Contractual Choice of Law: Legislative Choice in an Era of Party Autonomy

Abstract

This article considers contractual choice of law and, particularly, a proposal to substantially revise the choice of law provision in Article 1 of the Uniform Commercial Code, against the backdrop of conflict of laws jurisprudence and the lawmaking power of state legislatures. In all but narrowly-defined "consumer contracts," the UCC proposal would permit the parties to choose the law of any jurisdiction to govern their contract without regard to whether that chosen jurisdiction has any relationship whatever to the parties, or their subject matter. Party choice in this context is intended to supplant ordinarily-applicable state regulation that is not usually subject to party avoidance. All ordinarily-applicable mandatory rules are displaced except those a court denominates "fundamental policy." In "consumer contracts," on the other hand, the UCC proposal would give consumers the ordinarily-applicable legal protections to which they were entitled, despite a contractual choice of law clause to the contrary.

The article argues that the proposal, and similar provisions in the Uniform Computer Information Transactions Act (UCITA) are unnecessary and ill-conceived. Because these proposed rules are so different from the ordinarily-applicable conflict of laws rules governing choice of law clauses, there will be uncertainty about - and litigation over - when the new rules should apply. Moreover, the complexity of the new proposals will ensure uncertainty even in those cases where they clearly apply. In addition, because the proposals operate only in the adjudicatory fora of the states that enact them, forum shopping will be encouraged with anything less than one-hundred percent, uniform enactment which is extremely unlikely. Finally, the proposals carry with them a shift in lawmaking power from state legislatures to contracting parties sophisticated enough to use the new proposals to their best advantage. Under the proposals, parties wishing for a different set of applicable rules need only "choose" them through a suitable contract provision and thereby avoid ordinarily-applicable mandatory rules that do not rise to the "fundamental policy" level. When mass-market contracts involving non-consumers are included in the analysis, it becomes clear the shift in power is from voters who elect their legislatures to businesses who draft their choice of law provisions. In short, the proposals have the potential to alter in fundamental ways the power of state legislatures to regulate businesses that transact business with their residents. The article counsels caution for any state legislature considering the proposals.

Addendum: June 2007

As of April 2007, 25 state legislatures had rejected the proposed UCC choice of law rule and enacted Revised Article 1 by substituting the text of the current rule (UCC § 1-105) for the rule that was proposed. No state other than Virginia and Maryland has enacted UCITA and several states have enacted "bomb shelters" to protect their residents from UCITA's choice of law provisions.

Keywords: Contracts, conflict of laws, party autonomy, Uniform Commercial Code, legislation

JEL Classification: K10, K12, K20, K41