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Thursday, February 21, 2013

NY Ct of Appeals: Conflicts Analysis Obviated by Choice of Law Clause

500px-Seal_of_the_New_York_Court_of_Appeals.svgI have been meaning to blog about IRB-Brasil Resseguros, S.A. v. Inepar Investments, S.A., a New York Court of Appeals case holding that a conflict of laws analysis was obviated by the parties’ choice of law clause. 

IIC (a Brazilian company) owns a 60% stake in Inepar (a Uruguayan company). Inepar issued $30 million in notes to raise capital and refinance previous debt incurred by both companies.  IIC agreed to guarantee the notes.  The guarantee contained a clause choosing New York law to govern the agreement.  New York was also designated as the venue.

Another Brazilian company (IRB/Plaintiff) purchased $14 million of the notes.  When Inepar defaulted, IRB sued Inepar and IIC in New York.  IIC argued that New York’s choice of law principles should apply, resulting in the application of Brazilian law.  Under Brazilian law the guarantee was void because it was never authorized by IIC’s board. 

Invoking New York General Obligations Law § 5-1401, the New York Court of Appeals held that New York law applied and no choice of law analysis was necessary.  Section 5-1401(1) provides in part:

The parties to any contract . . . arising out of a transaction covering in the aggregate not less than two hundred fifty thousand dollars . . . may agree that the law of this state shall govern their rights and duties in whole or in part, whether or not such contract, agreement or undertaking bears a reasonable relation to this state.

The Court explained:

The Legislature passed the statute in 1984 in order to allow parties without New York contacts to choose New York law to govern their contracts.  Prior to the enactment of § 5-1401, the Legislature feared that New York courts would not recognize "a choice of New York law [in certain contracts] on the ground that the particular contract had insufficient 'contact' or 'relationship' with New York" (Sponsor's Mem, Bill Jacket, L 1984, ch 421).  Instead of applying New York law, the courts would conduct a conflicts analysis and apply the law of the jurisdiction with "'the most significant relationship to the transaction and the parties'" (Zurich Ins. Co. v Shearson Lehman Hutton, 84 NY2d 309, 317 [1994] [quoting Restatement (Second) of Conflict of Laws § 188 (1)]).  As a result, parties would be deterred from choosing the law of New York in their contracts, and the Legislature was concerned about how that would affect the standing of New York as a commercial and financial center (see Sponsor's Mem, Bill Jacket, L 1984, ch 421).  The Sponsor's Memorandum states, "In order to encourage the parties of significant commercial, mercantile or financial contracts to choose New York law, it is important . . . that the parties be certain that their choice of law will not be rejected by a New York Court . . ." (id.).  The Legislature desired for parties with multi-jurisdictional contacts to avail themselves of New York law if they so designate in their choice-of-law provisions, in order to eliminate uncertainty and to permit the parties to choose New York's "well-developed system of commercial jurisprudence" (id.).

General Obligations Law § 5-1402 (1) further provides:

any person may maintain an action or proceeding against a foreign corporation,           non-resident, or foreign state where the action or proceeding arises out of or relates           to any contract, agreement or undertaking for which a choice of New York law has been made in whole or in part pursuant to section 5-1401 and which (a) is a contract, agreement or undertaking, contingent or otherwise, in consideration of, or relating to any obligation arising out of a transaction covering in the aggregate, not less than one million dollars, and (b) which contains a provision or provisions whereby such foreign corporation or non-resident agrees to submit to the jurisdiction of the courts of this state.

The Court wrote that:

Section 5-1402 (1) opened New York courts up to parties who lacked New York contacts but who had (1) engaged in a transaction involving $1 million or more, (2) agreed in their contract to submit to the jurisdiction of New York courts, and (3) chosen to apply New York law pursuant to General Obligations Law § 5-1401. The statutes read together permit parties to select New York law to govern their contractual relationship and to avail themselves of New York courts despite lacking New York contacts.

Thus:

Applying General Obligations Law §§ 5-1401 and 5-1402 to the facts of the present case, we conclude that New York substantive law must govern, since the parties designated New York in their choice-of-law provision in the Guarantee and the transaction exceeded $250,000.  IIC argues that the "whole" of New York law should apply, including New York's common law conflict-of-laws principles.  IIC maintains 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; otherwise, IIC claims that the court must engage in a conflicts analysis that results in the application of Brazilian substantive law.  IIC's argument is unpersuasive.  Express contract language excluding New York's conflict-of-laws principles is not necessary.  The plain language of General Obligations Law § 5-1401 dictates that New York substantive law applies when parties include an ordinary New York choice-of-law provision, such as appears in the Guarantee, in their contracts.  The goal of General Obligations Law § 5-1401 was to promote and preserve New York's status as a commercial center and to maintain predictability for the parties.  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. 

IRB-Brasil Resseguros, S.A. v. Inepar Investments, S.A., (NY Ct of Appeals Dec. 12, 2012).

[Meredith R. Miller]

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