Also known as: applicable laws in contract cases · choice of law · governing law · lex contractus
Written by attorneys — see sources below.
A rule for determining which jurisdiction's substantive law governs the rights and duties of parties to a contract when the transaction involves contacts with multiple states. The rule first honors an effective choice of law by the parties. In the absence of such a choice the rule selects the local law of the state with the most significant relationship to the transaction and the parties.
Arcadia Retail, incorporated in State A, contracted with Apollo Energy, a State B firm, for delivery of fuel to stores in both states. Arcadia sued Apollo in federal court in State A for breach. The court applied State A's choice-of-law rules to decide whether State A or State B law measured the seller's performance obligations.
Anchor Bank in State X sold specialized equipment to Argonaut Shipping, headquartered in State Y, with delivery and payment occurring in State Z. When a dispute arose over title and risk of loss, the court weighed the contacts listed in the Restatement factors to identify the state whose law had the most significant relationship to the sale.
Austin Abbott executed a will in State P that contained a contractual promise to transfer land located in State Q to his niece Abigail Alvarez. After his death the niece sought enforcement in State R. The court checked whether the execution satisfied the law of the place of execution, the testator's domicile, or the place of the land.
Anika Anand, a State M resident, sued Alexis Archer, a State N resident, in federal court in State M for an accounting under a joint-venture agreement performed in both states. The court treated the accounting rules as substantive and therefore followed State M's choice-of-law rules to select the governing law.
In May 1930 the Van Sweringen Corporation issued $30,000,000 in notes under an indenture naming Guaranty Trust Co. of New York as trustee with power to enforce noteholders' rights. In October 1930 Guaranty and other banks advanced large sums to companies affiliated with the Corporation and controlled by the Van Sweringens. When the Corporation could not meet its obligations, Guaranty participated in an exchange plan under which noteholders could surrender their notes for cash equal to 50 percent of face value plus twenty shares of Van Sweringen stock per $1,000 note; the offer remained open until December 15, 1931. In 1934 respondent York received $6,000 of the notes as a gift from a donor who had not accepted the exchange offer. In April 1940 three accepting noteholders filed the Hackner suit in federal court charging Guaranty with fraud and misrepresentation in connection with the exchange. York's motion to intervene was denied, and summary judgment for Guaranty was affirmed on appeal. On January 22, 1942, after her exclusion from the Hackner litigation, York filed the present class action in the United States District Court for the Southern District of New York on behalf of non-accepting noteholders. The complaint, resting exclusively on diversity of citizenship, alleged that Guaranty had breached its trust by failing to protect noteholders' interests when it assented to the exchange offer and by failing to disclose its own self-interest. The district court granted Guaranty's motion for summary judgment on the authority of the Hackner decision. The Circuit Court of Appeals reversed, holding that a federal court sitting in equity is not required to apply the New York statute of limitations that would govern an identical suit in the New York state courts. The Supreme Court granted certiorari.
View caseAdam Anderson contracted with Amber Alonzo to build a warehouse spanning State C and State D. Anderson sued in federal court in State C alleging breach. The court refused to follow a State C procedural rule that would have removed the contract issues from the jury because doing so would alter the essential character of the federal proceeding.
The petitioner, a resident of North Carolina, sued respondent, a South Carolina corporation, for damages for injuries allegedly caused by the respondent's negligence. He was employed as a lineman in the construction crew of a construction contractor. Respondent Blue Ridge Rural Electrical Cooperative, Inc., a South Carolina corporation in the business of selling electric power, had contracted with R. H. Bouligny, Inc. for $334,300 to build approximately 24 miles of new power lines, reconvert about 88 miles of existing lines to higher capacities, and construct two new substations and a breaker station. The petitioner was injured while connecting power lines to one of the new substations. Byrd first recovered full benefits under the South Carolina Workmen's Compensation Law from his direct employer Bouligny. He then filed a negligence action against Blue Ridge in the United States District Court for the Western District of South Carolina under diversity jurisdiction pursuant to 28 U.S.C. § 1332. At trial Blue Ridge asserted an affirmative defense that Byrd qualified as its statutory employee because the contracted work was part of its trade, business, or occupation. Blue Ridge's manager testified on direct examination that three of its substations had been built by its own construction and maintenance crews. His answers on cross-examination created uncertainty that prompted the trial judge to note he appeared to have changed his testimony. Blue Ridge also introduced evidence that it financed the project with a federal loan, purchased the materials, and maintained an engineering service contract with an independent firm for design and supervision. Its charter under the South Carolina Rural Electric Cooperative Act authorized it to construct generating plants, buildings, and equipment necessary for its operations. After all evidence was presented the district judge struck the affirmative defense, ruling that Blue Ridge could not be a statutory employer because its crews performed work only for its own use rather than for others. The judge then denied Blue Ridge's motion for a directed verdict and submitted the negligence claim to the jury, which returned a verdict for Byrd in the amount of $126,786.80. The Court of Appeals for the Fourth Circuit reversed, resolved uncertainties in the manager's testimony in Blue Ridge's favor, and directed entry of judgment for Blue Ridge without remanding for further proceedings. Byrd petitioned for certiorari, which the Supreme Court granted. The case had previously been dismissed on the ground that Blue Ridge enjoyed tort immunity as a nonprofit corporation, but the Court of Appeals had reversed that dismissal and remanded for trial. On the present appeal the Court of Appeals did not reach other grounds raised by Blue Ridge because its resolution of the statutory employer issue disposed of the case.
View caseApollo Energy purchased a policy from Hartford Fire Insurance Co. covering risks in multiple states. When a coverage dispute arose, the court examined whether the parties' contacts and the policy's center of gravity pointed to one state's law or permitted application of the law chosen in the policy.
In the late 1970s, ISO, an association of approximately 1,400 domestic property and casualty insurers that serves as the almost exclusive source of support services for CGL insurance in the United States, began revising its 1973 standard CGL policy form. The 1973 form provided occurrence-based coverage for sudden and accidental pollution and did not cap defense costs. Primary insurers including Hartford Fire Insurance Company, Allstate Insurance Company, Aetna Casualty and Surety Company, and CIGNA Corporation sought four changes: a shift to claims-made coverage with a retroactive date, elimination of pollution coverage, and a legal defense cost cap. After ISO proposed 1984 forms that omitted some of these changes, Hartford persuaded General Reinsurance Corporation, the largest American reinsurer, to procure the modifications or derail the program. The Reinsurance Association of America agreed to boycott the 1984 forms unless the changes were added, and domestic and London reinsurers informed ISO they would withhold reinsurance until the forms were altered. ISO then withdrew the 1984 forms and adopted 1986 forms containing a retroactive date and pollution exclusion; it later withdrew support services for the 1973 form. Separate agreements among London reinsurers required primary insurers to switch to claims-made policies and excluded pollution coverage from reinsurance contracts covering North American risks. Nineteen states and many private plaintiffs filed 36 complaints alleging that these actions violated section 1 of the Sherman Act. The cases were consolidated in the Northern District of California. The District Court granted motions to dismiss in 1989, holding the conduct fell within McCarran-Ferguson immunity and applying international comity to the foreign defendants. The Ninth Circuit reversed in 1991. The Supreme Court granted certiorari in 1992.
View caseThe court applies the choice-of-law rules of the state in which it sits. Those rules are treated as substantive under Erie, so the federal court follows the forum state's conflict rules rather than creating its own.
Supporting sources
The court identifies the state with the most significant relationship to the transaction and the parties by evaluating the place of contracting, place of performance, location of the subject matter, and the domiciles and places of business of the parties.
A court honors the parties' choice unless it lacks a reasonable basis or violates a fundamental policy of a state with a materially greater interest that would otherwise supply the governing law.