Brazilian Noteholder Sues Brazilian Guarantor – What Does New York Law Have To Do With It?


At the opening of the Los Angeles aqueduct on November 5, 1913, William Mulholland famously declared “There it is. Take it!” Much the same could be said of Civil Code Section 1646.5. The statute provides that the parties to a contract relating to a transaction involving at least $250,000, including a transaction covered by Commercial Code Section 1301(a), may agree that California law governs their rights and duties in whole or in part, whether or not the contract or transaction bears a reasonable relation to California. In other words, “There is California law. Take it!”

The New York Court of Appeals recently considered a very similar New York statute. In IRB-Brasil Resseguros, S.A. v Inepar Invs., S.A., 20 N.Y.3d 310 (2012), a Brazilian noteholder sued on a guarantee of the notes. The guarantor, a Brazilian power company, moved for summary judgment, arguing that the guarantee was void under Brazilian law because it was never authorized by its board of directors. The guarantor claimed that New York’s choice-of-law principles should apply, resulting in the application of Brazilian substantive law. The guarantee provided that it would be ”governed by, and . . . be construed in accordance with, the laws of the State of New York.”

The Court of Appeals applied New York General Obligations Law § 5-1401(1) which was apparently the model for California’s Section 1646.5. The guarantor didn’t challenge the validity of the New York statute, but argued that the entirety of New York law, including its choice of law provisions must be applied. The Court of Appeals didn’t buy that reasoning:

To find here that courts must engage in a conflict-of-law analysis despite the parties’ plainly expressed desire to apply New York law would frustrate the Legislature’s purpose of encouraging a predictable contractual choice of New York commercial law and, crucially, of eliminating uncertainty regarding the governing law.

Thank you to Nancy Wojtas at Cooley LLP for bringing this case to my attention.

For more on Section 1646.5, see this post from a few years back. The Los Angeles Times has posted these famous pictures of the opening of the aqueduct.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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