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United States of America > New York > Litigation Dispute resolution > Advisory > Article > NY Choice of Law: You Get What You Bargain For

Article: NY Choice of Law: You Get What You Bargain For

Choice of law provisions are common to most commercial contracts between multi-jurisdictional parties. In IRB-Brasil Resseguros v. Inepar Investments, 20 N.Y.3d 310, 982 N.E.2d 609 (N.Y. 2012), the New York State Court of Appeals in a unanimous decision recently clarified the choice of law rule that when parties designate New York law to govern their contract, New York substantive law will apply to any disputes between the parties arising out of that contract. It is not necessary for a court to engage in a conflict of laws analysis. Nor is it necessary to include express language in the contract that excludes New York conflict of laws rules. Further, the court held that if contracting parties designate New York as the governing venue, the courts are under no obligation to conduct a choice of law analysis.

On September 30, 1996, Defendant (“Issuer”), a Brazilian power company issued $30 million in Global Notes to raise capital and refinance a previous debt. The notes were denominated in U.S. dollars and set to mature on October 1, 2001, and paid an annual fixed interest rate of 9.9%. Issuer, along with co-defendant (“Guarantor”), a Uruguayan corporation principally owned by Issuer, entered into an agreement (“Agreement”) which stated that, “this agreement, the Notes, and the Guarantees shall be governed by, and construed in accordance with, the law of the State of New York, without regard to conflict of laws principles.” Plaintiff (“Holder”) a partially state-owned Brazilian company, purchased $14 million of the Issuer’s Notes and duly received annual interest payments between April 1997, and October 2000 when the interest payments ceased. Holder did not receive the final interest payment nor the $14 million principal.

Holder filed suit against Issuer and Guarantor seeking payment of unpaid accrued interest and unpaid capital. Guarantor defaulted but Issuer moved for summary judgment arguing that under the Agreement, New York law applied to the dispute and according to New York’s choice of law provision, Brazilian substantive law should apply. Issuer advanced this argument because, under Brazilian substantive law, the guarantee of repayment is void because it was not authorized by the Issuer’s board of directors as required by applicable Brazilian law. Holder also filed a motion for summary judgment. The New York Supreme Court denied Issuer’s motion and partially affirmed Holder’s motion for liability only.

Contrary to Issuer’s contentions, N.Y. General Obligations Law § 5-1401(1) provides that: “[t]he parties to any contract . . . arising out of a transaction covering in the aggregate not less than two hundred fifty thousand dollars . . . may agree that the law of this state shall govern their rights and duties in whole or in part, whether or not such contract, agreement or undertaking bears a reasonable relation to this state.” Id. at 314 (citing N.Y. Gen. Oblig. Law § 5-1401(1)). The statute allows parties that lack otherwise sufficient contacts with New York to designate New York law to govern their contracts. The New York Legislature’s rationale for the statute was to ensure New York’s place as the world center for commerce and finance. Additionally, the legislature intended to ensure predictability for contracting parties by securing which law applied to their contract.

In accordance with the statute’s intended purpose and the expectations of the contracting parties, the court found that the Issuer and Guarantor chose to apply New York substantive law, not including its conflict of laws principles, to their Agreement. In support of its holding, the court noted that the Restatement (Second) provides that: “[i]n the absence of a contrary indication of intention, the reference [to the law of the state chosen by the parties] is to the local law of the state of the chosen law.” Id. at 316 (citing Restatement (Second) of Conflict of Laws § 187(3)). The Restatement defines “local law” as “the body of standards, principles and rules, exclusive of its rules of Conflict of Laws.” Id. (citing Restatement (Second) of Conflict of Laws § 4(1)). Thus, under the Restatement, as the Agreement designated New York as the local law governing the contract, New York substantive law applied to any disputes arising out of the contract, excluding New York’s conflict of laws provisions. Furthermore, the court noted that conducting a conflict of laws analysis under New York law in this instance would frustrate the purpose of the statute as well as conflict with the stated intentions of the parties in the contract.

New York State is a world capitol of finance and commerce and many large commercial contracts designate New York as both the venue and source of substantive law governing contract disputes. This definitive ruling of New York’s highest court prevents contracting parties from the backdoor use of another jurisdiction’s law to their advantage by holding parties accountable to the letter and spirit of their written agreements pertaining to governing substantive law. As a practical matter, including express contract language excluding New York’s conflict of laws principles is no longer necessary -- although most careful lawyers will almost certainly continue to do so.

Last Update: 2013-Apr-12 Charles E. “Trip” Dorkey III - Dentons
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Author: Charles E. “Trip” Dorkey III
Law Firm: Dentons
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