A “choice-of-law” provision in a contract allows parties to select which particular jurisdictions’ laws will be used and applied to interpret and enforce the contract.
Parties should be careful to review and understand choice of law provisions as they can have a significant impact on future disputes arising out of the contract. In fact, the choice of law can give one party a decided advantage (i.e., “home-court advantage”) in certain situations.
How NY Courts enforce Choice of Law Provisions
Generally, New York courts will support enforcement of choice-of-law provisions clauses in contracts. As long as the law(s) of the chosen jurisdiction or state bears a reasonable relationship to the parties or the transaction that is the subject of the contract. So, it is not unusual for New York courts to apply the substantive laws of sister states or even foreign countries to interpret and enforce contracts.
However, the freedom to contract is not unlimited.
For example, New York courts will not enforce agreements that are illegal or where the law chosen by the parties violates some fundamental principle of justice, some prevalent conception of good morals, or some deep-rooted tradition of the common weal.
This New York public policy exception is reserved for any foreign laws that are “truly obnoxious.” See Cooney v. Osgood Mach., 81 N.Y.2d 66, 78 (1993). But beware, the party seeking to invoke the public policy exception bears a “’heavy burden’ of proving that application of [the chosen] law would be offensive to a fundamental public policy of this State.” Weisbach Elec. Corp., 7 N.Y.3d 629 (2006).
In the recent case of Brown & Brown, Inc. v. Theresa Johnson the application of Florida versus New York law on restrictive covenants had a profound effect on the applicable legal standards and burdens of the parties (Florida law provided Brown & Brown a clear legal advantage). See Brown & Brown, Inc. v. Johnson, 25 N.Y.3d 364 (2015).
Lucky for Ms. Johnson, the New York Court of Appeals invoked the public policy exception.
It held that applying Florida law on restrictive covenants related to the non-solicitation of customers by a former employee would violate the public policy of New York. Id. Brown & Brown, a Florida corporation with New York subsidiaries, is a large reinsurance intermediary licensed to handle insurance in New York.
Brown & Brown recruited and ultimately hired Ms. Johnson to work in its New York office as an underwriter and actuary. On Ms. Johnson’s first day she was given paperwork that included an employment agreement with a broad restrictive covenant and a Florida choice-of-law provision. Ms. Johnson and Brown & Brown executed the employment agreement.
Some years later Brown & Brown terminated Ms. Johnson and she was eventually hired by another company. Afterward, Brown & Brown sued her for allegedly breaching the non-solicitation terms of the employment agreement. Brown & Brown sought to invoke Florida law (decidedly more pro-employer) on the issues surrounding the restrictive covenant pursuant to the choice-of-law provision of the employment agreement.
The Court of Appeals Decision
In its decision, the Court of Appeals analyzed and compared Florida and New York law concerning restrictive covenants. It held that applying the relevant Florida law on restrictive covenants would violate the long-held public policy of New York, which disfavors broad, overreaching restrictive covenants in employment agreements. Id. The Court of Appeals acknowledged some similarities between New York and Florida laws, but ultimately found several significant aspects of Florida’s law that was very favorable (too favorable) to employers in holding the Florida law on restrictive covenants.
Lucky Ms. Johnson – score one for the little guys! However, not everyone can afford to take their case to the Court of Appeals (the highest court of the State of New York) and the Court of Appeals does not easily (or often) invoke the public policy exception!
So, the takeaway is: Never just give away “home-court” advantage in a contract by overlooking or agreeing to a choice of law provision by default.
It is important to review, understand and even negotiate choice of law provisions like any other substantive terms of a contract. Failure to do so can have devastating consequences.
September, 2015