Choice of Law Provisions in Contracts

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Contracts often have a “choice of law “provision. An example of a typical choice of law provision is the following: “This Agreement will be governed by, and construed in accordance with, the laws of the State of Colorado.”

Put simply, the choice of law provision allows parties to choose the state law that will apply to the interpretation of the contract. This can be important for the parties to establish upfront for a number of reasons. First and foremost, contracting parties regularly choose a state’s law that they determine to be beneficial to them in some way–take, for instance, a corporation selecting a state’s law that is considered “business friendly.” This can mean many things including a state’s laws that limit certain damages or a state’s courts that tend to strictly interpret contract terms. Additionally, parties want to be reasonably certain what state laws will apply in the event of a breach of the contract, including what damages are available under the applicable state law. For instance, in Colorado, a willful and wanton breach of a contract may allow for the award of noneconomic damages (typically, pain and suffering, emotional distress, or other intangible injuries) whereas other states would not recognize such damages in that context.

However, just because the parties agreed that a particular state’s laws will apply, does that mean that a court will necessarily respect that agreement? Generally yes, but there are of course exceptions.

Choice of Law Provisions in Colorado

The Colorado Supreme Court has held that a the choice of law provision should be applied unless a) there is no reasonable basis for the parties’ choice or b) applying the state law chosen would be contrary to a fundamental policy of a state which has a materially greater interest in the issue.

As far as the reasonableness of the parties’ choice, a court will review a number of factors such as the principal place of business of the parties, the state where the business is incorporated or registered, the state where the contract was executed, or even the state in which performance took place. In Power Motive Corp. v. Mannesmann Demag Corp., U.S. District Court of Colorado found that a choice of law provision selecting Ohio law controlled and not Colorado law, as one of the contracting parties argued. As far as evaluating the reasonableness of applying Ohio law, the court reviewed that one party’s principal place of business was in Ohio and performance took place in Ohio.  Consequently, applying Ohio law was reasonable.

Additionally, a party might challenge a choice of law provision in Colorado by showing that enforcing the state law under the agreement would somehow conflict with the public policy of the state. However, this is not an easy standard to meet.  The court in Power Motive Corp. held that applying Ohio law was not in contravention to any fundamental policy of Colorado.

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