Conflict of Law Clauses | Whitman Legal Solutions, LLC

Once, a music classmate asked me for help with his music theory homework. He said he couldn’t figure out what key a piano composition was in. I watched the music, starting with the key[1] and the signing key[2] to restrict key options. Immediately I saw his challenge; unlike almost all other piano pieces where the lower staff is in bass clef, both staves were in treble clef.[3] My classmate, he had glossed over the key signs, thinking they were ‘boilerplate’.

Like my music theory classmate, when reviewing real estate contracts, many people gloss over various “boilerplate” sections. People believe that the ‘boilerplate’ is ‘standard’ and think there’s no need to read them, let alone negotiate them. In reality, the “boilerplate” sections are important, and the contracting party can be burned by not carefully reviewing and negotiating them.

This is one of a series of blog posts discussing typical boilerplate terms and their impact on real estate contracts.

Choice of law clauses

Choice of law clauses generally read as follows:

The parties agree that this Agreement shall be construed in accordance with the laws of the State of New York, without regard to conflict of law rules, as Buyer’s head office is in the State of New York.

This contract term seems simple – the parties agree that anyone interpreting the contract must apply New York law. New York is a populous state with a large number of business interpreting business law, so many mortgage lenders in particular like New York law to apply to their loan documents. In certain circumstances, it may be appropriate for the buyer’s registered office to govern the applicable law.

However, as simple as the wording of the contract may seem, before accepting state law, parties to a real estate contract should consider the following:

  1. What law would apply if I did not accept this choice of law? This will usually be where the property is located or where the contract was signed.

  2. What law would apply if I did not accept this choice of law? It will generally be one or the other where the use of real estate? State laws may vary in important areas such as how long a statute of limitations lasts or whether indemnification clauses are enforceable. Contracting parties should understand both the legal protections they are giving up and what they are gaining in the choice of law clause.

  3. Is the choice of law clause enforceable? Some courts will not apply the law of a state that has no connection with the contracting parties or the contract. This is why the clause mentions that the link between New York and one of the parties in that its head office is located there. For some States, this connection may be sufficient to show a connection between the State and the contract. In other states, more may be required.

What are the conflict of laws rules?

The second part of the model contract clause, which speaks of “conflict of law rules[4]”, may not seem important, but it can make a difference as to which law is applied. Each state has what are called “conflict of law rules,” or rules that decide which law applies if the contract is silent. These “conflicts of law rules” are what a lawyer or judge would use to decide which law would apply in answering question 1 above.

Suppose our real estate contract is signed by a seller from Ohio and a buyer from Florida for real estate in Georgia does not have a choice of law clause. The parties would then be required to use complex rules in the three states that related to the contract, and they might find that the law differs depending on which state’s conflict of laws rules are applied.

Conflict of law determinations are based on a variety of factors, including the connection of the contract to a state (for example, where the contract was signed and where the contract is to be performed) and what societal interests different states have in the contract. Sometimes it is even possible that the law of one state applies to one legal matter and a different state law applies to another legal matter in dispute.

With our contract between Ohio seller and Florida buyer, assume that each party signs the contract in that party’s state of residence. Suppose the seller sued the buyer for breach of contract claiming that the buyer reneged on acquiring the property. The buyer replies that the contract is not valid because the specific formalities required for signing a contract under Florida law have not been completed. The court may choose to apply Florida law to the buyer’s defense of contract performance, but Georgia law (the location of the property) to the seller’s underlying claim for breach of contract. Meanwhile, both parties will pay their attorneys just to determine which state law governs – without even getting into the underlying dispute!

Parties are rarely well served by arguing choice of law issues rather than getting to the heart of the dispute. In addition, lack of clarity about the applicable legal rules can contribute to the likelihood of disputes when parties find themselves disagreeing about which rules apply to a particular circumstance. It is almost always best for the parties to agree upfront on which law will apply and put that wording into the contract.

How to Choose a State for Your Choice of Law Clause

As long as there is a choice of law clause, does it matter which state is listed? Frequently, yes. State laws differ, making certain laws more favorable to parties in particular circumstances.

However, state selection involves more than negotiating the most favorable law for one party or another. In our previous example, deciding that Nevada law would apply to the contract between a party from Ohio and Florida regarding the sale of real estate in Georgia might not be enforceable, as many courts will require a bond minimum with the State whose law is applied. .

Additionally, judges and attorneys will almost always be most familiar with the laws of the state in which they practice. If a lawsuit were filed in Georgia in our example, but the contract required the application of Ohio law, this would require the attorneys and the court to become aware of applicable Ohio law. The result would likely be increased legal costs and possibly a less informed outcome.

Another reason for choosing state law could be the clarity of state law. Some states, including Maryland where my office is located, do not have a large number of court cases interpreting state commercial law. Other states, for example New York, have a rich history of commercial law. Parties can choose a state where there is more applicable case law, which can increase the predictability of the outcome of a trial. Many commercial lenders want their loan documents to be subject to New York law for this reason.

Don’t ignore the Boilerplate!

A choice of law clause should not be overlooked as a “boilerplate”. Rather, the state law chosen will depend on the states involved, the type of contract, the relative objectives, and the bargaining power of the parties. Parties should work with their lawyers to ensure both that there is a choice of law clause and that they understand the implications of the law they ultimately choose.

[1] In Western music, we usually see one of three possible clefs, which are placed on a “staff” made up of five parallel horizontal lines. The three clefs are: a treble clef (which revolves around the G on the staff), a bass clef (which has two dots, one on each side of the F on the staff) and a C clef (which revolves around the do Piano music is usually written with the upper staff as a treble clef (called the treble clef because it represents higher notes) which should be played with the right hand and a bass clef (called the bass clef because it represents the lowest notes) on the lower staff, which must be played by the left hand.

[2] In traditional Western music, there are 30 possible musical tones. There are 15 possible key signatures, each of which can represent a “relative” major key or minor key. The 15 possible key signatures consist of all sharps (up to seven possible sharps) or all flats (up to seven possible flats), plus no sharps or flats. There are no key signatures that consist of both sharps and flats. C major, as many know, has no sharps or flats in the key signature. Its relative minor is a minor. Therefore, if I hadn’t seen any sharps or flats in the key signature, that would have told me that the key was probably in C major or C minor, thus reducing the possibilities from 30 to two.

[3] Sometimes composers use an alternate key for an instrument’s part when the instrument is played at the extremes of its range. The intent is to allow music to be written largely in all five staves, rather than adding extra lines called “ledger lines”. In this case, the piano had to perform this whole part of the composition high up on the keyboard, so the composer chose to write the left and right hand parts to be played in treble clef.

[4] Many lawyers will use the terms choice of law and conflict of laws interchangeably, and they have very similar meanings. For the purposes of this blog post, I will refer to the contractual provision in which the parties choose a state law as the “choice of law” and the more general rules of state law under which the law applicable is chosen as “conflict of law”. ” rules.

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