Anti-Comity and N.Y. General Obligations Law 5-1401

Not many statutes can fairly be described as bruisers. Section 5-1401 of New York General Obligations Law is an exception. In the immortal words of The Bachelor: “Section 5-1401 didn’t come here to make friends.”

The purpose of Section 5-1401 is to generate business for New York lawyers and maintain New York’s status as a commercial center. It seeks to accomplish this goal by making it easy for parties with no connection to New York to choose the law of that state to govern their high-dollar-value commercial agreements. While there are some positive elements of Section 5-1401—discussed at greater length below—it has the potential to infringe upon the rights and prerogatives of other sovereigns. A recent report and recommendation by Magistrate Judge Valerie Figueredo in the U.S. District Court for the Southern District of New York in Louisiana Revitalization Fund LLC v. Starr Surplus Lines makes this point very clearly.

The Case

The plaintiffs in Louisiana Revitalization Fund were entities that owned real property in Louisiana. After the property was damaged by Hurricane Ida in 2021, the plaintiffs filed a claim with their insurer, Starr Surplus Lines Insurance Company (“Starr”). The amount of money that Starr paid out under the policy was not enough for the plaintiffs to make the necessary repairs. Accordingly, the plaintiffs sued Starr for breach of contract in the U.S. District Court for the Eastern District of Louisiana. Starr transferred the suit to New York pursuant to a New York forum selection clause. The parties then turned their attention to choice of law.

The plaintiffs argued that their claims against Starr were governed by Louisiana law because the insured property was located in Louisiana and the policy had been made in Louisiana. Starr argued that the claims were governed by New York law by virtue of a New York choice-of-law clause in the policy. The question presented in the plaintiffs’ motion for summary judgment was whether this choice-of-law clause was enforceable.

In most cases, New York courts will look to the common law test set forth in Section 187 of the Restatement (Second) of Conflict of Laws to evaluate whether a choice-of-law clause should be given effect. In this case, however, the court applied Section 5-1401. To appreciate the significance of this doctrinal move, it is useful to consider how the analysis plays out under each test. We begin with Section 187.

Restatement 187

Section 187(2) provides that a choice-of-law clause should not be enforced if doing so would be (1) contrary to a fundamental policy of a state with (2) a materially greater connection to the dispute and (3) whose law would govern the contract absent the clause. On the facts presented in Louisiana Revitalization Fund, the New York choice-of-law clause failed this test.

First, the State of Louisiana has a statute on the books specifically directing its courts to disregard choice-of-law clauses selecting the laws of other states when they appear in insurance policies.

Second, Louisiana has a materially greater connection to this particular dispute than does New York. The plaintiffs are based in Louisiana. The policy was issued in Louisiana. The policy covers property in Louisiana.

Third, Louisiana’s law would have applied to resolve this dispute in the absence of the choice-of-law clause. The contract was delivered in Louisiana and the insured real property is located in Louisiana.

Had the court applied Section 187, it would have held that the New York choice-of-law clause was not enforceable. We know this because the court actually performed a Section 187 analysis and told us that’s what it would have done. The court concluded that applying New York law on these facts would violate a fundamental policy of Louisiana, that Louisiana had a materially greater interest in applying its law, and that it would have applied Louisiana law but for the choice-of-law clause. At the end of the day, however, the court correctly held that the common-law test for enforceability in Section 187 did not control in this case. This test had been superseded by a statute—Section 5-1401.

Section 5-1401

Under Section 5-1401, a choice-of-law clause selecting the laws of New York must be enforced when (1) the contract is a commercial contract (as opposed to a consumer or employment contract), and (2) the contract relates to a transaction worth more than $250,000 in the aggregate. Applying this test, the court held that the insurance policy issued by Starr fell within the scope of the statute because it was a commercial contract and because the properties covered by the policy were valued at roughly $22 million. Having concluded that the statute applied, the court had no choice but to enforce the New York choice-of-law clause. As a federal court sitting in diversity, it must follow the choice-of-law rules of the state in which it sits.

In reaching this conclusion, the court rejected two arguments made by the plaintiffs. First, the plaintiffs argued that Section 5-1401 did not apply to insurance contracts. The court deemed this argument unpersuasive because nothing in the text of the statute purported to exclude insurance contracts. It also cited the absence of any case law from the New York state courts suggesting that insurance contracts did not fall within the ambit of the statute. Finally, it noted precedent from the SDNY holding that Section 5-1401 applied to insurance policies.

Second, the plaintiffs invoked a prior decision by the New York Appellate Division, North American Elite Insurance Co. v. Space Needle, LLC, where the court refused to enforce a choice-of-law clause and a forum selection clause choosing New York in light of a statutory prohibition enacted by the state of Washington purporting to “void” such provisions in insurance contracts. The plaintiffs argued that the same result should obtain on these facts because the statutory prohibition on enforcing choice-of-law clauses in Louisiana was quite similar to the one in Washington. The court declined to accept this argument. It concluded that this decision by the Appellate Division failed to meaningfully engage with several other decisions by the New York Court of Appeals, including one decided just a few months ago in the context of a dispute about Venezuelan bonds. The court read these decisions from the highest court in New York to require that Section 5-1401 be given a broader scope than the one assigned it in North American Elite Insurance.

Effect on Other Sovereigns

It is useful to take a step back and appreciate the effect of Section 5-1401. In the spirit of maintaining New York’s status as a premier commercial jurisdiction, that state directed its courts to enforce choice-of-law clauses selecting New York law even when (1) the contracting parties had no connection to New York, (2) another state’s law would have been applied but for the choice-of-law clause, (3) this other state had a materially greater connection to the dispute, and (4) applying New York law would be contrary to a fundamental policy of the other state.

Conflict of laws scholars often speak of “comity” among nations and the desire to respect the laws of other jurisdictions as a matter of mutual respect. The decision in Louisiana Revitalization Fund highlights the extent to which Section 5-1401 operates as an anti-comity device. This statute empowers private actors to evade mandatory laws enacted by other sovereigns.

One could argue that the Louisiana statute invalidating choice-of-law clauses in certain insurance contracts is itself an anti-comity device. The key difference, I would argue, is that the Louisiana statute is seeking to regulate people and contracts with a strong connection to Louisiana. It is one thing for Louisiana to insist that insurance policies issued to Louisiana residents with respect to real property in Louisiana be governed by Louisiana law. It is quite another for New York to enact a statute that expressly permits parties with no connection to New York to avoid Louisiana law on issues that the Louisiana legislature views as fundamental.

There are, to be sure, a number of countervailing considerations. Because the statute only applies to high-dollar-value transactions, New York’s interests will only run roughshod over the interests of other sovereigns in a narrow range of cases. The decision to carve out employment agreements from the ambit of Section 5-1401 ensures that workers will not be deprived of protections conferred by other jurisdictions. There is also value in certainty. While Section 187 does an admirable job of balancing the interests of one state against the other, it can sometimes be difficult to predict the outcome of an analysis under Section 187. The outcome of an analysis under Section 5-1401, by comparison, is very easy to predict.

Finally, and perhaps most importantly, Section 5-1401 validates the concept of party autonomy by giving parties nearly unlimited power to choose New York law. While one party may subsequently come to regret this choice — as apparently happened in Louisiana Revitalization Fund — most contracting parties would prefer to live in a world where they have the autonomy to pick the laws that will be applied to their high-dollar value commercial contracts. Whether this ringing endorsement of party autonomy represents a positive development will, in the final analysis, likely depend on whether one is the State of Louisiana or the Starr Surplus Lines Insurance Company.

Conclusion

While these considerations serve to mitigate the harshness of the anti-comity critique, there is no denying that Section 5-1401 has the potential to infringe on the rights of other sovereigns. In this particular case, Louisiana was on the losing end. In other recent cases, the sovereigns impacted were Venezuela and Brazil. While Section 5-1401 helps New York maintain its primacy as a commercial center, it limits the ability of other states to apply their mandatory law to certain agreements and transactions occurring within their borders. This advances the interests of the state of New York. It sits uneasily, however, with traditional notions of comity.