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Laws Applicable To Contracts

No element of the law is more confusing than that under the conflict of laws and the conflict between the places of making and performance of a contract where such places are not the same.  This confusion is mainly caused as a result of the existence of a number of choice of law that courts have developed and applied over the years in contract cases.  Law governing contracts apply to the parties regardless of the fact that which conflict of laws rule is applied.

Courts have recognized that there may be a “false conflict.”  To resolve a conflict of law issue, the court must determine whether there is a true conflict exists between the application of differing states’ laws.  Under general conflict of laws principles, if the laws of the two jurisdictions produce the same result on a particular issue presented, then there is a false conflict.  Under this condition, the court must avoid the choice-of-law question[i] and apply the presumptive local law.  If a true conflict of laws exists, a court must then determine which state has the greater interest in the application of its law[ii].  Under the most significant relationship test used in choice of law cases, courts must take into account[iii]:

  • Place of the alleged contracting or where the relationship is centered;
  • Place of negotiating the alleged contract;
  • Place of the alleged performance;
  • Place of the subject matter; and
  • Place(s) of incorporation and business of the parties.

It can be seen that courts have abandoned the traditional conflict-of-laws rules.  Instead, courts adopted the rules regarding the rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which has the most significant relationship to the transaction and the parties.  This rule is known as significant relationship rule.  In addition to being referred to as the “significant relationship” rule, this is also referred to as the center-of-gravity theory, the interest weighing or choice-influencing theory, the grouping of contacts theory.  Under this rule, courts apply the law of the state with the most significant or substantial contacts with the parties and the transaction underlying the lawsuit in the absence of a valid contractual choice of law.  One of the traditional conflict-of-laws rules that many courts abandoned in favor of the significant relationship rule is that the construction and validity of a contract are governed by the law of the place where it is made.

It is to be noted that some courts have stated that the parties to a contract may effectively agree as to that state whose law will govern the validity, construction, interpretation, and effect of the contract.  Some courts have reasoned that there is no justification for precluding parties to a contract from stipulating that the laws of any jurisdiction must govern the rights and obligations of the parties, if they are not against public policy.

[i] Underhill Inv. Corp. v. Fixed Income Disc. Advisory Co., 319 Fed. Appx. 137, 140 (3d Cir. Del. 2009)

[ii] Hammersmith v. TIG Ins. Co., 480 F.3d 220 (3d Cir. Pa. 2007)

[iii] Underhill Inv. Corp. v. Fixed Income Disc. Advisory Co., 319 Fed. Appx. 137, 140 (3d Cir. Del. 2009)

Inside Laws Applicable To Contracts