Choice of Law Rules Explained
Within the legal system of any state in the U.S., there are rules and guidelines that assist in determining which laws to apply when a legal question or issue is being decided. These are referred to as the choice of law rules. They will not automatically apply, so that when a case or a dispute arises, it is actually looking at which laws and which jurisdiction to apply.
An example of how these choice of law rules are applied would be in the situation where you may be bringing a lawsuit about an accident that occurred between cars registered in different states. Perhaps there are questions about liability, damage or compensation because at least one of the vehicles was not registered in California. So, whose laws do we apply when making decisions on these issues?
When a case involves questions about these issues, there can be significant differences in the answer. Because of this, the state has to make a determination about what laws apply. The issue could be about a variety of things: torts; contracts; or damage awards , among others. The choice of law rules can be used to determine which law is the most appropriate.
The question of which law should be applied is in many cases resolved by the conflict of laws. This concept refers to the body of law, essentially, with principles that are used to make determinations about any substances of legal issues that are being raised in the case. There may be different sets of rules, such as for cases involving torts, contracts, conflicts of law, family code issues and issues relating to the probate code.
So if you find yourself in a situation where you have an accident in California, and you are not sure whether your case falls under California laws because you are a resident or the driver from out of state is a resident, you will likely face this issue about which laws apply. The choice of law rules, along with conflict of law issues, are there to essentially provide directions on which material facts to apply to the case.
The History of California Choice of Law Rules
Historically, California courts have analyzed choice of law issues using the "governmental interest" or "comity" approach, focusing on which jurisdiction’s interest would be more impaired if its law is not applied. In 1985, the relationship among the various tests used by California courts was clarified by the adoption of Evidence Code section 3101 for substantive issues and Evidence Code section 3102 for procedural issues. See Alexander v. Superior Court, 210 Cal. App. 3d 1208, 1215-16 (Cal. Ct. App. 1989). At essentially the same time, the California Supreme Court adopted section 3123 of the Restatement Second of Conflict of Laws governing choice of law in tort actions, and a combination of the three approaches noted above — governmental interest analysis, comity, and the Restatement — has been used since then.
The most recent articulation of California’s choice of law framework was in 2018, when the California Supreme Court decided McGill v. Citibank, N.A., 2 Cal. 5th 945 (2018). That case explains that California does not rely exclusively on the Restatement or another choice of law test, but uses considerations from all of California’s choice of law doctrines in a specific situation to determine the state law that applies to a particular dispute. Id. at 961 (internal citations omitted). McGill also updated earlier California Supreme Court precedent, such as the 1934 decision in Coastal Bulk Shipping Corp. v. Admiral furn. Ltd., 3 Cal. 2d 409 (1935), which requires courts to weigh the conflict of laws analysis "against the presumption in favor of the application of California law," as well as any "compelling reason[]" why California law should not apply. Id. at 959.
In addition, the California Legislature passed California Civil Code section 1646.5 (also known as the "Usury Law"), which states that usury claims are governed exclusively by California laws, even if the loan agreement was not executed in California. Section 1646.5 is similar to Civil Code section 1646.3, which governs the enforceability of non-recourse loan agreements.
How California Chooses the Right Law
When a case involves parties from different jurisdictions or seeks to enforce a contract that spans multiple states, the matter of which jurisdiction’s law should apply can give rise to difficult legal questions. A court may make this determination in several ways: through statutory directives, legislative pronouncements, or judicial discretion. The first approach may be found at Title Eight of the California Civil Code, regarding contracts. In Sections 1646-1646.5, the California legislature set forth rules for resolving any potential conflict of laws. If the parties have entered into a contract without specifying which state’s law applies, the party who would lose if the law of California were decided to apply to the contract will be able to support application of the other jurisdiction’s law. The exceptions are Section 1646.5(a) (applying the law of California if both parties are domiciled in California or if the state chosen in the contract does not legally regard the transaction), and 1646.5(b) (applying California law if the state chosen in the contract has no substantial relationship to the parties or the transaction and that state’s law violates fundamental public policy of California). However, parties may contract around these rules by explicitly naming the state whose law applies. This rule holds so long as no overriding public policy dictates application of a different law. Citing Washington Mutual Bank, FA v. Superior Court, 24 Cal. App 4th 928, 934 (1994); see also Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 64, 70 (1992). Further, the California Supreme Court held that "the fundamental public policy exception to contractual choice of law provisions apply only in exceptional cases… ." Nedlloyd 3 Cal. 4th 77. Finally, absent any legislative directive, California courts follow the Restatement Second of Conflict of Laws. See Washington Mutual Bank, 24 Cal. App 4th at 934 (citing Restatement of Conflict of Laws § 187). This test is whether a party who has substantial relationships with two or more jurisdictions are application of the law of one over the other is so basic that it would be contrary to the public policy of California to apply the law of a different jurisdiction. Nedlloyd 3 Cal. 4th at 73 (citing Restatement of Conflict of Laws § 187, comment (b)).
Key Court Decisions Shaping California Choice of Law
In the realm of choice of law, California’s courts have provided many of the guiding principles that help practitioners and even individuals navigate the often tricky waters of legal jurisdiction and applicable law. Some of the most influential cases in California choice of law history are:
Nazione Unita Rx v. Nicholas Appg., Inc. (1986) 187 CA3d 1417
Facts: A suit arose concerning a contract dispute between a California corporation and a Delaware corporation over royalties on the sale of drugs. The California corporation moved to try the case in New York even though the company’s incorporation was in California.
Result: The California Court of Appeals held that licensing or distribution agreements are not traditional contracts. The court ruled that the court having jurisdiction over the defendants can hear the action with any dispute over the payment of royalties.
Criscuolo v. Williams International, Inc. (1986) 185 CA3d 383
Facts: An employee of a company based in California, Plaintiff filed a suit against her employer under a contract for breach and intentional infliction of emotional distress. Plaintiff’s contract required all disputes to be adjudicated in Michigan.
Result: The California Court of Appeals affirmed the decision of the superior court, holding that an employer cannot enforce a mandatory arbitration agreement in California if the forum selection clause notwithstanding the public policy of the state where the employee resides and performs the services under its contract with that employer.
Borton v. Easter Seals Soc. for Crippled Children & Adults of N. Cal. (1992) 9 CA4th 1225
Facts: The Plaintiff, a resident of California, who had been an employee of a California branch of Michigan corporation filed a lawsuit in the state of California against his employer, its agents and it’s insurance company for injuries that occurred in the scope of his employment.
Result: The California Court of Appeal affirmed the lower court’s ruling and found that California laws applied to the case despite the fact that the injury and other relevant issues all took place in Michigan. The court held that since the relevant work was performed in California, the state has a vested interest in the employee/employer relationship which resulted in industrial injuries.
Kronos, Inc. v. Avalon Capital Group, Inc. (2007) 174 Cal.App.4th 1002
Facts: The dispute originated from a contract violation of a stock sale agreement in California.
Result: The court encouraged California courts complying with the provision of the Uniform Commercial Code. The Court of Appeals affirmed the order of the lower court, which included a decision not to use Delaware as the applicable jurisdiction in this case.
These cases stand out as some of the most influential within California pertaining to choice of law.
Public Policy Considerations in Choice of Law Determinations
The public policy of a state is often the decisive factor in California’s choice of law rules. Under this part of the analysis, California courts may apply its own law to determine issues of liability if "there is a fundamental conflict between the law of its [or another state] and the law of California" and "the potential law they will apply is both distinctive and substantive." Consol. Ins. Co. v. Longmire, 70 Cal. App. 4th 548, 557 (1999) (irrelevant whether defendant had contacts with California); see also Baker v. General Motors Corp., 145 Cal.App.4th 1159 (2006) (despite only one California contact, defendant’s liability resulting from events occurring in Michigan after purchase of car in Michigan held not violated California’s public policy); Arno v. Helge, 65 Cal . 2d 63, 67 (1966) ("In determining the reasonableness of the application of local law, we must assess the substantiality of the public policies which will be affected."). Thus, the court has discretion to apply California law, over another state’s law if doing so "will not impair the predictability of results." Arno v. Helge, 65 Cal.2d 63, 67 (1966).
At least one California court of appeal has expressed doubt about whether California would apply another state’s tort law over California law if the latter were better for the injured person, finding even the California Legislature unlikely to favor a Minnesota statute. Cano v. G. M. Co., 75 Cal. App. 4th 751, 759-760 (1999). This exception is rare, however, and is unlikely to be applied outside of the context of personal bodily injury. See, e.g., Consol. Ins. Co. v. Longmire, 70 Cal. App. 4th 548, 558 (1999) (dismissing rationale in Cano noted above.)
Domestic Impact on Businesses and Individuals
California’s choice of law rules have practical implications for both businesses and individuals who have entered into contracts. The rules apply when a dispute arises and the parties find themselves in litigation. Unless an agreement contains a "governing law" provision, however, California courts will apply a governmental interest analysis to "determine which of the potentially applicable bodies of law will best advance the interests of the states and people involved."
In practice, that means that the governing law of a contract or tortious conduct will depend on the facts and claims that parties are bringing against each other.
Plaintiffs can bring multiple claims based on related factual allegations. For example, a plaintiff might bring several claims in one lawsuit against a defendant who is a resident of California and who has significant minimum contacts with California. In that scenario, the plaintiff could argue that California law should be applied to all claims, even those that "touch [other] states’ interests."
On the other hand, a defendant sued in California might find itself trying to persuade a California court that the laws of another state (or states) should govern the particular claims at issue because they would better advance the interests of the states and the people involved. This, of course, requires that the defendant develop and put forth workable arguments for why other states’ laws should govern the case.
Thus, uncertain procedural outcomes await those who have not specifically accounted for choice of law issues when drafting a contract or formulating a strategy for a lawsuit.
Recent Trends in California Choice of Law
The last several years have brought some interesting developments on the issue of whether California or Colorado law governed on various issues. A "choice of law" issue arises when there is a dispute over which law – California’s or another state’s – should apply in a particular situation.
In February of 2017, the Ninth Circuit Court of Appeals decided Heller v. Fortis Insurance, No. 15-55159. In this case, the Ninth Circuit held that the insurance policy at issue was valid under California law. Another case was decided by the Ninth Circuit on April 10, 2017. In Galvez v. Neil Giraldo, et. al., No. 15-557327, the court held that California law should have been applied because the policy was purchased and delivered in California, with all premium payments having been made in California.
Meanwhile, the California legislature is seeking to simplify choice of law issues through Assembly Bill 973 , (which has subsequently been signed into law) by:
- (1) Affirming that California contract law applies to contracts entered into within California unless
- (a) the parties to a contract agree to apply the law of another state;
- (b) a substantial portion of the contract is performed in another state; or
- (c) the application of California law would be contrary to contractual expectations.
- (2) It also will make clear that a "substantial portion of the contract is performed in another state" when more than 30% of the performance occurs in that state.
- (3) The bill is effective January 1, 2018.
While many contracts will be drawn up under California law, they may still need alternative interpretation for various situations:
Example: A company based in California may make pre-printed risk or waiver forms that have a choice of law provision that says it is governed by the laws of the state of Colorado. A California based insurance company may argue that the Colorado choice of law clause should control. The policy holder may counter that California law would actually apply and prevail in a dispute about an insurance claim.