Choice of Law Clauses in San Diego Business Contracts (Part II)

In part I of this series, we discussed how California courts apply the concept of choice of law with respect to a factual/legal situation where the parties themselves did not otherwise specify which law they wanted applied. As noted in that article, in other circumstances, via CONTRACT, parties can choose which set of laws they want to apply and, in general, such contractual choices will be enforced.

To continue our example from Part I, imagine that your San Diego business manufactures electrical switches. You receive an order from a company in Texas that wants to use your switches. You and the purchaser can, via a provision in the sales contract, agree that Texas law will apply to any dispute OR that California law will apply to any dispute. Such contractual provisions are called “choice of law provisions” (or sometimes “forum selection clauses”). As noted in Part I, you will need a good San Diego corporate attorney to help draft choice of law provisions (and also help avoid provisions that will not be enforced by California courts). Here is a quick rundown.

San Diego Corporate Law: What is a Choice of Law Clause?

A choice of law provision allows the parties to a contract to choose which set of laws they want to apply to any dispute that might arise — in our example, Texas law or California law. A representative example of such a clause comes from the case of Verdugo v. Alliantgroup, 237 Cal. App. 4th 141 (Cal. App. 4th Dist. 2015). That case involved an employment contract. The choice of law provision was this:

“Choice of Law/Jurisdiction/Venue: This Agreement shall be governed in all respects, including, but not limited to, validity, interpretation, effect and performance by the laws of the State of Texas. The parties agree that proper subject matter and personal jurisdiction shall be had solely in the State of Texas. The sole venue for disputes arising hereunder shall be in Harris County, Texas.”

This is a typical example of a choice of law provision that also includes a choice of venue. “Venue” is the legal term for the location of the courthouse.

San Diego Corporate Law: Choice of Law Provisions Will be Enforced Mostly

In general, choice of law clauses are enforced in California. As one court stated it: “California favors contractual forum selection clauses so long as they are entered into freely and voluntarily, and their enforcement would not be unreasonable.” America Online, Inc. v. Superior Court, 108 Cal.Rptr.2d 699 (Cal. App. 2001). Indeed, the court went so far as to say such clauses “should be welcomed.” The reasons generally given by courts for favoring such clauses are these:

• California’s commitment to the concept of “one’s free right to contract”
• Facilitating national and international commerce by allowing the choice of law
• Facilitating commerce in general by honoring contractual choices

Under California caselaw, the chosen state must have a substantial relationship to the parties or their transaction OR there must be some other reasonable basis for the choice; in other words, the parties cannot choose the laws of some random state. Thus, in our example above with regard the light switches, choosing Texas law or California law satisfies the rule because both states are connected to the transaction — a San Diego, California manufacturer and a Texas purchaser. In our example, the parties also freely agreed — the choice of law provision was not buried in “fine print,” for example.

San Diego Corporate Law: Exceptions to Enforceability

There is one main exception to the enforceability of choice of law clauses, which is if the enforcement would be contrary to a fundamental policy of California AND if California has a “materially greater interest than the chosen state in the determination of the particular issue….”

In the Verdugo case cited above, the choice of law provision satisfied the first part of the test — Texas was reasonably related to the parties and the employment contract — but not the second. The plaintiff in Verdugo worked in California for the Texas company and sued based on the California Labor Code. She claimed that her employer had violated various provisions of the law regarding overtime pay, other forms of compensation, provision of meal and rest breaks, and provision of accurate wage statements. The trial court dismissed the case and, essentially, told Ms. Verdugo that she had to sue in Texas.

However, the Court of Appeals reversed. Many of the provisions in the California labor code cannot be waived by agreement. See Cal. Lab. Code, § 219(a) and § 1194 (a). Similarly, the Court of Appeals ruled that the protections for employees cannot be denied to California employee by use of a choice of law clause. In short, the Court of Appeals held that the Verdugo provision violated the fundamental policies of California. As such, the provision was struck down and Ms. Verdugo was allowed to continue her lawsuit here in California despite the Texas choice of law provision.

Contact San Diego Corporate Law Today

In general, choice of law provisions are enforced in California. Verdugo is a rare exception. For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can assist in drafting enforceable choice of law provisions and can offer advice and counsel on which choice of law might draw a critical eye from a California court. a be reached at (858) 483-9200 or via email.

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