As members of SGR's transportation group, Marc (in New York) and Shani (in L.A.) are often called upon to advise clients about the choice of the law to govern the interpretation and enforcement of agreements and the place for adjudication of disputes (likely with little nexus to New York other than that clause). And, as a commercial litigator in New York, Victor must navigate, challenge or defend those choices.
One of the factors to be considered is the extent to which the Courts in New York will enforce the selection of New York law and venue.
Under agreements, governed by New York law, but involving parties in different jurisdictions, disputes often arise as to which state's substantive law applies. "Old Timers" were schooled in choice of law/conflict of law analysis under the "grouping of contacts"/"center of gravity"/"significant relationship" protocols.
The grouping of contacts/center of gravity tests were principles governing conflict of laws that, in case of choice-of-law questions, the law of the jurisdiction which had the most significant relationship to the transaction or event applied. It was a bit messy.
The grouping of contacts theory required courts to examine many factors in order to determine which state's law to apply when choice of law was at issue. These factors included the place of contracting, the place of negotiation of the contract, the place of performance, the location of the subject matter of the contract, and the domicile, residence, nationality, place of incorporation, and place of business of the parties.
The parties would assert competing claims about which jurisdiction had the more important contacts with the parties, agreement and dispute. And the Court would choose the law of the state with the most significant contacts and interests. Often, this required submission of voluminous affidavits and documents—and, in many cases, required an evidentiary hearing (essentially a mini trial). The threshold issue of which law applied was time consuming and expensive and delayed an adjudication on the merits—especially where that initial ruling was appealed (as was permitted under New York practice).
The New York State Legislature sought to bring certainty to the matter. In 1984, the Legislature adopted amendments to the General Obligations Law (See end notes). The amendments gave our Courts subject matter jurisdiction to hear disputes where the parties, in their agreement, agreed to be covered by New York law; and personal jurisdiction where the parties submitted to the jurisdiction of our Courts.
Section 5-1401 of the GOL provides that a choice of law provision in an agreement designating New York law to govern the parties' rights and duties is valid, even if the agreement has no reasonable relation to the State, provided that the transaction is valued at a minimum of $250,000.00.
Where one of the parties is a foreign corporation or non-resident, Section 5-1402 allows parties to designate New York as the forum for resolving any disputes that arise out of their agreement, provided that: (1) the agreement contains a choice of law provision pursuant to Section 5-1401 designating New York law as governing the parties relations, in whole or in part; (2) the agreement involves an obligation arising out of a transaction involving at least $1 million; and (3) the agreement contains a clause in which the foreign corporation or non-resident agrees to submit to the jurisdiction of New York's courts.
But those amendments did not address and resolve the issue of whether those choices and consent abrogated the old “grouping of contacts” choice of law analyses where the parties were domiciled elsewhere and in different jurisdictions. Parties still litigated "choice of law" disputes under pre-amendment GOL precedents. The results were unpredictable – going one way or the other depending upon the facts and circumstances.
In the past decade, the New York Court of Appeals opportunistically intervened to bring predictability where uncertainty prevailed.
A recent trilogy of decisions mandate the recognition, enforcement, and application of the New York choice of law statute in a clear-cut way. Each case involved a dispute with respect to the application of New York law to an agreement which contained a New York choice-of-law provision. Declining to engage in an outdated choice-of-law analysis, the Court of Appeals in each instance held that New York substantive law governed the agreement where the parties include a New York choice-of-law provision in their contract.
In IRB-Brasil Ressguros v Inepar Investments, S.A., (2012), the Court of Appeals held that when there is an express choice of New York law provision in a contract that falls within the ambit of General Obligations Law § 5-1401, "the need for a conflict-of-laws analysis is obviated" and that New York substantive law applies. In that case, a Brazilian company sought payment of the principal of a note and unpaid accrued interest from a Uruguayan corporation and its sixty percent shareholder corporation, who guaranteed the note. The defendant corporation moved for summary judgment, arguing that New York's choice-of-law principles required the application of Brazilian substantive law, and that the guarantee was void under Brazilian law. The parties elected New York as both their choice of law and venue for dispute resolution.
The Court of Appeals held that the New York substantive law governed, since the parties designated New York in their choice-of-law provision in the guarantee and the transaction exceeded the amount specified in the New York General Obligations Law. In so holding, the Court rejected defendant's argument that the guarantee's choice-of-law provision would have had to expressly exclude New York's conflict-of-law principles in order for New York substantive law to apply. To find otherwise, the Court held, would frustrate the ability to have "a predictable contractual choice of New York commercial law" and to eliminate "uncertainty regarding the governing law."
In Ministers & Missionaries Benefit Board v Snow (2015), the Court of Appeals admonished that "New York courts should not engage in any conflicts analysis where the parties include a choice-of-law provision in their contract, even if the contract is one that does not fall within General Obligations Law § 5-1401." In Ministers, a New York administrator of retirement and death benefit plans filed a federal interpleader action against the estate and beneficiaries of a plan enrollee. The plan contained a New York choice-of-law provision.
To decide whether any claims of the enrollee's former spouse terminated upon their divorce, the Second Circuit Court of Appeals certified the question to the Court of Appeals.
Declining to engage in an outdated conflict-of-laws analysis, the Court held that the existence of a New York choice-of-law provision required application of New York substantive law. And, accordingly, the Court held that "that provision [of the EPTL] should not be considered in resolving t[he] dispute." In the same vein as in IRB-Brasil, the Court concluded that "[c]ontractually planning for the application of New York substantive law regarding benefit distribution would provide stability, certainty, predictability and convenience."
Finally, in 2138747 Ontario, Inc. v Samsung C&T Corporation (2018), the Court of Appeals once again confirmed that the substantive law designated in a choice-of-law provision will govern the agreement. There, the Court held that, unless specifically stated otherwise, a general choice-of-law provision incorporates the chosen substantive law, and that the procedural law of the chosen forum would apply. In Ontario, the assignee of an Ontario renewable energy developer sued for breach of a nondisclosure agreement. The NDA contained a New York choice of law provision. The defendants moved to dismiss based on Ontario's two-year statute of limitations. Applying New York's borrowing statute, the Court held that the plaintiff's action was required to be timely under both New York and Ontario statute of limitations. In so holding, the Court rejected plaintiff's argument that the NDA's broad choice-of-law provision encompassed a choice of New York's procedural law, to the exclusion of New York's borrowing statute.
In ABB, Inc. v. Havtech, LLC, decided by the First Department last year, the parties’ agreement contained a clause entitled “governing law” that provided the agreement was to be interpreted and construed in accordance with New York law, without reference to its choice of law principles. The contract involved millions of dollars of heating, ventilation and air conditioning equipment sales.
The parties’ agreement fell within the ambit of General Obligations Law § 5-1401, and thus, regardless of whether there was a connection between the transaction and New York, New York the Court held that the choice of law clause would be enforced.
Defendant’s sole defense and counterclaims were based on its argument that the Maryland Dealer Act applied to invalidate the termination without cause and other provisions of the agreement. The motion court properly rejected the application of Maryland law. IRB-Brasil made clear that no such choice of law analysis was proper in light of the clear choice of New York law and the legislative purpose of General Obligations Law § 5-1401.
The Court rejected defendant’s argument to consider the public policy concerns of the Maryland Dealer Act in determining this dispute. Non-New York statutes do not invalidate contracts that chose New York law and are valid and enforceable under New York law.
Finally, defendant’s reference to similar dealer protection statutes in New York that protected dealers in other industries did not indicate a public policy in New York that would mandate extending such protections to HVAC equipment dealers. The Legislature made the determination to provide such protections on an industry by industry basis, thus far not including HVAC distributors.
In Lederer v Mizrahi Development Group [The One] Inc., decided late last year, Mizrahi entered into an exclusive financial advisory and consulting services agreement with Lederer, a financial advisor with experience in sourcing debt for real estate development projects.
Pursuant to the terms of the agreement, Mizrahi retained Lederer as its exclusive consultant and advisor to help it find capital for acquisition, development, and financing of a real estate development project in Toronto, Canada. The agreement (i) contained New York choice of law and forum selection provisions, (ii) was to run for six months, and (iii) after that was terminable by either party on 60 days’ notice.
Lederer found a potential source of financing. But Mizrahi informed Lederer that the firm had obtained financing from another source. The funding was later reported in the press. Lederer sent Mizrahi an invoice for $1.35 million, pursuant to the agreement. In response, Mizrahi sent Lederer a written termination notice and disputed owing any fees. Lederer then sued (represent by SGR), asserting a single cause of action for breach of contract.
Mizrahi argued that the case should be dismissed because the complaint did not allege the Lederer was licensed to deal in mortgages, as Ontario law requires. The law was similar to New York Real Property Law which requires a license to provide real estate brokerage services in New York. [Although the agreement was not for brokerage services, Lederer was licensed and a broker in New York.]
Mizrahi argued and the Court agreed that recent New York State Court of Appeals cases required application of New York law. Simply put, the Court of Appeals held that New York substantive law governs where, as was the case here, the parties’ agreement contains a New York choice of law provision. Accordingly, the Court found that New York law applied and governed (without regard to the law of Ontario) because the agreement contained a New York choice of law provision, New York was the designated forum, and Lederer was to perform his advisory and consulting work under New York Law.
The decisions of the First Department in AAB and Supreme Court in Lederer are representative of the post-GOL amendment trend towards finding that New York law applies simply because an agreement so provides.
Absent fraud or overreaching, a choice of law provision, pursuant to Section 5-1401, will likely be enforced, even if a traditional choice of law analysis would apply another forum's laws. Some cases suggest that a choice of New York law provision arguably may be avoided if the issue in question is of such overriding concern to the public policy of the other jurisdiction as to override the intent of the parties and the interest of New York in enforcing its own policies. But even there, New York's very substantial interest in enforcing Section 5-1401 would probably prevail absent proof that another jurisdiction probably had a predominating and overwhelming public policy concern that justified ignoring a contractual New York choice of law provision. A forum selection clause, pursuant to Section 5-1402, will likely be seen as a waiver by the parties of any objections based on personal jurisdiction, improper venue, or forum non conveniens. Such a clause now appears to be and enforceable, absent fraud or overreaching or proof that enforcement would be unreasonable and unjust.
Caveat: If New York law applies, does Section 202 of the Civil Practice Rules and Law, which mandates a choice of law analyses with respect to the statute of limitations under certain circumstances, still control?
Postscript: GOL § 5-1401 does not limit the right to enter into a contract specifying New York law in a transaction involving less than $250,000. And GOL § 5-1402 does not limit the right to designate New York as the choice of forum in transactions involving less than one million dollars.
GOL § 5-1401 Choice of Law
- The parties to any contract, agreement or undertaking, contingent or otherwise, in consideration of, or relating to any obligation 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[.]
Model clause: The parties hereto hereby jointly, severally, unconditionally and irrevocably agree that the agreement, and any and all disputes, claims or controversies, directly or indirectly, arising out of, or relating to this agreement, shall be interpreted, applied and enforced exclusively in accordance with substantive and procedural law of the State of New York, now in effect or hereafter enacted. It is the intent and agreement of the parties that New York General Obligations Law Sect ion 5-1401(1) applies to the agreement and is hereby incorporated by reference and shall be applied without regard to, among other things, and without limitation, New York Civil Law & Practice Section 202, the location of the (airplane), public policy, any other statutory or other choice of law or conflict of law provisions, “grouping of contacts” or center of gravity” or other analyses, lex situs, lex registri or the United Nations Convention for the International Sale of Goods.
G.O.L § 5-1402 Choice of Forum
- Notwithstanding any act which limits or affects the right of a person to maintain an action or proceeding, any person may maintain an action or proceeding against a foreign corporation, non-resident, or foreign state where the action or proceeding arises out of or relates to any contract, agreement or undertaking for which a choice of New York law has been made in whole or in part pursuant to section 5-1401 and which (a) is a contract, agreement or undertaking, contingent or otherwise, in consideration of, or relating to any obligation arising out of a transaction covering in the aggregate, not less than one million dollars, and (b) which contains a provision or provisions whereby such foreign corporation or non-resident agrees to submit to the jurisdiction of the courts of this state.
Model clause: The parties hereto hereby jointly, severally, unconditionally and irrevocably agree that any action or proceeding to enforce the terms of the agreement or to adjudicate a dispute, claim or controversy hereunder, shall be brought only in the Supreme Court of the State of New York, County of New York or the United States District Court for the Southern District of New York and such courts shall have exclusive jurisdiction thereover and the parties hereby submit to the exclusive jurisdiction thereof. It is the intent and agreement of the parties that New York General Obligations Section 5-1402(1) applies to the agreement and is hereby incorporated by reference, among other things, and without limitation, regard to any other statutory, forum non conveniens or other jurisdictional provisions or analysis.
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.