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New York Court of Appeals Rules that Conflict-of-Law Analysis is Unnecessary When Contract Contains New York Choice-of-Law Clause

The New York Court of Appeals has now confirmed that a conflict-of-laws analysis need not be undertaken, and New York substantive law must be applied, when an express choice of New York law is contained in the parties' contract. IRB-Brasil Resseguros, S.A. v. Inepar Investments, S.A. (Dec. 18, 2012).

In IRB, the Plaintiff was a Brazilian company that had purchased USD 14 million in Global Notes issued by Inepar, a Uruguayan company, and guaranteed by IIC, a Brazilian company.  The Agreement at issue stated that "[t]his Agreement, the Notes, and the Guarantee shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to conflict of laws principles."  The Guarantee provided that it would be "governed by, and . . . be construed in accordance with, the laws of the State of New York."  Plaintiff commenced the lawsuit against Inepar and IIC in 2006, seeking payment of the Global Note principal and the unpaid accrued interest.  Inepar defaulted and IIC moved for summary judgment, arguing that New York's choice-of-law principles should apply, resulting in the application of Brazilian substantive law (under which the Guarantee would be void because it was never authorized by IIC's board of directors).  The New York Supreme Court (i.e. – the Court of first instance), denied IIC's motion for summary judgment, ruling that the choice-of-law clause denoting New York law should be given "mandatory effect" under General Obligations Law § 5-1401.  The Appellate Division affirmed this ruling, and the Court of Appeals granted leave for IIC to appeal.

In affirming the decisions of the lower courts, the Court of Appeals looked to the plain language of the relevant provisions of New York's General Obligations Law ("G.O.L."), along with the legislative history surrounding the enactment of same.  Under G.O.L. § 5-1401(1), parties to a contract "may agree that [New York law] shall govern their rights and duties in whole or in part, whether or not such contract, agreement or undertaking bears a reasonable relation to this state", as long as the transaction involved USD 250,000 or more.  The Court noted that prior to § 5-1401(1)'s enactment, New York Courts reviewing a New York choice-of-law clause would not recognize the clause if the particular contract lacked sufficient "contact" or "relationship" with New York.  Instead, the Courts would conduct a conflicts analysis and apply the law of the jurisdiction with "the most significant relationship" to the transaction and the parties at issue.  In passing § 5-1401(1) in 1984, the Legislature recognized that the prior "most significant relationship" rule would deter parties from choosing New York law in their contracts, which could affect New York's standing as a commercial and financial center.  Accordingly, the Legislature determined that the enactment of  § 5-1401(1) would "encourage the parties of significant commercial, mercantile or financial contracts to choose New York law" by eliminating uncertainty as to whether their choice of law would be rejected by a New York Court.  The Court also cited G.O.L. § 5-1402(1), which allows parties to maintain an action in a New York court, even if the parties lack New York contacts, if they have engaged in a transaction involving USD 1 million or more; agreed in their contract to submit to the jurisdiction of New York Courts (as the parties in IRB had); and had chosen to apply New York law under § 5-1401(1). 

Reading the two statutes together, and applying them to the Parties' Agreement, the Court of Appeals concluded that the need for a conflict-of-laws analysis was obviated by the terms of the agreement, and that New York substantive law was to be applied.  The Court further held that the plain language of G.O.L. § 5-1401 mandates that New York substantive law be applied when parties agree to a New York choice-of-law provision in their contracts, and that express contractual language excluding New York's conflict-of-laws principles is not necessary.  In so holding, the Court found that it would "strain[] credulity that the parties would have chosen to leave the question of the applicable substantive law unanswered and would have desired a court to engage in a complicated conflict-of-laws analysis, delaying resolution of any dispute and increasing litigation expenses."

Read a copy of the New York Court of Appeals' decision

For more information on this decision and how it may apply to specific facts and circumstances, please do not hesitate to contact us at info@chaloslaw.com.

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