Ken Adams here. My book A Manual of Style for Contract Drafting deals with the building blocks of contract language—the how-to-say-it part of contract drafting. That leaves the vast what-to-say world. So far, I've addressed small parts of that. One way is through blog posts on "boilerplate"—the miscellaneous stuff you find at the end of most contracts. One boilerplate topic is governing-law provisions. The post below is about language you often see in governing-law provisions. Most people don't really know what purpose it's meant to serve, but they assume it's necessary. I've established to my satisfaction that you can do without it.
[Updated July 13, 2015] In my original post, I proposed not bothering to say in a governing-law provision that the court is to consider just the substantive law of the jurisdiction in question, instead of using choice-of-law principles as a basis for deciding to apply a different law.
That was my opening position, pending further research. Well, I’ve now done further research, and I’ve found no sign of any U.S. caselaw in which a court holds that although a governing-law provision says that the law of X governs the contract, it will apply the law of Y, because the choice-of-law provisions of X require that one apply the law of Y.
Yes, the concept of renvoi exists. Given widespread misunderstanding of this issue, there’s value to having the parties make it explicit that renvoi doesn’t apply. And if most contracts professionals think that renvoi might apply, leaving in anti-renvoi language might help you avoid wasting time discussing the issue.
But including a prophylactic measure in a contract makes sense only if the threat is real. I’ve seen no sign that the threat is real. So if economy were the only consideration, one would eliminate the anti-renvoi language. As it is, some balancing is required.
(For additional posts on governing-law provisions, go here and here.)]
[Original July 6, 2015 post]
In the first installment in this miniseries of posts (here), reader Vance Koven jumped the gun and waded into the question of renvoi, and others followed his lead. I took that as a sign from the drafting gods that I should tackle the topic toot sweet. Please note that this is my initial quick take on this topic, with the aim of prompting discussion. I wouldn’t be surprised at all if I revise my views over time.
I consulted Vladimir R. Rossman & Morton Moskin, Commercial Contracts: Strategies for Drafting and Negotiating (“CCSDN“), simply because it came to hand quickly and offered extensive commentary. I’ve included extracts below, but here’s where I come out on this:
As you’ll see in the comments to my initial post, there are various ways to say in a governing-law provision that the court is to consider just the substantive law of the jurisdiction in question, instead of using choice-of-law principles as a basis for deciding to apply a different law. You can say without regard to its conflicts of laws provisions. Or you can refer to the domestic laws of the state in question.
I say the heck with all such formulations, at least for purposes of contracts that might appear before the courts of a U.S. jurisdiction.
I say that because, first, if any mandatory rules make choice of law a factor, nothing you say in a contract will change how the court handles the issue. And second, courts very likely won’t otherwise indulge in any choice-of-law shenanigans—it’s an entirely theoretical concern.
I suspect that the overwhelming majority of those who include anti-renvoi language in contracts do so without having considered whether it’s necessary and whether it’s effective. (I include myself in that oblivious group.)
What do you think? And are there any international ramifications?
***
Now, here are the extracts.
First, let’s consider what happens if you simply say, New York law governs this agreement. Here’s what CCSDN § 6.09[A] has to say:
What is the intention of parties to a contract who agree that “New York law shall govern”? Do they intend that New York substantive or local law alone shall govern or that the whole of New York law shall govern, including its conflict of laws rules?
In Siegelman v. Cunard White Star Ltd., [221 F.2d 189 (2d Cir. 1955),] a contract of carriage of a steamship company provided that all questions under the contract were to be decided according to English law. The Court of Appeals for the Second Circuit, applying federal choice-of-law rules, held that this provision was effective. Turning next to the issue of the scope of the provision, the court posed the whole law/substantive law question: …
…
Thus, the court determined that the governing law clause referred to the substantive law of the chosen jurisdiction, and not to the whole body of law including the conflict of laws rules of such jurisdiction. The Restatement Conflict of Laws is in accord. Absent a clear New York decision on the same issue, Siegelman constitutes strong persuasive authority in New York.
The above-quoted statement of Siegelman reflects common sense: parties to an agreement, who stipulate that the law of a specified jurisdiction shall govern their agreement, probably always intend that the substantive rules of the chosen jurisdiction apply. However, the extent to which this intention will be carried out requires further analysis.
CCSDN § 6.09[B] goes on to state a limit to that general notion:
However, the conclusion that the parties chose the substantive law of the forum does not mean and cannot mean that the substantive law also applies (1) where mandatory conflict of laws rules of the stipulated law (the law of the forum) refer to another law, or (2) with respect to issues that are not within the scope of those issues as to which the parties may choose the applicable law.
Mandatory rules cannot be changed by agreement. Mandatory rules of conflict of laws that require the application of the law of another country or state and that override the parties’ choice of the forum law as the governing law may have been developed by the courts, such as the act of state doctrine, the internal affairs doctrine, the application of the public policy of another country or state pursuant to Restatement Conflict of Laws § 187(2)(b), and the rule that foreign bankruptcy proceedings may modify the rights and obligations of the parties to a contract irrespective of the stipulated governing law. Statutes of the forum may also mandatorily refer to the laws of other countries or states …. A governing law clause that attempts to exclude the application of a mandatory rule of conflict of laws is not enforceable.
CCSDN § 6.09[C] makes it explicit that renvoi shouldn’t apply in the absence of mandatory rules:
Renvoi means that a court in a country other than the country of the chosen governing law does not only apply the substantive law of the stipulated jurisdiction, but also its conflict of laws rules and such conflict of laws rules refer either back to the forum (remission) or to the law of a third country (transmission). For instance, if the parties agree on English law, a New York court applying the doctrine of renvoi would not look to English substantive law, but to the whole English law, including the English conflict of laws rules that refer to the law of another country, and would apply the foreign law that the English court would apply. Such English conflict of laws rules could be rules that apply in the absence of a valid choice of law clause or rules that refer to a foreign law irrespective of the existence of a valid choice of law clause.
If the parties have agreed on a law other than the law of the forum to govern their agreement, adherence to the holding in Siegelman that the parties intend the substantive or local law of the stipulated jurisdiction to apply would mean that the forum will not apply objective conflict of laws rules of the stipulated jurisdiction that provide for the selection of the proper law of an agreement in the absence of a governing law clause. Siegelman generally excludes the doctrine of renvoi in cases in which the parties selected in their agreement the law applicable to the agreement.
The conclusion that the parties chose the substantive law of the jurisdiction of the governing law does not mean, however, that the chosen substantive law also applies when the forum’s own mandatory conflict of laws rules refer to a third country’s or state’s law.
CCSDN § 6.11[A] goes on to consider the effect of excluding principles of conflict of laws rules in contracts where the governing-law provision stipulates the law of the forum:
Some proponents of governing law clauses that exclude conflict of laws principles have argued that wording the clause in such a manner would be effective in preventing a court in the jurisdiction of the chosen law from applying its objective rules of choice of law to reach a different outcome despite the governing law clause. This concern, however, may be exaggerated because, as stated above, once a court has held that the governing law clause is valid and must be given effect, that court should not apply the rules that would be applicable if no valid choice of law clause existed. For the court to apply those rules, it must have held that the choice of law clause is ineffective. On the other hand, if a governing law clause is ineffective under the forum’s conflict of laws rules, it cannot be made effective simply by the parties’ inclusion in their contract of wording that seeks to exclude conflict of laws principles because those principles are there precisely to establish conditions for the autonomy of the parties to choose the law of the contract in question. For instance, if the choice of law clause is not given effect because the transaction does not meet the minimum requirements as to the amount covered by the transaction set forth in New York General Obligations Law § 5-1401 and does not have a reasonable relationship with New York, its effectiveness cannot be forced by an exclusion of those two requirements established by New York’s conflict of laws rules.
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Although a governing law clause stipulating New York law yet excluding its conflict of laws rules would be void under New York law if taken literally, a New York court is likely to ignore the exclusion language since, as a court said, it “defies common sense.” A court’s position will most likely be based on the interpretation that the parties did not intend to agree to a clause that is invalid, but rather intended to instruct the court not to apply the objective conflict of laws rules of the forum law that determine the law of the contract in the absence of a governing law clause. This is in effect what courts would do anyway, thus making the exclusion language superfluous and irrelevant. A court would likely uphold the validity of the clause by interpreting the clause as stating a rule that would apply even in the absence of the exclusion language. It is curious that some lawyers insist on drafting language that is either invalid on its face or irrelevant in practice.
And CCSDN § 6.11[B] consider the effect of excluding principles of conflict of laws rules in contracts where the governing-law provision stipulates the law of a jurisdiction other than the forum:
The drafters of an agreement that contains a governing law clause excluding the conflict of laws rules of the stipulated foreign law frequently argue that they wish to exclude the doctrine of renvoi. If the forum, like New York, follows the nearly universal rule that the validity and effectiveness of a choice of law clause, even if stipulating a foreign law, is determined by the conflict of laws rules of the forum, it would be strange indeed and contradictory if the forum were to determine under the conflict of laws rules of the forum that the clause is valid, and therefore applied the stipulated foreign law, but then decided that the validity of the choice of law clause is determined in a second round of analysis under the conflict of laws rules of the jurisdiction of the governing law. Under this approach–which probably no court has taken– the parties’ choice of law would have to fulfill the requirements of two sets of conflict of laws rules.
Furthermore, the forum might take the position that renvoi is an issue of conflict of laws, that the forum law determines conflict of laws issues under its own rules, and that therefore the law of the forum determines whether or not the forum must apply renvoi. Thus, a governing law clause excluding conflict of laws rules of the chosen foreign law does not have any effect on the conflict of law rules, including the rules of renvoi, of the forum. For instance, if a governing law clause stipulates English law but excludes England’s conflict of laws rules, the question whether by application of renvoi a referral by English law to a third-country law must be followed by a New York court remains a question of New York’s conflict of laws. Thus, the clause excluding English conflict of laws rules is meaningless insofar as the application of renvoi by a New York court is concerned. If the conflict of laws rules of New York have mandatory statutory or court-developed provisions requiring renvoi, New York courts must apply such mandatory renvoi.
Note that CCSDN § 6.11[A] cites TriBar Opinion Committee, Third-Party “Closing” Opinions, 53 Bus. Law. 592 (1998) sub 4.3, at 633 n.89 (formulations with and without exclusion language mean the same thing as neither can be interpreted to exclude mandatory choice of law rules).
[Updated July 13, 2015: And here’s something from 16 Am Jur 2d Conflict of Laws § 6 (footnotes omitted):
The general view is that where a question comes before a court which, according to the law of the forum as to conflict of laws, is to be determined by the law of another jurisdiction, the question is determined by the law of such other jurisdiction applicable to the precise question; the law of such other jurisdiction as to conflict of laws is not taken into consideration.]
Ken Adams is president of Adams Contracts Consulting LLC, author of A Manual of Style for Contract Drafting, and an advisor to LegalSifter.
