SMU Law Review Volume 54 | Issue 2 Article 12 2001 Contractual Choice of Law: Legislative Choice in an Era of Party Autonomy William J. Woodward Jr. Follow this and additional works at: https://scholar.smu.edu/smulr Recommended Citation William J. Woodward Jr., Contractual Choice of Law: Legislative Choice in an Era of Party Autonomy, 54 SMU L. Rev. 697 (2001) https://scholar.smu.edu/smulr/vol54/iss2/12 This Symposium is brought to you for free and open access by the Law Journals at SMU Scholar. It has been accepted for inclusion in SMU Law Review by an authorized administrator of SMU Scholar. For more information, please visit http://digitalrepository.smu.edu. CONTRACTUAL CHOICE OF LAW: LEGISLATIVE CHOICE IN AN ERA OF PARTY AUTONOMY William J. Woodward, Jr.* The foundation upon which our system of government rests is the pos- session by the states of the right, except as restricted by the Constitu- tion, to exert their police powers as they may deem best for the happiness and welfare of those subject to their authority. The whole theory upon which the Constitution was framed, and by which alone, it seems to me, it can continue, is the recognition of the fact that differ- ent conditions may exist in the different states, rendering necessary the enactment of regulations of a particularsubject in one state when such subject may not in another be deemed to require regulation; in other words, that in Massachusetts, owing to conditions which may there prevail, the legislature may deem it necessary to make police regula- tions on a particularsubject, although like regulations may not obtain in other states. -Mr. Justice White, dissenting, in Fauntleroy v. Lur, 210 U.S. 230, 240 (1908). 1 TABLE OF CONTENTS I. INTRODUCTION ........................................ 698 II. PART 1: CONFLICTS RULES AND CONTRACTUAL CHOICE OF LAW ............................... 702 A. IMPLICATIONS OF FORUM-CENTRICITY I: "RELATED" VERSUS "UNRELATED" LAW .......................... 703 B. IMPLICATIONS OF FORUM-CENTRICITY II: MANDATORY RULES AND FUNDAMENTAL POLICY ................... 706 III. PART 2: DEVELOPMENT OF PARTIES' POWER TO CHOOSE LAW BY CONTRACT ........................ 711 IV. PART 3: CONTRACTUAL CHOICE OF LAW IN THE COURTS: ILLUSTRATIVE AREAS .................... 715 * I. Herman Stern Professor of Law, Temple University. My thanks go to Amy Boss, Jean Braucher, Dick Cappalli, Jeff Dunoff, Laura Little, and especially Rick Green- stein, all of whom have offered conceptual help and support over the course of this project. I also thank my research assistants, David Inscho and Emily Mirsky who worked tirelessly to bring the project in on time. I am also grateful to Temple University's Beasley School of Law which provided generous research support. The author is the American Bar Association's Business Law Section Representative to the UCC Article 1 Drafting Committee. The views advanced in this Article are the au- thor's alone and should not be associated in any way to members of that Committee. 1. The case is discussed briefly infra note 250. 698 SMU LAW REVIEW [Vol. 54 A. CHOICES OF "UNRELATED" LAW ...................... 715 B. CHOICES THAT VIOLATE "FUNDAMENTAL POLICY" OF A NON-CHOSEN STATE ................................ 721 1. Franchise Cases ................................... 722 2. Usury Cases ....................................... 725 V. PART 4: PROPOSED PARTY AUTONOMY AND IMPLICATIONS FOR STATE LAWMAKING ........... 728 A. THE PROPOSED RULES AND THEIR LIMITS ............ 728 B. THE MANDATORY CONSUMER LAW EXCEPTIONS ...... 731 C. THE FUNDAMENTAL POLICY EXCEPTIONS ............. 733 D. OTHER LIMITATIONS ON PARTY POWER TO CHOOSE: INTERNATIONAL V. DOMESTIC V. INTRASTATE CONTRACTS ........................................... 737 E. THE PROBLEMATIC SCOPE OF THE PROVISIONS ........ 739 1. O verbreadth ....................................... 739 2. Underbreadth ..................................... 745 F. JUSTIFICATIONS OFFERED FOR THE PROPOSED C HANG ES ............................................. 746 1. InternationalLaw and the Globalization of Com m erce ......................................... 746 a. Globalization of Commerce ................... 747 b. Consistency with International Conflict of Laws Norm s .................................. 749 2. Economic Well-Being .............................. 757 3. Uniformity ........................................ 764 4. Certainty .......................................... 766 VI. POLICY IMPLICATIONS OF THE PROPOSALS ....... 769 A. POLICY IMPLICATIONS WITHOUT THE COMPLICATIONS OF PARTIAL ENACTMENT .............................. 771 B. PROBLEMS OF PARTIAL ENACTMENT: FORUM SHOPPING AND COMITY ............................... 776 1. For Enacting States ................................ 777 2. For Non-enacting States ........................... 779 3. Other Alternatives to Enactment ................... 780 VII. CONCLUSION ........................................... 783 I. INTRODUCTION USTICE White's powerful Civics I statement expresses bedrock val- ues underlying our federal system. There are countless expressions of these ideas throughout our history and that history is replete with examples of State governments exercising their legal authority in unique ways. Texas, for example, established itself as a debtors' haven by creat- ing generous debtors' exemptions from execution on judgments. Its his- tory includes substantial migration of debtors from the Northeast 2001] CONTRACTUAL CHOICE OF LAW attempting to avoid their debts.2 Florida has more recently done much the same thing by creating a regime of debtors' exemptions widely per- ceived to be unfair by those to whom the money has been owed. 3 In the less distant past, California attracted families by offering a very high qual- ity public education,4 Delaware has become the choice for incorporating many businesses, and New York may be the jurisdiction of choice for 5 litigating commercial law cases. Indeed, the perceived importance of state sovereignty and federalism is linked to the idea that one state might, through enlightened legislation or judicial decisions, create a more hospitable regime for its inhabitants and thereby create for them benefits not presently available to citizens of other states. Obviously, in its traditional form in the United States, creat- ing hospitable or inhospitable environments is the business of State gov- ernments. An individual's desire for different limits on creditor remedies, a different public school structure, different tax statutes, or other different rules traditionally calls for political action or physical relocation. Since at least the 1930s, however, individual choice has played a slightly larger role in determining the legal regime that would apply to some of one's activities. 6 Since that time, individual parties to contracts have had limited power to choose from among the different governing laws that might arguably apply to their contract. The development of this power was controversial well before that;7 but, recently, this limited power to select applicable law has been relatively uncontroversial. When contracting parties or the subjects of their contracts are located in different states, it is not obvious which law ought to govern their rela- 2. See, e.g., James W. Paulsen, Introduction: The Texas Home Equity Controversy in Context, 26 ST. MARY'S L.J. 307, 310 (1995). 3. Florida provides for 47 different exemptions available to debtors. The Florida homestead exemption, which denies creditors access to a debtor's home, is found in article X section 4 of the Florida Constitution. The exemption protects up to one half of an acre within a municipality and 160 acres outside a municipality regardless of the value. This exemption can seem particularly unfair to creditors. Donna Litman Seiden, There's no Place Like Home(stead) in Florida- Should it Stay that Way?, 18 NOVA L. REV. 801, 809- 817, 837 (1994); see also Lawrence J. Goodrich, How Much Debt Should CreditorsForgive? Rise in personal bankruptcies may prompt Congress to stiffen laws, CHRISAN SCIENCE MONITOR, Nov. 6, 1997, at 1, available in 1997 WL 2805070 (telling the horror story of a multimillionaire who bought a mansion in Florida and then declared bankruptcy). 4. State statutes give some of the flavor of these reforms. See CAL. EDUC. CODE § 66052(a), (b) (West Supp. 1995) (providing that the Legislature intends the University of California and the California State University to adopt and enforce procedures in order to ensure that quality teaching is an essential criterion when evaluating faculty for appoint- ment, retention, promotion, or tenure). 5. Cf. EUGENE F. SCOLES ET AL., CONFLICT OF LAWS § 18.6, at 872 (3d ed. 2000): "[Authorizing parties to select unrelated New York law was said] to afford parties the opportunity to select a sophisticated body of commercial law and a judicial system with substantial experience as well as to enhance the importance of New York as an interna- tional commercial center." 6. JOESPH BEALE, TREATISE ON CONFLICT OF LAWS 1173 (1935). 7. See Joseph Beale, What Law Governs the Validity of a Contract,23 HARV. L. REV. 260, 260 (1910) (stating that choice of law give parties "permission to do a legislative act"). SMU LAW REVIEW [Vol. 54 tions. Uncertainty about applicable law creates commercial problems of predictability for those who draft contracts. To reduce that uncertainty, courts began giving parties limited power to choose from among the legal systems that the adjudicating court might have chosen in the absence