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California'
s Approach to Choice of Law in
the Absence of an Effective Choice by the Parties
General Rule
As previously analyzed, the courts in California allow
the parties to a contract to choose the state law which will apply to
their contract, and the forum which will have jurisdiction to hear a
suit arising out of the contract, if certain conditions are met. See,
e.g., Smith, Valentino & Smith~ Inc. v. Superior Court, 17 Cal.3d
491, 551P.2d 1206, 131 Cal. Rptr. 374 (1976); Nedlloyd Lines B.V.v.
Superior Court, 3 Cal. 4th 459, 834 P.2d 1148, 11 Cal. Rptr.2d 330 (1992);
Hambrecht & Quist Venture Partners v. American Medical International, Inc., 38 Cal. App.4th 1532, 46 Cal. Rptr.2d 33 (1995); Guardian
Savings and Loan Assoc. v. MD Assocs., 64 Cal. App.4th 309, 7 Cal.
Rptr.2d 151 (1998). To allow this, the California Supreme Court adopted
the rule laid out in § 187 of the Restatement (Second) of Conflict
of Laws.
Where the parties to a contract, oral or written, have
not made an effective choice of law, § 188 of the Restatement controls.
See Robert Allen Sedler, "The Contracts Provisions of the
Restatement (Second): An Analysis and A Critique," 72 Colum. L.
Rev. 279, 280-81 (1972); Gary J. Simson, Issues and Perspectives
in Conflict of Laws (Durham: Carolina Academic Press, 1985), at
128-30 n.2. Under § 188, tile law of the state with the "most significant
relationship" to the transaction at issue is applied. Id. California
and Nevada have both adopted the rule of § 188. See Edwards v. United
States Fidelity and Guar. Co., 848 F. Supp. 1460 (N.D. Cal. 1994);
Stonewall Surplus Lines Ins. Co. v. Johnson Controls, Inc., 14
Cal. App.4th 637, 17 Cal. Rptr.2d 713 (1993); Sotirakis v. United
Services Automobile Assoc., 106 Nev. 123, 787 P.2d 788 (1990). § 188 reads, in its entirety:
Law Governing in Absence of Effective Choice by the Parties
- The rights and duties of the parties with respect
to an issue in contract are determined by the local law of the state
which, with respect to that issue, has the most significant relationship
to the transaction and the parties under the principles stated in § 6.
- In the absence of an effective choice of law by the
parties (see § 187), the contacts to be taken into account in applying
the principles of § 6 to determine the law applicable to an issue
include:
(a) the place of contracting,
(b) the place of negotiating of the contract,
(c) the place of performance,
(d) the location of the subject matter of the contract,
and
(e) the domicil, residence, nationality, place of
incorporation and place of business of the parties.
These contacts are to be evaluated according to
their relative importance with respect to the particular issue.
(3) If the place of negotiating the contract and
the place of performance are in the same state, the local law of
this state will usually be applied, except as otherwise provided
in §§ 189-199 and 203.
Standing alone, the place of contracting is the least
significant contact. See Comment e to § 188. The § 6 mentioned
in § 188 relates to the basic principles of choice of law embodied in
the Restatement. The more important sections incorporated by § 188 are §§ 189-197, which deal with specific types of contracts wherein
no choice of law has been made by the parties, and provide a general
rule for which state's law appl{es to the situation. For example, §
189 concerns "contracts for the transfer of interests in land."
Here, "the local law of the state where the land is situated "applies, unless, with respect to the particular issue, another
state has a more significant relationshipto the issue. All of
the general rules sections contain this proviso, thus allowing a court
the discretionto ignore the general rule. The remaining sections, and
the types of contracts they concern (and thegeneral rule of which state's
law applies) are:
§ I90 "Contractual duties arising from transfer
of interests in land" ("the local law of the state where
the land is situated");
§ 191 "Contracts to sell interests in chattel"
("the local law of the state where under the terms of the contract
the seller is to deliver the chattel");
§ 192 "Life insurance contracts" (the local
law of the state where the insured was domiciled at the time the policy
was applied for");
§ 193 "Contracts of fire, surety
or casualty insurance" ("the local law of the state which
the parties understood was to be the principle location of the insured
risk during the term of the policy");
§ 194 "Contracts of suretyship"
("the law governing the principal obligation which the contract
of suretyship was intended to secure");
§ 195 "Contracts for the repayment of money lent"
("the local law of the state where the contract requires that
repayment be made");
§ 196 "Contracts for the rendition of services"
("the local law of the state where the contract requires that
the services, or a major portion of the services, be rendered");
and
§ 197 "Contracts of transportation"
("the local law of the state from which the passenger departs
or the goods are dispatched.
In general, the rules of §§ 189-197 are applied faithfully
by the courts. For example, in Stonewall, supra, a casualty insurance
contract was at issue. Since the location of the insured risk was California,
California law applied to the insurance policy, instead of Wisconsin
law, the state wherein the insured corporation was incorporated. A similar
result occurred in Sotirakis, supra, which concerned an insurance
policy on an automobile. Thus, although a car accident occurred in Nevada,
the Nevada Supreme Court applied California law to the case, since the
policy was issued in California to a California resident on a car normally
driven in California.
In some cases, despite seemingly strong contacts with
a particular state, the law of another state is applied when the balancing
test of § 188 is applied. This is shown by Edwards, supra. Here,
Edwards was employed by defendant USF & G in San Jose, California.
She became aware of an opening in the company's Baltimore office, and
interviewed there. A few weeks later, while back in California, she
accepted an oral offer for the position. While still working in California,
Edwards had a confrontation with a subordinate wherein she humiliated
the other employee in front of several people. USF & G placed her
on probation, and later the Baltimore offer was rescinded. A year later,
Edwards was fired during a company downsizing. Prior to this, she filed
a lawsuit in federal court concerning the Baltimore offer.
Sitting in diversity jurisdiction, the federal court
judge had to apply California's choice of law rules. See Klaxon Co.
v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941); Waggoner v. Snow,
Becket, Kroll, Klaris & Kraus, 991F.2d 1501 (9th Cir. 1993).
In so doing, the judge found that Maryland law was controlling:
In this case, Edwards was interviewed for the position
in Baltimore, the work was to be performed in Baltimore, all the individuals
with whom she was dealing were located in Baltimore and USF & G is incorporated in Mary]mnd Th~ nnly r~n~t th~ company had with
California in this transaction was the offer Edwards
received by telephone from Baltimore. This contact, without more,
is simply too tenuous to justify the application of California law.
Edwards, 848 F. Supp. at
1465 (emphasis added). Although Edwards herself had strong ties to California
and USF & G had a presence there, the contract at issue did not.
The state of Maryland had the most significant relationship to the contract
at issue, and thus its law applied to the case.
One of the important sections of the Restatement
is § 196, which concerns contracts for the rendition of services.
The general rule calls for the application of the local law of the state
where the contract requires that the services, or a major portion of
the services, be rendered. However, the rule has an exception, as discussed
above. This was shown in Nunez v. Hunter Fan Co., 920 F. Supp.
716 (S.D. Texas 1996). Here, Nunez signed a contract to work for defendant
in Mexico, and actually worked there for a time before being fired.
The negotiations had occurred both in Texas and Mexico. By the general
rule of § 196, and § 188(3), Mexican law would apply. Instead, the court
applied the exception found in ~ 189-197, and held that Texas [had the
more significant relationship to the employment contract, and applied
Texas law. It did so since Nunez was paid in U.S. dollars deposited
in a U.S. bank account, was subjected to U.S. federal income and social
security taxes, and negotiated and interviewed for the job partly in
Texas. Thus, "[i]n light of these circumstances, Nanez certainly
could have reasonably and justifiably expected to be governed by Texas
and not Mexican law." Id. at 721.
Conclusion
In the absence of a choice of law by the parties to
a contract, the law of the state with the "most significant relationship" to the particular transaction will by applied. Although the Restatement
gives general rules for particular types of contracts, these too
can be ignored by a court if it finds that another state has a more
significant relationship to that particular contract. Thus, if the parties
fail to choose the law which will apply to their contract, the court
will make the decision for them, guided by certain principles but free
to override them. Therefore, in order to not be left in the dark about
whose law will be applied to a given contract, a choice of law clause
should always be employed, if possible.
A BRIEF COMPARISON OF STATUTES
OF LIMITATION IN CALIFORNIA AND NEVADA
In many cases, California's statutes of limitation are
shorter than those found in Nevada. This fits California's public policy
in this area of the law:
Statutes of limitation are designed to protect the
enacting state's residents and courts from the burdens associated
with the prosecution of stale cases in which memories have faded and
evidence has been lost.
Ashland Chemical Co. v. Provencp, 129
Cal. App.3d 790, 794, 181 Cal. Rptr. 340, 341 (1982)(citing McGee
v. Weinberg, 97 Cal. App.3d 798, 159 Cal. Rptr. 86 (1979). The McGee
court added:
Statutes of limitation are not disfavored in the law.
To the contrary they are favored in the law because they promote desirable
social ends and give security and stability to human affairs.
Id. at 804.
Some specific examples will illustrate
Caiiforzlia's approach to statutes of limitation as compared to Nevada.
For an action upon a written contract, a lawsuit in California must
be commenced within four years. Cal. Civil Code § 337. In Nevada, such
a suit can be brought up to six years after the cause of action accrues.
Nevada Revised Statutes (NRS) § ll.190(1)(b). On an oral contract, California
law allowl only two years to bring a lawsuit. Cal. Civil Code § 339.
In Nevada, four years is allowed. NRS § 11.190(2)(c).
In tort, California allows only one year to commence
an action for injury, illness or wrongful death. Cal. Civil Code § 340.2.
Nevada allows two years for the commencement of such a suit. NRS § 11.190(4)(e).
California allows only six months to bring a suit against
a public officer for a wrongful tax seizure, Cal. Civil Code § 341,
while Nevada allows one year. NRS § 11.190(5)(a). Both jurisdictions
allow three years to commence a suit for either au action upon a liability
created by statute, Cal. Civil Code § 338 and NRS § 11.I90(3)(a), and
for trespass to real property. Cal. Civil Code § 338 and NRS § 11.190(3)(b).
The same holds true for actions based on fraud. Cal. Civil Code § 338
and NRS § 11.190(3)(d).
From these examples of major categories of lawsuits
which one might potentially face, the statutes of limitation in California
are either shorter than or equal to those of Nevada. Thus, as is consistent
with state policy, one subject to California law is less likely to face
a stale claim than a person subject to Nevada law.
California law also allows parties to contractual agreements
to shorten the applicable statute of limitation as part of the
contract. This common law rule is of longstanding origin, with the only
requirement being that the chosen limitations period be "reasonable."
See, e.g., Hambrecht & Quist Venture Partners v. American
Medical International~ Inc., 38 Cal. App.4th 1532, 46 Cal. Rptr.2d
33 (1995); C & H Foods Co. v. Hartford Ins. Co., 163 Cal.
App.3d 1055, 211 Cal. Rptr. 765 (1984); Capehart v. Heady, 206
Cal. App.2d 386, 23 Cal. Rptr. 851 (1962); Ward v. System Auto Parks
and Garages, inc., 149 Cal. App.2d Supp. 879, 309 P.2d 577 (1957);
Olds v. General Accident Fire Corp., 67 Cal. App.2d 812, 155
P.2d 676 (1945); Beeson v. Schloss, 183 Cal. 618, 192 P. 292
(]920); Tebbets v. Fidelity & Casualty Co., I55 Cal. 137,
99 P. 501 (1909). So far, a contractual limitations period as short
as three months has been deemed 'treasonable." See Ward, supra
(which changed the statutory period of four years for written contracts).
From all of the above, it can clearly be seen that,
on the issue of statutes of limitation, California provides more protection
than does Nevada on the same issue. This is one of the few issues where
this can be honestly stated.
- This research
attempts to answer the question of whether or not a state
can apply its own law regarding piercing an entity to so-called "pseudo-foreign" corporations.
Which State to Incorporate In?