 N.Y.S.2d 475 (1957) ["reasonable
relation"]; Rubin v. Irving Trust Co., 305 N.Y.
288, 113 N.E.2d 424 (1953) ["center of gravity"].
3/
See Klaxon Co. v. Stentor Elec. Mfg. Co., 313
U.S. 487, 61 S. Ct. 1020, 84 L.Ed. 1477 (1941).
4/
See, e.g., S. Leo Harmonay, Inc. v. Binks Mfg.
Co., 597 F. Supp. 1014 (S.D.N.Y. 1984), aff'd, 762 F.2d
990 (2d Cir. 1985); So. Int'l Sales Co., Inc. v. Potter
& Brumfield Div. of AMF Inc., 410 F. Supp. 1339
(S.D.N.Y. 1976).
5/
N.Y. Gen. Oblig. Law §5-1401 (l).
6/
Id.
7/
Memorandum of Legislative Representative of City of New
York, reprinted in 2 McKinney's 1984 Session Laws of New
York 3288 (1985) ("Legislative Memorandum").
8/
Id.
9/
See, e.g., Hundertmark v. Boston Professional Hockey
Ass'n, No. CV-93-1369, 1996 WL 118538 (E.D.N.Y. Mar.
7, 1996); In re Joint E. & S. Dist. Asbestos Litigation,
129 B.R. 710 (E. & S.D.N.Y. 1991), vacated on other
grounds, 982 F.2d 721 (2d Cir. 1992).
10/
Hundertmark, 1996 WL 118538 at *4.
11/
See, e.g., Philips Credit Corp. v. Regent Health Group,
Inc., 953 F. Supp. 482 (S.D.N.Y. 1997); Herman Miller,
Inc. v. Thom Rock Realty Co., L.P., 849 F. Supp. 911
(S.D.N.Y. 1994), aff'd in part, rev'd in part on other grounds,
46 F.3d 183 (2d Cir. 1995); Flexi-Van Leasing, Inc. v.
Pharos Lines, S.A., 808 F.Supp. 237 (S.D.N.Y. 1992).
But see Bank of Am. Nat'l Trust and Savings Ass'n v.
Envases Venezolanos, S.A., 740 F. Supp. 260 (S.D.N.Y.
1990), aff'd, 923 F.2d 843 (2d Cir. 1990) [enforcing parties'
selection of New York law under §5-1401 without contacts
analysis].
12/
Id.
13/
Lehman Brothers, 2000 WL 1702039 at *13.
14/
Id.
15/
Id.
16/
Flexi-Van Leasing, 808 F. Supp. at 253-54;
Philips Credit, 953 F. Supp. at 503-04.
17/
Memorandum of Legislative Representative of City of New
York, reprinted in 2 McKinney's 1984 Session Laws of New
York 3289 (1985) ("Legislative Memorandum").
18/
Lehman Brothers, 2000 WL 1702039 at *13.
19/
Id.
20/
Hilton v. Guyot, 159 U.S. 113, 163-64 (1895).
21/
Philips Med. Sys. Int'l B.V. v. Bruetman,
8 F.3d 600, 604 (7th Cir. 1993); Lehman Brothers,
2000 WL 1702039 at *13.
22/
Erlich-Bober & Co. v. Univ. of Houston, 49 N.Y.2d
574, 404 N.E.2d 726, 427 N.Y.S.2d 604, 608 (1980).
23/
994 F.2d 996 (2d Cir. 1993), cert. denied, 510 U.S.
945, 114 S.Ct. 386, 126 L.Ed.2d 334 (1993).
24/
Id. at 1000.
25/
Lehman Brothers, 2000 WL 1702039 at *14.
26/
Id.
©2001 Thelen Reid Brown Raysman & Steiner LLP
|
