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- The New York Court of Appeals Broadly Validates Contractual Choice of Law Clauses
The New York Court of Appeals Broadly Validates Contractual Choice of Law Clauses
Since the enactment of General Obligations Law (“GOL”) §§ 5-1401 and 5-1402, which permit parties to contracts involving transactions exceeding threshold amounts ($250,000 and $1,000,000, respectively) to agree to apply New York law and litigate their disputes in New York, commentators and courts have expressed doubts about the enforceability of a New York choice-of-law clause where the contracting parties have limited or no contacts with New York. On December 18, 2012, the New York Court of Appeals held that such a clause is enforceable even absent any contacts with New York other than the parties’ choice of New York law and forum in their agreement. IRB-Brasil Resseguros, S.A. v. Inepar Investments, S.A., et al., 2012 N.Y. Slip Op. 08669. The Court of Appeals also held that a New York choice-of-law clause requires application of New York’s substantive law even where the clause does not expressly exclude the application of New York conflicts of law principles.
Defendant Inepar Investments S.A., a Uruguayan corporation, issued $30 million in Notes. The Notes were guaranteed by its indirect parent, Inepar S.A. Industria e Construções.
The Guarantee stated that it was “governed by . . . the laws of the State of New York.” Unlike the New York choice-of-law clause in the contemporaneously executed Fiscal Agency Agreement (governing the issuance of the Notes), the Guarantee’s New York choice-of-law clause did not expressly exclude the application of New York’s conflicts of law principles.
IRB-Brasil Resseguros S.A., a Brazilian corporation, bought $14 million of the Notes. IRB commenced an action against IIC in New York seeking payment of the unpaid principal and interest due on the Notes.
The Guarantor argued that the Guarantee’s choice-of-law clause required the application of New York’s conflicts of laws principles which would mandate the application of Brazilian substantive law. It argued that Brazilian law rendered the Guarantee unenforceable because the Guarantee’s execution had not been properly authorized by the Guarantor’s board. Notwithstanding the failure to expressly exclude application of New York’s conflicts of laws principles, IRB argued that the Guarantee’s choice-of-law clause mandated the application of New York’s substantive law and that the Guarantee was enforceable either because the persons executing the Guarantee had apparent authority or because the Guarantee had been ratified by the acceptance and retention of the proceeds of the sale of the Notes by the Guarantor’s subsidiary.
The Issuer defaulted. The trial court granted summary judgment in favor of IRB and IRB was ultimately awarded over $27 million in damages. The Guarantor appealed.
General Obligations Law § 5-1401(1) provides:
The parties to any contract . . . arising out of a transaction covering in the aggregate not less than two hundred fifty thousand . . . may agree that [New York] law shall govern their rights and duties in whole or in part, whether or not such contract . . . bears a reasonable relationship to this state.
General Obligations Law § 5-1402(1) provides:
[A]ny person may maintain an action or proceeding against a foreign corporation [or] non-resident . . . where the action or proceeding arises out of or relates to any contract . . . for which a choice of New York law has been made in whole or in part pursuant to section 5-1401 and which (a) is a contact . . . in consideration of, or relating to any obligation arising out of a transaction covering in the aggregate, not less than one million dollars, and (b) which contains a provision or provisions whereby such foreign corporation or non-resident agrees to submit to the jurisdiction of the courts of this state.
The Court of Appeals’ Decision
The opinion leads with the statement that “the need for a choice of law analysis is obviated by the parties’ agreement.” The General Obligations Law provisions quoted above “read together” permit parties to select New York law to govern their contractual relationship and to avail themselves of New York courts “despite lacking New York contacts.”
The Court of Appeals next held that parties seeking to be governed by New York’s substantive law “are not required to expressly exclude the application of New York conflicts of law principles.” Thus, it was “inconsequential” that (unlike the Fiscal Agency Agreement’s choice-of-law clause) the Guarantee’s choice-of-law clause did not expressly exclude New York’s conflict of law principles. In so holding, the court sought to give effect to the legislative intent behind the laws: to secure and augment New York’s reputation as a center of international commerce by providing certainty and predictability among parties to global transactions in the application of New York law to their contractual obligations.
Parties may continue to choose New York as the law to be applied to the interpretation of their contracts and as the jurisdiction in which disputes over the enforcement of their contracts will be resolved with renewed assurance that New York courts will give effect to their choice.
For more information concerning the matters discussed in this publication, please contact the authors, James Gadsden (212-238-8607, email@example.com) or Leonardo Trivigno (212-238-8724, firstname.lastname@example.org), or your regular CL&M attorney.
Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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