Floating Choice of Law Held Invalid

Is a “floating” choice of law clause — one which provides that the contract will be governed by the law of a future assignee of the agreement — effective under UCC Article 2A?  A New York trial judge, in a recent opinion, ruled that it does not.

In the case, NorVergence, Inc., of New Jersey was a lessor of telecommunications systems.  It leased systems to Kings Manor Estates in Florida.  The contract contained the following choice-of-law provision:

This agreement shall be governed by, construed and enforced in accordance with the laws of the State in which the Rentor’s principal offices are located [i.e. New Jersey] or, if the lease is assigned by Rentor, the laws of the state in which the assignee’s principal offices are located, without regard to such State’s choice of law considerations . . . .

NorVergence assigned the lease contracts to Sterling Bank, whose principal offices were in New York.  NorVergence’s operations were subsequently uncovered as a massive fraud scheme and the company went bankrupt.  Sterling sued the lessee and the lease guarantor, claiming a right to be paid under the agreement’s hell-or-high-water clause.

Sterling claimed that New York law applied, since it was the assignee.  Manhattan supreme court Justice Diane Lebedeff rejected the claim.  Under the UCC, she noted, where the contract bears a “reasonable relation to this State and also to another state . . . the parties may agree that the law of either . . . shall govern their rights and duties.”  The problem here is that at the time of contracting, the parties could not have specified New York law.  At the time of formation New York did not bear a “reasonable relation” to the contract.  The subsequent action of one party could not retroactively change that fact.  Moreover, it is hard to say that the parties had a meeting of the minds on a choice of law provision that make it entirely uncertain what law would apply.  Since New Jersey had a reasonable relationship to the contract, and the original clause specified New Jersey law, the court concluded that New Jersey law should govern the transaction.

Sterling National Bank v. Kings Manor Estates, LLC,  2005 NY Slip Op 51604(U) (Civ. Ct. N.Y. Cty., Oct. 6, 2005).

[Frank Snyder]