This article examines New Jersey case law on governing law provisions typically found in contracts and frequently ignored by attorneys. Attorneys automatically include these provisions in their contracts without a real understanding of their meaning or how they may affect their clients. The purpose of this article is to provide the drafter and negotiator of contracts with a better understanding and appreciation of the importance of governing law provisions.
The old or traditional rule was that the law of the state where the contract was entered into would determine the rights and duties of the contracting parties. See Gilbert Spruance v. Penn. Mfrs., 134 N.J. 96, 102 (1993) (citation omitted). However, in 1980 this mechanical rule was replaced with a more flexible one that focuses on the state that has the most significant contacts or connections with the parties and the transaction. Id. (citing State Farm v. Estate of Simmons, 84 N.J. 28, 34-37 (1980)). Thus, the law of the state of contracting no longer automatically and conclusively determines the parties’ rights and duties. Black v. Walker, 295 N.J. Super. 244, 253-254 (App. Div. 1996) (citing Gilbert Spruance and State Farm).
However, even under the more flexible approach, the law of the state where the contract was entered into should be applied to determine the parties’ rights and duties because it usually comports with the parties’ reasonable expectations, unless another state has a more dominant and significant relationship to and closer contacts with the parties, the transaction and the underlying issues. Gilbert Spruance, 134 N.J. at 102 (citing State Farm, 84 N.J. at 37); Keil v. NatWest, 311 N.J. Super. 473, 484-485 (App. Div. 1998) (citing Gilbert Spruance); Nat’l Util. Serv., Inc. v. Chesapeake Corp., 45 F. Supp. 2d 438, 446 (D.N.J. 1999) (citing Gilbert Spruance and Keil). Indeed, one court has characterized this as a presumption. Nat’l Util. Serv., 45 F. Supp. 2d at 447 (citations omitted).
The foregoing analysis is consistent with the factors and "contacts" set forth in Sections 6 and 188 of the Restatement (Second) of Contracts. Gilbert Spruance, 134 N.J. at 102-103 (citing State Farm, 84 N.J. at 34-35). Section 188 lists several relevant "contacts" to be considered in the analysis under Section 6, including the domicile, residence, nationality, place of incorporation and place of business of the parties, and the places of contracting and performance. Id. at 103 (citing Restatement (Second) of Contracts § 188). Section 6 sets forth the factors relevant to the court’s analysis, including the relevant policies of the forum and of other interested states, the protection of justified expectations, the basic policies underlying the particular field of law, and certainty, predictability, and uniformity of result. Restatement (Second) of Contracts § 6, reprinted in Gilbert Spruance, 134 N.J. at 103.
In the absence of a contract provision specifying the law to be applied, the court will engage in the foregoing choice of law analysis. Bell v. Merchants & Businessmen’s Mutual Ins., 241 N.J. Super. 557, 562 (App. Div. 1990). See also McCabe, 222 N.J. Super. at 399. However, the parties have the power to specify which state’s law will govern their contract and, given the relative uncertainty over which state’s law will apply in determining their rights and duties, they often do specify the governing law in their contracts. McCabe v. Great Pacific Century, 222 N.J. Super. 397, 400 (App. Div. 1988).
The court will apply the law of the state chosen by the parties so long as doing so does not contravene New Jersey public policy. Winer Motors, Inc. v. Jaguar Rover Triumph, Inc., 208 N.J. Super. 666, 671 (App. Div. 1986) (citing Turner v. Aldens, Inc., 179 N.J. Super. 596, 601 (App. Div. 1981)). See also Kalman Floor Co., Inc. v. Jos. L. Muscarelle, Inc., 196 N.J. Super. 16, 21 (App. Div. 1984) (citations omitted). Otherwise, the court will reject the parties’ choice of law. Winer Motors, 208 N.J. Super. at 672. New Jersey law is consistent in this regard with the principles of law set forth in Section 187(2)(b) of the Restatement (Second) of Conflict of Laws.
There have been a number of cases where the court has refused to honor the parties’ choice of law in order to protect a party under New Jersey public policies. In one case, a party argued that Delaware law allowed it to unilaterally modify the parties’ agreement to include an arbitration provision. The court, however, held that the application of Delaware law, which was the governing law specified in the agreement, would violate New Jersey public policy—New Jersey does not allow the unilateral modification of a contract of adhesion—thus, the choice of law provision would not be given effect. Discover Bank v. Shea, 362 N.J. Super. 200, 207 (Law Div. 2001).
Likewise, in another case, the court refused to apply Delaware law, which was specified in the parties’ property settlement agreement, to resolve an issue concerning a child residing in New Jersey. Black, 295 N.J. Super. at 256 (citing Blum v. Alder, 279 N.J. Super. 1, 3-4 (App. Div. 1994)). Finally, in a third case, a franchise agreement provided for the application of New Jersey law. The court, however, refused to apply New Jersey statutory law because the franchisee was located in Connecticut. It reasoned that it would have applied New Jersey law if a New Jersey franchisee was a party to a contract providing for the application of another state’s law. Thus, Connecticut statutory law should be applied to the Connecticut franchisee despite the parties’ selection of New Jersey law. Winer, 208 N.J. Super. at 671-672.
The court will not apply the parties’ choice of law if the state chosen has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice of law. See Restatement (Second) of Conflict of Laws § 187(2)(a). For example, parties located in New Jersey cannot select the law of California to govern their contract, unless there is a reasonable basis for them to do so.
Some states have enacted statutes allowing the parties to select their law even if there is no connection to the state, provided that the parties meet certain statutory requirements. See, e.g., 6 Del. Code Ann. 2708; N.Y. Gen. Oblig. Law 5-1401. For example, the parties would have a reasonable basis to select Delaware law to govern a corporate transaction or New York law to govern a commercial transaction because of the amount of settled law on such matters.
Finally, it should be noted that there is case law providing that an inconspicuous choice of law provision will not be given effect. However, they involve contracts of adhesion between parties of unequal bargaining power. See Discover Bank, 362 N.J. Super. at 207-208 (citing Fairfield, 256 N.J. Super. at 545). See also Turner, 179 N.J. Super. at 601 & 604 (court applied New Jersey law even though the parties’ contract of adhesion specified another state’s law).
In conclusion, it is important for an attorney to bear these principles in mind when deciding which state’s law should govern the parties’ contract. Otherwise, the parties’ rights may be governed by the law of a state other than the one selected by them.
* Gianfranco A. Pietrafesa is a partner in the firm of Cooper, Rose & English, LLP, in Summit, New Jersey. His practice is primarily devoted to business transactions and litigation. He is a member of the Board of Directors of the Business Law Section of the New Jersey State Bar Association. This article is based upon a more comprehensive paper prepared by the author for the entitled "Those Boilerplate Provisions at the End of the Contract: Fine Print, Big Deal!" presented at the New Jersey State Bar Association’s Fifth Annual Business Law Symposium and previously published in the February 2005 edition of New Jersey Lawyer Magazine as part of an article entitled "New Jersey Law on Contract Boilerplate Provisions."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
