Significant Relationship Rule

The significant relationship rule provides that 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.  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.

According to 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.  Rather than mechanically apply the law of the place of contracting or the place of performance, courts apply the law of the state with the most significant or substantial contacts with the parties and the transaction underlying the lawsuit[i].  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.

The main intention behind the application of the significant relationship rule is to identify the state most significantly related to the particular issue and to apply its law to resolve the same.   The following factual contacts has to be considered applying the significant relationship rule to determine the law applicable to an issue:

  • The place of contracting;
  • The place of negotiation of the contract;
  • The place of performance;
  • The location of the subject matter of the contract; and
  • The domicile, residence, nationality, place of incorporation, and place of business of the parties.

[i] Brennan v. Carvel Corp., 929 F.2d 801 (1st Cir. Mass. 1991)


Inside Significant Relationship Rule