Throwback Thursday: Choice-of-Law Clauses Through the Lens of Contract

The academic literature on choice-of-law clauses may be usefully sorted into three boxes.

Articles in the first box seek to ascertain when, exactly, the courts will enforce these clauses. This body of literature looks to case decisions, treatises, statutes, and works such as the Restatement (Second) of Conflict of Laws in an attempt to determine just how much autonomy contracting parties really have. The authors of these papers are principally conflict-of-laws scholars.

Articles in the second box seek to ascertain what jurisdiction is selected in choice-of-law clauses. This body of literature is empirical in its orientation. The authors of papers in this box look at many thousands of choice-of-law clauses across a range of agreements, identify the jurisdictions chosen in these clauses, and then explain as best they can why some jurisdictions are chosen more frequently than others. The authors of these papers are principally empiricists.

Articles in the third box seek to ascertain the precise meaning of words and phrases in the choice-of-law clause as a matter of contract law. This body of literature looks to the text of actual contracts, interviews with contract drafters, and case decisions interpreting the contract in an attempt to discern the intent of the contracting parties as reflected in the text of their agreement.  The authors of these papers are principally contracts scholars.

Historically, most articles about choice-of-law clauses were written by conflict-of-laws scholars. It should come as little surprise, therefore, that overwhelming majority of articles written between 1900 to 1980 sort neatly into the first box. In 1980, however, a new voice began urging scholars to pay more attention to choice-of-law clauses as contracts. That new voice did not belong to a law professor. It belonged to a practicing attorney in New York named Michael Gruson.

Gruson was born in Berlin in 1936 and was raised in Germany. He obtained an LLB from Columbia Law School in New York and joined the law firm of Shearman & Sterling in 1965. Over the course of a long career, he became an expert in foreign banking and securities law, represented companies from three different continents, and helped promote commercial relations between the United States and Germany. Gruson passed away in 2005. (His obituary is here.) Along the way, Gruson wrote a paper that helped to reframe the scholarly literature as it relates to choice-of-law clauses.

Gruson’s article, Governing Law Clauses in Commercial Agreements-New York’s Approach, was published in 1980. While he devotes a significant amount of the article to the question of enforceability, Gruson spends the first four pages analyzing these provisions from the perspective of a contract drafter. With respect to the choice of a governing jurisdiction, for example, Gruson dismisses the notion that contract drafters use choice-of-law clauses to select law that is substantively favorable to their interests. Instead, he argues that drafters are motivated by familiarity and habit:

Why do parties to an agreement select a particular governing law? It has been frequently said that parties like to stipulate the law which gives them the most advantages. This is a fiction. In the author’s experience, there are two reasons why a specific law is chosen. First, often a party to an international transaction retains the lawyer in whom it has confidence irrespective of the jurisdiction in which he practices. If one party has the bargaining power to determine the applicable law, the legal system of his lawyer will be chosen. Secondly, parties tend to prefer the law of the jurisdiction in which they reside or in which they customarily do business. This desire is usually not based on any deep knowledge of this law, but rather on a vaguely felt preference for dealing with what appears to be familiar rather than with the unfamiliar (p. 325).

Gruson also acknowledged that the parties will sometimes select the law of a well-established commercial jurisdiction like New York due to the well-developed character of that law:

Because of New York City’s role as a leading international financial center, New York lawyers are frequently involved in multi-jurisdiction transactions which may have little or no contact with New York. If a New York lawyer is asked to draft the agreements for such transactions, his client usually expects him to provide for the application of his own law, that of New York. The client may also hope to see New York law stipulated because of the widespread belief that New York has a well-developed commercial law and that New York judges are competent, free from prejudice against foreigners and accustomed to handling commercial cases. This widely held conviction is the reason why parties to international agreements having little or no connection with New York so frequently agree on New York law as the governing law (p. 325).

Up until this point, so far as can be determined, very few of the scholars writing about choice-of-law clauses had ever drafted an actual choice-of-law clause for an actual client. Gruson’s experiences as a practicing attorney and a contract drafter thus informed his insights into the factors that motivate the contracting parties to select one jurisdiction over another in their choice-of-law clauses.

Later in the paper, Gruson turns his attention to the issues of contract interpretation. He notes the existence of an ambiguity as to whether the word “laws” in a generic choice-of-law clause refers to the whole law or the internal law of the chosen jurisdiction. He then comments that, in his experience, the parties nearly always intend that the internal laws of the chosen jurisdiction shall govern. (He expanded on this argument in a subsequent article, Governing Law Clauses Excluding Principles of Conflict of Laws, which was published in 1993.) Gruson also notes the existence of an ambiguity as to whether the use of the word “laws” operates to select the laws of the chosen jurisdiction at the time the contract was signed or the time of the litigation. He takes the position that the court should apply the law at the time of the litigation.

In working through these issues, significantly, Gruson is analyzing choice-of-law clauses as contracts. While the notion that such clauses should be treated as contracts may seem obvious, Gruson’s work—informed by his experience as a practicing attorney—marks an important moment in a broader shift away from an older scholarly tradition that viewed these provisions primarily through the lens of enforceability and conflict of laws. His work helped to set the stage for a newer tradition that views choice-of-law clauses as contract provisions that are subject to the usual vagaries, idiosyncrasies, and occasional irrationalities of the contract drafting process.