The term lex loci contractus is a legal term based on the Latin expression "law of the place where the contract is made.” The term is used to describe the proper law for deciding contract disputes. It is applicable when a question of the validity of a contract comes into question.

Definition of "Lex Loci Conctractus"

Simply stated, the principle of lex loci contractus means the that the contract gains its validity based on the laws of the place where the contract was formed. The rule of lex loci contractus does not apply in situations where the contract is in violation of the law of nature or the law of a forum country.

In the event that a contract is made in one state but the obligations of it are carried out in a different state, the applicable law will be in the state in which the contract was constructed and signed. Any disputes that arise from the contract will be decided on using the laws of the origination state.

The application of lex loci contractus has applied in many court decisions, including the following cases:

  • Southeast vs. Trimm, decided by the Supreme Court of Georgia
  • In Pritchard vs. Norton, decided by the United States Supreme Court

The rule was primarily founded not only for the convenience it provides but its necessity in carrying out commerce in the nation. There are a number of systems founded on this principle:

  • Purchases
  • Sales
  • Mutual credits
  • Transfers of negotiable instruments

This same rule can apply in the invalidating of contracts as well. If the contract was legal or void in the place in which it was created, it would be deemed illegal everywhere based on the element of natural justice. There is an exception to the rule which states that no nation can be bound to enforce contracts that would be considered injurious to its citizens or its own interests.

Additionally, some states will have their own internal laws in regards to restricting the rule of lex loci contractus. An example is the State of Georgia, which limits the application of foreign laws to the statues and decisions that control those statutes. So if there are no statutes involved in the case, the local law will be used.

Application of Lex Loci Contractus

The rule of lex loci contractus has been applied in a number of court cases at many levels of law. An example was the case of Publish America vs. Stern in which the U.S. District Court in Maryland ruled on a defendant's motion for a partial summary judgment as well as a cross-motion by the plaintiff to render a summary of judgment for tort action and a breach of contract.

In this case, the plaintiffs brought a suit against Tran Source Logistics and Howard Cates. The suit was based on four grounds:

The plaintiffs were both limited liability companies that retailed and wholesaled products of the Marc Ecko-branded clothing. The company MEE Direct had been organized under formation laws in Delaware with its sole member, Holton 99, being an LLC organized under New Jersey Law. MEE Apparel was organized under New Jersey organization laws and shared the same ownership as MEE Direct.

The defendant Tran was a Maryland-based corporation, and Howard Cates was a citizen of Pennsylvania and owner of the company.

The dispute arose over an agreement between the companies that stated that Tran would provide MEE with transportation services, including the following:

  • Collecting invoices
  • Reviewing invoices
  • Auditing invoices of MEE's carriers

Tran was also to make payments to carriers on behalf of MEE. Tran failed to make payments to the vendors and instead used the money to pay their vendors, payroll, corporate debt, and expenses. When Cates took over as president, he began using funds based on the urgency of given situations. The president never disclosed the company's financial constraints to MEE but continued to take payments.

Due to the rule of lex loci contractus, the suit was moved to the District of Maryland, where the contract was formed and subject to Maryland law. Ultimately, the court granted the defendant's motion and granted part and denied part of the plaintiff's motions.

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