The Many Uses of the Choice-of-Law Clause

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In prior posts, I have written about the things that a forum selection clause can and cannot do. In this post, I do the same for choice-of-law clauses. Among other things, a choice-of-law clause may be invoked to:

1. Select a law to govern the contract and claims related to the contract;
2. Provide support for the assertion of personal jurisdiction over a defendant;
3. Justify (in part) the dismissal of a case on the basis of forum non conveniens; and
4. Waive the sovereign immunity of foreign states.

Each of these functions is discussed below.

Choice of Law

The most obvious purpose of a choice-of-law clause is to select a law to govern the contract and (occasionally) claims with some connection to the contract. In this capacity, the clause facilitates settlement because it identifies the law that will be applied to resolve any future dispute. It also reduces the cost of dispute resolution by making it unnecessary for the court to conduct a choice-of-law analysis should a dispute wind up in litigation.

The added uncertainty posed by transnational—as opposed to merely interstate—disputes helps to explain why choice-of-law clauses may be found in a wide array of international agreements. Loyal readers will recall that we have previously discussed the role played by choice-of-law clauses dim sum bonds, bonds issued by the Venezuelan government, maritime insurance contracts, purchase orders, and prenuptial agreements.

Personal Jurisdiction

The choice-of-law clause, standing alone, cannot justify the assertion of personal jurisdiction. The existence of such a clause does, however, make it more likely that the court named in the clause will assert personal jurisdiction over an out-of-state defendant. As the U.S. Supreme Court observed in Burger King Corp. v. Rudzewicz, the act of signing a contract governed by the laws of a particular state serves to “reinforce” the defendant’s “deliberate affiliation” with that State. It also supports the idea that the defendant has “purposefully availed” himself of the “benefits and protections” of the chosen state’s laws for purposes of the personal jurisdiction analysis.

In practice, it is rare for a choice-of-law clause to play a dispositive role on the question of personal jurisdiction in transnational cases. Many international contracts contain forum selection clauses as well as choice-of-law clauses and there is no need for the courts to consult the latter when a defendant has expressly consented to personal jurisdiction via the former. Even when a choice-of-law clause choosing the law of U.S. state is considered in isolation, moreover, courts are reluctant to assert jurisdiction over a foreign defendant in the absence of significant additional contacts with the state. So while the choice-of-law clause may serve as a feather on the scale in a personal jurisdiction analysis, it is the unusual case where its presence will change the outcome.

Forum Non Conveniens

When choice-of-law clause selects the law of a foreign nation, it lends support to the notion that the forum chosen by the plaintiff is inconvenient. In Piper Aircraft Co. v. Reyno, the U.S. Supreme Court observed that “[m]any forum non conveniens decisions have held that the need to apply foreign law favors dismissal.” In the intervening decades, a number of lower courts have cited the possibility that a claim may be governed by foreign law as a basis for dismissing a claim on the basis of forum non conveniens. When  a contract contains a foreign choice-of-law clause, in short, a U.S. court is more likely to conclude that the parties’ dispute should be resolved in the courts of a foreign country.

Waiving Foreign Sovereign Immunity

On its face, a choice-of-law clause selecting the laws of a state in the United States may seem irrelevant to the determination as to whether a foreign nation has waived its sovereign immunity. Over the years, however, a number of U.S. courts have held that a choice-of-law clause may, in fact, function as an implied waiver of sovereign immunity. In each instance, the courts cited the following sentence in the House Report prepared in connection with the passage of the Foreign Sovereign Immunities Act:

With respect to implicit waivers, the courts have found such waivers in cases where a foreign state has agreed to arbitration in another country or where a foreign state has agreed that the law of a particular country should govern a contract (emphasis added).

In a prior post, Ingrid Brunk and I explained why this sentence cannot bear the weight that the courts have placed on it. There is nothing in the text of the typical choice-of-law clause that references sovereign immunity. There is likewise nothing in the text of the FSIA directing courts to treat choice-of-law clauses as de facto waivers of sovereign immunity. To date, however, the courts have not altered their position based on our arguments. The upshot is that a U.S. choice-of-law clause may in some cases function to strip away the sovereign immunity of foreign states when they are named as defendants in the United States.