Chapter 9: Choosing Legal Regimes - Party Autonomy

Question 1

Party Choice of Law and Forum

Answer 1

• The widespread acceptance of choice of law and choice of forum clauses is consistent with trends in American law favoring freedom to contract and party autonomy
• Since a fundamental rule in contracts is protection of parties’ expectations, predictability in choice of law has become an important value in contracts
• Parties are generally free to select the law governing their contract, subject to certain limitations
• A choice of law clause does not, without more, operate as a selection of forum. Vice versa, a choice of forum clause usually is not understood to incorporate choice of the forum’s substantive law
• Issues of misrepresentation, duress, mistake, or undue influence are generally governed by the law of the forum: that is, before its law is displaced, a forum still gets to decide whether a valid agreement exists
• Party choice usually does not extend to matters of procedure, which are governed by forum law

Question 2

Contractual Choice of Law: Nedlloyd Lines BV v. Superior Court of San Mateo County Seawinds Ltd.

Answer 2

Facts: Plaintiff Seawinds Limited, a shipping company incorporated in Hong Kong with its principal place of business in California, entered a contract with three other shipping companies, incorporated, and with their principal place of business, in the Netherlands. The contract contained a choice-of-law clause providing that the contract was to be governed by Hong Kong law. Plaintiff brought an action against the other corporations which included causes of action for breach of the implied covenant of good faith and fair dealing and breach of fiduciary duty. Defendant corporations demurred to the complaint. Applying California law, the trial court sustained the demurrer with leave to amend. The Court of Appeal, First Dist., Div. One, No. A049718, denied defendants’ petition for a writ of mandate seeking the application of Hong Kong law to the ruling on the demurrer. Subsequently, the trial court overruled defendants’ demurrer to plaintiff’s first amended complaint, again applying California law. The Court of Appeal, First Dist., Div. One, Nos. A049718 and A050535, summarily denied defendants’ second writ petition challenging the order overruling the demurrer. Defendant corporations petitioned for review.

Rule: The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties choice, or (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which would be the state of the applicable law in the absence of an effective choice of law by the parties. This is a rule providing for incorporation by reference and is not a rule of choice of law.

Question 3

Contractual Choice of Law: Banek, Inc. v. Yogurt Ventures USA, Inc

Answer 3

• Plaintiff Michigan corporation entered into a franchise agreement with defendant Georgia corporation containing a choice of law provision that provided the rights of the parties were governed by the laws of Georgia. Plaintiff brought a series of state law actions against defendant and subsequently asserted that the choice of law provision was invalid because it violated the Michigan Franchise Investment Law. The court affirmed the lower court’s decision and found that the choice of law provision was enforceable. The court noted that contrary to plaintiff’s assertions, a law providing that waivers and releases depriving a franchisee of his or her rights were void under Mich. Comp. Laws Ann. § 445.1527 and did not void contractual choice of law provisions. The court noted that contractual choice of law provisions governed unless the chosen state had no substantial relationship to the parties or transaction or application of the law of the chosen state would be contrary to the public policies of a state with a greater material interest in the position of the case. The court found that this was not the case here because the Michigan and Georgia statutes were similar.
• The court affirmed the lower court’s decision and found that the choice of law provision in the agreement between the two parties did not violate state law because it did not operate as a waiver of plaintiff Michigan corporation’s statutory rights. The court found that the laws of Georgia had a connection to the dispute and were in not in contradiction to the public policies of Michigan.

Question 4

Contractual Choice of Law: Cook Sign Co. v. Combs

Answer 4

• The salesman signed a one-year noncompete agreement before accepting employment for the employer. The salesman worked for the employer, which was a sign company located in Minnesota, for approximately six months. He provided a two-week notice of resignation before beginning employment for a competitor, which was a sign company located in North Dakota. Although the term of the agreement had expired and the appeal was arguably moot, the court considered the appeal in the interests of justice, pursuant to its discretion under Minn. R. Civ. App. P. 103.04. The court first concluded that Minnesota law was the proper choice of law. Minnesota deemed noncompete agreement enforceable if they served a legitimate employer interest and were not broader than necessary to protect this interest. The court also held that the district court did not abuse its discretion in granting the temporary injunction. The salesman had access to confidential information of the employer’s specialized business, which would be harmful to the employer if disseminated. The noncompete agreement was supported by consideration because the employee received a signing bonus and income guarantee.
• The court affirmed the judgment of the district court.

Question 5

Forum Selection Clauses

Answer 5

• Once regarded with great disfavor by courts, which didn’t appreciate their jurisdiction being “ousted”, choice of forum clauses is now widely accepted in both federal and state law
• Won’t be enforced if it was obtained by fraud/duress or if it is deemed unreasonable
• Some state statutes refuse enforcement to COF clauses regarding matters or prohibit them altogether in contracts made in that state
• COF clauses may also require the parties to submit to personal jurisdiction in a forum where it would otherwise be lacking

Question 6

Forum Selection Clauses: The Bremen v. Zapata Off-Shore Co

Answer 6

Facts: A German corporation contracted with a United States corporation to transport an oil rig from Louisiana to the Adriatic Sea. During transportation, the rig was damaged and was towed to Tampa, Florida, where the United States corporation filed suit. The German corporation, however, asked the district court to enforce the forum-selection clause contained in the contract placing jurisdiction in England. The district court refused to enforce the clause and the lower appellate court affirmed.

Rule: Forum-selection clauses are prima facie valid and should be enforced unless enforcement is shown by the resisting party to be unreasonable under the circumstances. This is the correct doctrine to be followed by federal district courts sitting in admiralty.

Question 7

Forum Selection Clauses in Diversity Cases

Answer 7

• In a diversity case in federal court, when a party seeks to enforce a forum-selection clause (FSC) in federal court, it typically will also move for a change of forum/venue
• If the alternative forum is another federal district court, the mechanism is a motion to transfer venue pursuant to a federal statute, 28 USC §1404(a)

Question 8

Forum Selection Clauses in Diversity Cases: Carnival Cruise Lines, Inc v. Shute

Answer 8

Facts: Respondent spouses were residents of the State of Washington, and they boarded petitioner’s ship in California. Respondent wife was injured while the ship was in international waters off the coast of Mexico. Respondents filed an action in the U.S. District Court in Washington, which granted petitioner’s motion for summary judgment, since the contract between respondents and petitioner provided that all suits were to be brought in Florida. The appellate court reversed the order granting summary judgment.

Rule: Forum selection clauses contained in form passage contracts are enforceable if they pass judicial scrutiny for fundamental fairness.

Question 9

Forum Selection Clauses in Diversity Cases: America Online, Inc v. Superior Court of Alameda County

Answer 9

Facts: An Internet subscriber brought a class action for himself and others against an Internet service provider seeking compensatory and punitive damages, injunctive relief, and restitution based on allegations that defendant continued to debit plaintiffs’ credit cards for monthly service fees after plaintiffs had terminated their subscriptions. Among other causes, plaintiffs alleged that defendant had violated the California Consumers Legal Remedies Act (CLRA) (Civ. Code, § 1750 et seq.). The trial court denied defendant’s motion to stay or dismiss the action on the ground of inconvenient forum, which motion was based on a forum selection clause in its service agreement with plaintiffs designating Virginia as the chosen forum and requiring that Virginia law be applied to any dispute.

Rule: The California Consumers Legal Remedies Act (CLRA), Cal. Civ. Code § 1750 et seq., contains a provision that voids any purported waiver of rights under the CLRA as being contrary to California public policy. Enforcement of contractual forum selection and choice of law clauses resulting in the functional equivalent of a contractual waiver of the consumer protections under the CLRA is prohibited under California law.

Question 10

Forum Selection Clauses in Diversity Cases: Wong v. PartyGaming Ltd

Answer 10

• When the poker players registered on the poker website, they agreed to the site’s terms and conditions, which included an anti-collusion policy and a Gibraltar forum selection clause. The poker players alleged that defendants made false representations regarding the anti-collusion policy. The appellate court determined that the enforceability of the forum selection clause was governed by federal law. The forum selection clause was enforceable because the poker players (1) did not allege that defendants falsely represented the chosen forum, (2) did not allege that they could not bring the suit in Gibraltar, but only that they could not bring it in class form, and (3) failed to show how litigating in Gibraltar would be such an inconvenient forum to yield it unjust or unreasonable. The district court’s dismissal for forum non conveniens was not an abuse of discretion, because (1) forum non conveniens was properly raised sua sponte, (2) Gibraltar was an appropriate alternative forum, (3) public and private factors weighed in favor of a Gibraltar forum, and (4) the district court did not abuse its discretion by not giving deference to the poker players’ choice of home forum.
• The appellate court affirmed the district court’s decision.