Contract Choice of Law Provision

Memorandum
Date: September 1, 2016
Re: Impact of the law chosen to govern matters directly related to a contract as well as matters
arising out of or related to a contract.
Overview
Question: What aspects of a chosen law govern over matters in connection with a contract?
Answer: First, a court will look at the language of the choice of law provision and determine if the
drafter intended the governing law to only cover the contract (narrow) or the governing law
covers the contract and all matters arising out of or related to the contract (broad). If a court
determines that a choice-of-law provision is narrow then it will only apply the chosen law in matters
dealing with interpreting or enforcing provisions of the contract; the law of the venue will govern
matters arising out of or related to the contract. On the other hand, if a court determines that a
choice-of-law provision is broad, then the law chosen in the contract will govern all matters
associated with the contract, whether in contract law, tort law, etc.
Second, a court will rely on some form of Section 187 of the Second Restatement of Contracts,
which evaluates the acceptability of the contractually chosen body of law by (1) determining
whether sufficient contacts exist with the location governed by the chosen law and (2) whether
application of the chosen body of law would contravene the policies implemented by law governing
the venue location.
Question: What is Californias law with respect to the enforcement of a choice-of-law provision
in a contract?
Answer: the following excerpts from California court cases provide the legal tests and principles
that are followed by California courts.
Law
"[W]hen a rational businessperson enters into an agreement establishing a transaction or

relationship and provides that disputes arising from the agreement shall be governed by the law of
an identified jurisdiction, the logical conclusion is that he or she intended that law to apply to all
disputes arising out of the transaction or relationship." Washington Mutual Bank v. Superior Court,
24 Cal. 4th 906, 916 (Cal. 2001) (internal citation omitted).
The California Supreme Court has held that "a valid choice-of-law clause, which provides that a
specified body of law `governs' the `agreement' between the parties, encompasses all causes of
action arising from or related to that agreement, regardless of how they are characterized, including
tortious breaches of duties emanating from the agreement or the legal relationships it creates."
Hatfield v. Halifax PLC, 564 F.3d 1177, 1183-84 (9th Cir. 2009) (quoting Nedlloyd Lines B.V. v.
Superior Court, 3 Cal.4th 459, 466 (1992)).
If the trial court finds that the class claims fall within the scope of a choice-of-law clause, it must
next evaluate the clause's enforceability pursuant to the analytical approach reflected in section
187, subdivision (2) of the Restatement Second of Conflict of Laws (Restatement). Under that
approach, the court must first determine: "(1) whether the chosen state has a substantial relationship
to the parties or their transaction, or (2) whether there is any other reasonable basis for the parties'
choice of law. If neither of these tests is met, that is the end of the inquiry, and the court need not
enforce the parties' choice of law. If, however, either test is met, the court must next determine
whether the chosen state's law is contrary to a fundamental policy of California. If there is no such
conflict, the court shall enforce the parties' choice of law. If, however, there is a fundamental
conflict with California law, the court must then determine whether California has a `materially
greater interest than the chosen state in the determination of the particular issue....' (Rest., 187,
subd. (2).) If California has a materially greater interest than the chosen state, the choice of law
shall not be enforced, for the obvious reason that in such circumstance we will decline to enforce a
law contrary to this state's fundamental policy." (Nedlloyd, 3 Cal.4th at 466

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Memorandum

Date: September 1, 2016

"[W]hen a rational businessperson enters into an agreement establishing a transaction or

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