NY Ct of Appeals: Conflicts Analysis Obviated by Choice of Law Clause
IIC (a Brazilian company) owns a 60% stake in Inepar (aUruguayan company). Inepar issued $30 million in notes to raise capital andrefinance previous debt incurred by both companies. IIC agreed toguarantee the notes. The guarantee contained a clause choosing New Yorklaw to govern the agreement. New York was also designated as the venue.
Another Brazilian company (IRB/Plaintiff) purchased $14million of the notes. When Inepar defaulted, IRB sued Inepar and IIC inNew York. IIC argued that New York’s choice of law principles shouldapply, resulting in the application of Brazilian law. Under Brazilian lawthe guarantee was void because it was never authorized by IIC’s board.
Invoking New York General Obligations Law § 5-1401, the NewYork Court of Appeals held that New York law applied and no choice of lawanalysis was necessary. Section 5-1401(1) provides in part:
The parties to any contract . . . arising out of atransaction covering in the aggregate not less than two hundred fifty thousanddollars . . . may agree that the law of this state shall govern their rightsand duties in whole or in part, whether or not such contract, agreement orundertaking bears a reasonable relation to this state.
The Court explained:
The Legislature passed the statute in 1984 in order to allowparties without New York contacts to choose New York law to govern theircontracts. Prior to the enactmentof § 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 theparticular contract had insufficient ‘contact’ or ‘relationship’ with NewYork” (Sponsor’s Mem, Bill Jacket, L 1984, ch 421). Instead of applying New York law, thecourts would conduct a conflicts analysis and apply the law of the jurisdictionwith “‘the most significant relationship to the transaction and theparties'” (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 theircontracts, and the Legislature was concerned about how that would affect thestanding of New York as a commercial and financial center (see Sponsor’s Mem, BillJacket, L 1984, ch 421). TheSponsor’s Memorandum states, “In order to encourage the parties ofsignificant commercial, mercantile or financial contracts to choose New Yorklaw, it is important . . . that the parties be certain that their choice of lawwill not be rejected by a New York Court . . .” (id.). The Legislature desired for partieswith multi-jurisdictional contacts to avail themselves of New York law if theyso designate in their choice-of-law provisions, in order to eliminateuncertainty and to permit the parties to choose New York’s “well-developedsystem of commercial jurisprudence” (id.).
General Obligations Law § 5-1402 (1) further provides:
any person may maintain an action or proceeding against aforeign corporation, non-resident, or foreign state where the action or proceeding arises outof or relates to anycontract, agreement or undertaking for which a choice of New York law has beenmade in whole or in part pursuant to section 5-1401 and which (a) is acontract, agreement or undertaking, contingent or otherwise, in considerationof, or relating to any obligation arising out of a transaction covering in theaggregate, not less than one million dollars, and (b) which contains a provisionor provisions whereby such foreign corporation or non-resident agrees to submitto the jurisdiction of the courts of this state.
The Court wrote that:
Section 5-1402 (1) opened New York courts up to parties who lackedNew York contacts but who had (1) engaged in a transaction involving $1 millionor more, (2) agreed in their contract to submit to the jurisdiction of New Yorkcourts, and (3) chosen to apply New York law pursuant to General ObligationsLaw § 5-1401. The statutes read together permit parties to select New York lawto govern their contractual relationship and to avail themselves of New Yorkcourts despite lacking New York contacts.
Thus:
Applying General Obligations Law §§ 5-1401 and 5-1402 to thefacts of the present case, we conclude that New York substantive law mustgovern, since the parties designated New York in their choice-of-law provisionin 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-lawsprinciples. IIC maintains that theGuarantee’s choice-of-law provision would have had to expressly exclude NewYork’s conflict-of-laws principles in order for New York substantive law toapply; otherwise, IIC claims that the court must engage in a conflicts analysisthat results in the application of Brazilian substantive law. IIC’s argument is unpersuasive. Express contract language excluding NewYork’s conflict-of-laws principles is not necessary. The plain language of General Obligations Law § 5-1401dictates that New York substantive law applies when parties include an ordinaryNew York choice-of-law provision, such as appears in the Guarantee, in theircontracts. The goal of GeneralObligations Law § 5-1401 was to promote and preserve New York’s status as acommercial center and to maintain predictability for the parties. To find here that courts must engage ina conflict-of-law analysis despite the parties’ plainly expressed desire toapply New York law would frustrate the Legislature’s purpose of encouraging apredictable contractual choice of New York commercial law and, crucially, ofeliminating 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]