Understanding How Conflict of Law Rules Impact Your Transaction?

Conflict of law rules or CLR come into play when a transaction or occurrence involves more than one State or Country.  And this occurs far more often than most recognize.  For example what laws apply when contracting parties are from different States or Countries?  Alternatively, what laws apply when a transaction or occurrence takes place across State lines or international boundaries?  Similarly, what laws apply when an act or occurrence takes place entirely within one State or Country, but the damages are suffered in a different State or Country? The answers to these and related questions are answered by the CLR.

Every State and Country has adopted some form of CLR.  The principal purpose of CLR is to identify the rights, duties, and liabilities of parties to a lawsuit.  Unfortunately, there is no uniformity between the CLR  adopted by States and Countries but there are some general rules that are used to guide the CLR decisions.  For starters, almost all courts, State and Federal, draw a distinction between procedural law and substantive laws.  Procedural laws are the rules governing the Court and the methods used in deciding the rights and obligations of the parties.  Procedural laws are generally governed by the laws of the forum or "lex fori" meaning the place where the issue is to be decided.  A majority of courts consider procedural laws to include the form of the lawsuit, service of process, management of the trial, witnesses, and evidentiary issues. 

Substantive laws define the rights and obligations of the parties, and are derived from common law, statutes, and Constitutions.  Substantive laws give rise to CLR and are used to determine the rights and obligations of the parties and turn upon the location where the infraction occurred or “lex loci”.  Procedural laws can have a huge impact upon substantive laws, especially since statutes of limitations or SOL's are considered to be procedural in most jurisdictions.  [See, “The Tortured Relationship Between Statutes of Limitations and Statutes of Repose”, posted 10/18/23].  A majority of courts, consider substantive laws to include civil law, including the law of contracts, torts, property, family law, estates, as well as criminal laws. 

Courts throughout the United States have adopted one or more of four (4) different CLR approaches to determine the lex loci or substantive laws that apply to a dispute.  In turn, the United States Supreme Court has held that federal courts sitting in diversity actions are obligated to apply the CLR of the State in which the federal court is located.   Whereas, federal courts sitting in federal question actions, have far more leniency to develop CLR as a matter of federal common law.

The “Traditional CLR Approach”, looks to the laws applicable to the location giving rise to the dispute.  For tort cases, this is  where the wrong took place, for contract cases, this is where the agreement was made, and for property cases, this is where the property is located.  This approach has drawn criticism as being too simplistic given the explosion of interstate commerce and travel.  Therefore most courts  who use this approach generally combine it with one or more of the other approaches.   

The “Interest CLR Approach” looks to the law where the parties to a lawsuit reside, otherwise known as their domicile.  The court will analyze the laws applicable to the domicile of each party to determine whether the laws applicable to that State or Country have an interest in application of their laws to the dispute.  Most courts apply the substantive laws of the forum where multiple States and/or no States have an interest in application of their laws. Most courts will apply the laws of the interested State where just one State or Country has an interest in the application of its laws.

The "Better Rule CLR Approach" looks to the law where the parties reside and the court then selects the the law that is better as a matter of policy.  The selection process is based upon four factors: 1.) predictability, 2.) maintenance of order, 3.) simplicity, and 4.) advancement of government interest.  This approach has been subject to criticism in that it allows the courts to legislate the CLR issue. 

The “Most Significant Relationship CLR” combines the prior three approaches and is the approach most commonly used by Courts today. This approach is very flexible and looks to locality, including where the conduct occurred, the injury occurred, the contract was made, and the domicile of the parties.  The court then compares the policies of the forum, the policies of the interested States, and the expectations of the parties.  Although widely applied, this approach has drawn criticism as being complex and time intensive. 

As the world becomes a smaller place with respect to travel and commerce, the CLR  will continue to adopt and change.  Meanwhile parties to contracts and transactions where the the choice of law can be agreed upon should continue to include CLR in their written agreements.  Otherwise the substantive laws governing the dispute in which you become involved will be out of your hands and decided by the courts.