You Can Choose Another State’s Law As Long As It is Not Obnoxious

If you are a vendor or supplier of services outside of New York you may want your transaction with your New York customer to be controlled by the law of your state and not that of New York. There may be some good reasons to want your state’s law to control, particularly if it provides certain advantages to you as a seller if you end up having to sue your customer in New York. So, you ask your company’s attorneys to draft up language in your standard contract which provides that in the event of a dispute the law of your state will govern. You think you are protected until the day you end up suing that New York customer you knew was going to be trouble and your customer’s attorneys argue that despite what the contract says, applying your state’s law is unfair. How do New York courts handle choice of law clauses?

In Welsbach Electic Corp. v. MasTec North America, Inc., 7 N.Y.3d 624 (2006) (“Welsbach”), New York’s highest court set forth a two-pronged approach in determining whether a choice of law clause in a written contract would be enforced. First, the Court stated that as a general matter, a choice of law clause would be enforced if the chosen law bears a reasonable relationship to the parties or the transaction. If the agreement is clear and unambiguous, a court will not interfere with the contract and the intent of the parties in choosing a particular law. However, New York’s highest court goes on to state that a contract, which is clearly illegal or contravenes some fundamental principle that is deeply rooted in New York State’s history, or as the high court put it — those foreign laws that are “truly obnoxious” — will not be enforced. If this type of moral repugnancy is not present, New York will enforce the intent of the parties in choosing to be governed by a sister state’s law.

Welsbach is a good example of how New York analyzes choice of law clauses. In Welsbach, the issue concerned whether a Delaware sub-contractor’s agreement with a Florida general contractor which contained a “pay if paid” provision (legal under Florida law) and which agreement provided that Florida law applied would be enforced even though the provision was illegal under Section 34 of New York’s lien law. In order to determine the issue, the Court needed to decide whether a fundamental concept was in question. Finding that prior precedent has found fundamental concepts to be present in cases involving human rights and civil rights discrimination, the Court held that the issue of risk allocation present in the lien law context did not arise to the level of a fundamental concept, particularly where the parties are commercial entities and voluntarily entered into the contract. In short, the Court held that the given all of the circumstances, the “pay if paid” clause was not “truly obnoxious” so as to void the parties’ choice of law.

Other examples of how New York courts have dealt with choice of law clauses include a New York appellate court that refused to enforce a Florida choice of law provision because in the context of employee restrictive covenants, Florida expressly forbids courts from considering hardship imposed upon an employee in evaluating reasonableness of a restrictive covenant, and requires courts to construe restrictive covenants in favor of party seeking to protect its legitimate business interests. This, the New York court found to be truly obnoxious and contrary to New York public policy. Brown & Brown, Inc. v. Johnson, 115 A.D.3d 162 (4th Dep’t. 2014). And in Boss v. American Express Financial Advisors, Inc., 15 A.D.3d 306 aff’d sub nom. Boss v. Am. Express Fin. Advisors, Inc., 6 N.Y.3d 242 (2006), the Court decided to enforce a choice of law provision of an employment agreement between financial advisers and financial advisory firm employing them, requiring that breach of contract action be brought under law of Minnesota, even though challenged deductions from pay, allegedly invalid under New York labor law, would be permitted under Minnesota law.   In so holding, the New York Court found that although the Minnesota law lacked a cap on otherwise legal deductions, available under New York, this did not preclude application of Minnesota law on grounds that enforcement would be offensive to New York public policy.

Though it is not always clear when a New York court will be offended by some conduct and find a public policy history contrary to a sister state’s law, the “truly obnoxious” standard has typically be found present in cases involving human rights and civil rights discrimination. Therefore, it is fair to say that New York Courts will enforce a choice of law provision if the choice of law bears a reasonable relationship to the law chosen and provided the law in question is not abhorrent to a fundament concept.