New York's Highest Court Affirms Contractual Right to Select New York Law to Govern Transactions Without Nexus to the State

by Holland & Knight LLP
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In a case of first impression, the New York Court of Appeals has held that a court need not undertake a conflicts-of-laws analysis when there is an express choice of New York law in a contract pursuant to New York General Obligations Law §5-1401. Although the particular facts of the case are outside the aviation context, the decision should be of interest to parties that engage in aviation contracts without a nexus to New York that select New York law as the governing law. The holding confirms that parties to a contract arising out of a transaction covering in the aggregate of not less than $250,000 are not required to expressly exclude New York conflicts-of-laws principles in their choice-of-law provisions in order to avail themselves of New York substantive law.

In the facts of the case, IRB-Brasil Resseguros, S.A. v. Inepar Investments, S.A., __ N.E.2d __, 2012 WL 6571286 (N.Y. Dec. 18, 2012), a Brazilian company issued $30 million in notes to raise capital and refinance certain debt. An agreement between the issuer, a guarantor, and a bank provided that the 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." The plaintiff, who had purchased $14 million of the notes, commenced an action against the issuer and the guarantor seeking paying of the principal and the unpaid accrued interest. The issuer defaulted in the action, leaving the guarantor as the sole defendant.

Plain Language of General Obligations Law §5-1401 Governs

The defendant asserted that the "whole" of New York law should apply in assessing the scope of the guarantee's choice-of-law provision, including New York's common law choice-of-law principles. Under the defendant's theory, the court should conduct a conflicts analysis and, applying New York's common law choice-of-law principles, apply the law of the jurisdiction with the most significant relationship to the transaction and parties. The likely result of such an approach would be the application of Brazilian substantive law as against the guarantor because the transaction and the parties had a greater nexus with Brazil. The defendant maintained that the guarantee's choice-of-law provision would have had to expressly exclude New York's conflict-of-laws principles in order for New York substantive law to apply.

Affirming the holding of the trial court and the intermediate appellate court, the Court of Appeals found that the plain language of General Obligations Law §5-1401 dictates that New York substantive law applies when parties include an ordinary choice-of-law provision as found in the guarantee. The Court noted:

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.

The Court found that the difference between the language of the choice-of-law provision in the agreement and the guarantee to be inconsequential as a matter of law.

New York Legislature's Intent for Predictable Choice of Law

As noted by the Court, the New York Legislature passed General Obligations Law §5-1401 in 1984 in order to allow parties without New York contacts to choose New York law to govern their contracts. The purpose of the statute was to encourage the parties of significant commercial, mercantile, or financial contracts to choose New York law and be certain that their choice of law would not be rejected by a New York court. Prior to the statute, New York courts would conduct a conflicts analysis using the "significant relationship" test, which was the exact result being sought by the defendant in this case. The decision by the Court of Appeals reaffirms that a New York court will recognize a New York choice-of-law provision, and confirms that the provision need not expressly exclude New York conflicts-of-law principles in order to be enforceable.

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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