New York Court of Appeals Broadly Upholds Parties’ Freedom to Choose New York Law

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Explore:  Choice-of-Law

What’s The Takeaway?

The Court’s decision re-affirmed New York’s strong policy of (1) encouraging domestic and international commercial entities, including those who have little or no contact with New York, to choose New York’s “well-developed system of commercial jurisprudence;” and (2) offering commercial parties certainty that their contractual choices of law will be validated by New York courts. The Court’s decision confirms that parties to contracts that contain New York choice of law clauses, or parties contemplating including New York choice of law clauses in their contracts, can expect to have their disputes resolved under New York substantive law, even if the contract does not expressly exclude the application of New York conflict of laws principles. That certainty allows parties to know that, not only will their contractual choices be upheld, New York courts will be unlikely to engage in costly and time-consuming conflict of laws analysis.

Background

Defendant Inepar Investments, S.A. (“Inepar”) issued $30 million in Global Notes to raise capital and re-finance debt previously incurred by Inepar and defendant Inepar S.A. Industria e Construcoes (“IIC”), a Brazillian company that owned a 60% stake in Inepar. A Fiscal Agency Agreement between Inepar and IIC provided that the Notes and IIC’s Guarantee would be governed by New York law “without regard to conflict of laws principles.” The Guarantee provided that it also would be governed by New York law, but, notably, the Guarantee did not include the language “without regard to conflict of laws principles.”

Plaintiff IRB-Brasil Resseguros, S.A. (“IRB”), which had purchased $14 million of Inepar’s Notes, commenced an action against Inepar and IIC for unpaid interest and principal. On the parties’ cross-motions for summary judgment, IIC argued that New York’s choice of law principles should apply, which would result in the Notes being voided under Brazilian substantive law. IRB sought the application of New York substantive law without a conflict of laws analysis. The Supreme Court, New York County, and the Appellate Division, First Department, agreed with IRB.

The Court of Appeals granted leave to appeal and rejected IIC’s argument that the “whole” of New York law should apply, including its conflict of laws principles, and that, for New York substantive law to apply, the relevant clause in the Guarantee “would have had to expressly exclude New York’s conflict of laws principles.” The Court of Appeals held that “[e]xpress contract language excluding New York’s conflict of laws principles is not necessary.” In reaching that conclusion, the Court of Appeals relied heavily on the strong public policy set forth in General Obligations Law §§ 5-1401 and 5-1402, which permit parties to contracts exceeding certain thresholds ($250,000 and $1,000,000, respectively) to agree to submit to the jurisdiction of New York courts and have their disputes resolved under New York substantive law, even if the parties have little or no contact or relation with New York. Finally, the Court of Appeals concluded that, if parties wish to have New York’s conflict of laws principles determine which substantive law should be applied to resolve their dispute, “they can expressly so designate in their contract.”

If you have questions about including New York choice of law clauses in your contracts, or may become embroiled in litigation in New York state or federal court, please contact the author or anyone from Saul Ewing’s Commercial Litigation Practice.

Topics:  Choice-of-Law

Published In: General Business Updates

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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