Conflict of Laws Provisions in Contracts

Key Takeaways

• Conflict of laws provisions help determine which jurisdiction’s laws apply in multi-jurisdictional legal disputes.
• Governing law clauses can reduce uncertainty and litigation risks by clearly identifying applicable law.
• Excluding conflict of laws principles prevents unintended application of another jurisdiction’s laws.
• Renvoi, though recognized in some legal systems, is largely avoided to prevent legal uncertainty.
• Courts apply various tests (e.g., most significant relationship test) to resolve conflict of laws issues.
• U.S. states may vary in approach, with some following the Restatement (Second) of Conflict of Laws.
• Including conflict of laws provisions is particularly important in international contracts.
• Legal assistance is advisable when drafting or interpreting conflict of laws provisions.

Conflict of laws provisions usually include identifying a governing law that the contracting parties agree to abide by in the case of a dispute related to the contract.

Governing Law Provision

A business contract usually contains a provision saying that the laws of a specific jurisdiction (for example, the laws of Delaware or the federal laws of the United States) would apply to the contract. Such a provision is called a governing law provision. It helps the contracting parties choose their own jurisdiction irrespective of the jurisdiction that would otherwise apply to the case. A governing law provision must not be illegal or against a public policy.

Excluding the Conflict of Laws Principles

The governing law provision usually includes a clause for exclusion of conflict of laws principles. There are two main reasons for this:

• It avoids the likelihood of any future argument that the law of a different jurisdiction should be applied on the grounds of conflict of laws principles.
• It avoids a renvoi, wherein a court refers a dispute involving conflict of laws to the jurisdiction of another country. A renvoi may result in nullifying the intention of the parties to apply the law of a specific jurisdiction to their case.

Thus, excluding the conflict of laws principles is an important clause of a governing law provision since it prevents the imposition of other laws than those intended by the contracting parties. It usually excludes the application of laws of the state where the cause of action arose.

For example, when you enter into a contract with a company located in Texas, the cause of action may arise in Texas. However, you may want the contract to be governed by the laws of Delaware instead and hence include a governing law provision. Unfortunately, the governing law provision may be in conflict with most of the state laws which state that the law of the state where the cause of action arose would apply to the case.

Now this would mean that the laws of Texas would apply to the contract despite your expressly choosing of Delaware laws. Including a clause to exclude the conflict of laws principles can help you avoid such situations.

Effectiveness of Renvoi

Renvoi is a French word which means “send back.” It refers to a situation where a court sends back a case to another state or country in the case of a conflict of laws. Several private international law systems reject the concept of renvoi since it creates legal uncertainty and brings inefficiencies in the legal process. Instead of resolving a case in an unequivocally acceptable manner, it often leads to endless rounds of referrals.

Due to this inherent flaw, even the countries accepting renvoi have reduced its application to the minimal extent. Contractual obligations and laws permitting broader autonomy to the parties are usually excluded from the scope of renvoi.

Criteria for Excluding Conflict of Laws Principles

In order to make the clause for exclusion of conflict of laws principles meaningful, it must meet all of the following three criteria:

• The private international law of the place must accept the concept of renvoi; otherwise, the courts would refuse a renvoi on their own, and hence there would be no need for the exclusion clause.
• The private international law of the place must not permit the parties to choose the law of their preferred jurisdiction. If it does, then the choice of law by the parties would be conclusive in itself without any need for the exclusion clause.
• Courts must not determine the validity of the choice of law provision or the intention of the parties in putting down such provision in the contract.

Conflict of Laws Explained

When a case is subject to the laws of two or more jurisdictions, and the laws have contradicting provisions with respect to any of the matters in dispute, such a situation is referred to as conflict of laws. The conflict can be between the laws of different states, municipalities, and countries or between any of these laws and a federal law.

The process through which a court determines which law to apply in the case of conflict of laws is called characterization or classification. When faced with the question of which law to apply in a given case, courts usually have two choices:

• Lex fori or the law of the forum.
• Lex loci or the law of the place where the transaction took place.

When Courts Disregard Governing Law Clauses

Even when a conflict of laws provision is included in a contract, courts may disregard it under certain circumstances, such as:

• Public policy violations: If applying the chosen law would violate the fundamental public policy of the forum state.
• Fraud or misrepresentation: If the clause was included under fraudulent conditions.
• Lack of connection: Some courts require a reasonable connection between the parties or the contract and the chosen jurisdiction.
• Consumer or employment contracts: Courts may refuse to enforce provisions that significantly disadvantage a weaker party (e.g., consumers or employees).

Thus, while conflict of laws provisions offer predictability, they are not always absolute.

Importance in International Contracts

Conflict of laws provisions play a crucial role in international contracts, where parties are often located in different countries with vastly different legal systems. Without clear conflict of laws clauses:

• Courts may apply international private law rules, which can vary significantly.
• There is increased risk of forum shopping and prolonged litigation.
• Legal outcomes may be unpredictable due to differing views on issues such as damages, enforceability, or remedies.

International agreements often rely on conventions such as the Rome I Regulation (in the EU) or the Hague Principles on Choice of Law in International Commercial Contracts to support contractual autonomy and clarify which laws apply.

U.S. State Variations in Conflict of Laws Rules

In the United States, there is no single federal rule governing conflict of laws provisions—each state adopts its own approach. For example:

• New York law heavily respects contractual autonomy, allowing parties broad discretion in selecting governing law, even if there’s minimal connection to the jurisdiction.
• California applies a governmental interest analysis, focusing on the comparative interests of the states involved in the dispute.
• Some states continue to follow traditional rules such as lex loci delicti, applying the law of the place where the tort occurred.

Given this variation, parties should carefully tailor conflict of laws provisions based on the relevant jurisdictions.

Restatement (Second) of Conflict of Laws

The Restatement (Second) of Conflict of Laws, widely cited in U.S. courts, provides guidance on resolving conflict of laws issues, especially in the absence of an explicit choice of law clause. This approach emphasizes the “most significant relationship” test, which considers several factors:

• The place of contracting
• The place of negotiation
• The place of performance
• The location of the subject matter
• The domicile, residence, nationality, or place of incorporation of the parties

This framework is designed to balance fairness, predictability, and the policies of interested states. Many courts use the Restatement’s flexible, interest-based approach as opposed to rigid mechanical rules like lex loci contractus.

Choice of Law vs. Conflict of Laws

While the terms "choice of law" and "conflict of laws" are often used interchangeably, they refer to related but distinct concepts. Choice of law refers to the decision made by parties in a contract to specify which jurisdiction’s laws will govern the agreement. Conflict of laws, on the other hand, is the legal process a court undertakes when determining which jurisdiction’s laws apply in the absence of such a provision.

In cases where a choice of law clause is absent or contested, courts must resolve the conflict by using predetermined legal frameworks or principles. These may include:

• The most significant relationship test (used in the Restatement (Second) of Conflict of Laws)
• Governmental interest analysis
• Lex loci contractus (law of the place the contract was made)
• Lex loci delicti (law of the place where the tort occurred)

Including a choice of law clause within a contract is a proactive way to avoid ambiguity and legal conflict.

Frequently Asked Questions

1. What is a conflict of laws provision in a contract?
   A conflict of laws provision specifies which jurisdiction’s laws will govern the contract in the event of a dispute, especially when the parties are located in different states or countries.
2. Why exclude conflict of laws principles from a governing law clause?
   Excluding these principles helps prevent a court from applying a different jurisdiction’s law due to conflict rules, thereby honoring the parties' original intent.
3. What is the renvoi doctrine, and why is it avoided?
   Renvoi refers to the process where a court refers a case to another jurisdiction’s laws, which may then refer it back. It creates legal uncertainty and is often excluded.
4. Are governing law clauses enforceable in all U.S. states?
   Generally, yes—but they may be unenforceable if they violate public policy, were induced by fraud, or have no reasonable connection to the chosen jurisdiction.
5. Do international contracts need conflict of laws provisions?
   Yes, they are especially critical in international contracts to clarify legal expectations and avoid unpredictable outcomes in cross-border disputes.

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