Hostname: page-component-6766d58669-6mz5d Total loading time: 0 Render date: 2026-05-16T14:21:58.999Z Has data issue: false hasContentIssue false
  • English
  • Français

The Current Status of the Contractual Choice of Law Clause Provisions in the Draft Restatement (Third) of Conflict of Laws

Published online by Cambridge University Press:  05 November 2025

Laura E. Little
Laura E. Little*
Affiliation:
Temple University, Beasley School of Law, Philadelphia, United States
*
Email: Laura.little@temple.edu

Abstract

The entity responsible for preparing and distributing the restatements of U.S. law has commissioned a new Restatement of Conflict of Laws. This effort includes a reworking of the provisions relating to contractual choice of law clauses. In this Article, I describe the draft contractual choice of law provisions. As a governing theme, I highlight the balance between party autonomy and economic efficiency on one hand and respect for democratic sovereign governance on the other hand: a balance that can traced through each of the new draft provisions. I explain how the current draft resembles and differs from the provision on contractual choice of law clauses in the prior restatement on conflict of laws.

Keywords

Restatementchoice of law clausecontract

Information

Type
Article
Information
German Law Journal , Volume 26 , Special Issue 5: (Informed) Consent to Dispute Resolution Agreements , June 2025 , pp. 815 - 828
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s) 2025. Published by Cambridge University Press on behalf of the German Law Journal

A. Introduction

Those in the know would have predicted it. Of all the topics addressed in the new U.S. version of the Restatement (Third) of Conflict of Laws, the contracts chapter has been among the most controversial topics to redraft.Footnote 1 Why would one predict this controversy? In substantial part, clashing ideologies might be to blame. At one far end of the ideological spectrum is libertarianism: opposing government intervention in economic and social policy unless property rights are being threatened. At the other far end is command and control liberal democracy: belief that well-designed regulation can make possible a properly functioning democratic government that ensures liberty and political equality for as many citizens as possible.

The terms “libertarianism” versus “command-and-control liberal democracy” are not the lingo of contractual conflict of laws debates. Instead, the ideological split among those who participate in the debate is less extreme: terms such as “promoting party autonomy and transaction planning” versus “respect for mandatory rules” more often frame the two ends of the spectrum. Although well known to conflict of laws experts, the term “mandatory rules” is notoriously obscure for legal consumers (judges, students, and lawyers) who grapple with conflict of law rules on a limited basis. One point of reference in explaining the term observes that mandatory rules are more than just gap-fillers. Instead, mandatory rules are created to serve substantive purposes deemed important enough to require as a matter of law, rather than leave to private choice. According to this view, parties to a contract should encounter significant restraints on their ability to fully define their rights and responsibilities in a private agreement. In other words, rules that define the rights and responsibilities of citizens are mandatory rules that parties should not easily avoid.Footnote 2 According to this line of thought, parties should not be able to “perform a legislative act” and “free themselves from the power of the law which apply to their acts”Footnote 3 —at least not without sufficient justification. Further discussion of mandatory rules and their relationship with a contrasting set of rules, sometimes called default rules, appears later in this Article.Footnote 4

Yet ideological differences about the scope of party autonomy and the importance of transaction planning may not be the only reason for the controversy about contractual choice of law rules among the participants in the restatement drafting process. Choice of law clauses can divest a state of power, even though it may have a significant stake in its law governing to a particular controversy. This could implicate a strong reaction by those concerned with promoting principles of U.S. federalism honoring state sovereignty, and ensuring respect among sister states. The controversy may be fueled in part by the possibility that some participants have economic interests at stake, having long made a living practicing law under an existing set of principles that could be unsettled by a dramatic change in contract choice of law rules. Whether conscious or unconscious, these interests may be triggered especially by contractual choice of law clause rules, given the common presence of these clauses in contracts drafted by corporate counsel practicing in-house or in law firms. As for other participants in the drafting, judges were heard during the discussions pleading for simplicity in the contract rules. Given the frequency that disputes about contractual choice of law rules occur in litigation, several judges during American Law Instittutw advisor meetings expressed frustration with the indeterminism, uncertainty, and the sometimes-called “chopped salad” approach arising from the rules of Restatement (Second) of Conflict of Laws.Footnote 5 The reporters seek to avoid this indeterminate approach in the Restatement (Third) of Conflict of Laws by injecting a commitment to articulating clear rules into the contracts chapter, as we have sought to do in other parts of the project.

The controversy over the draft contract rules in the Restatement (Third) has been particularly robust in the context of contractual choice of law clauses, which are the focus of this Article. After providing an overview of the contracts chapter, the Article will turn to the philosophy and structure of the contractual choice of law clause provision (section 8.02).

B. Overview of the Restatement (Third) Conflict of Laws Chapter on Contract Choice of Law Rules

Like other restatements published by the American Law Institute, the mission of the Restatement (Third) of Conflicts of Law is primarily focused on restating the state common law of the United States: summarizing, synthesizing, and providing improvements to case law decisions from courts around the United States. While focusing on the state common law of the United States, the Restatement (Third) must be consistent with a small body of federal common law and, more importantly, treaties, federal statutes, and state statutes.

The most pertinent state statute is the Uniform Commercial Code, which governs the sale of goods in the United States. The Uniform Commercial Code has been adopted and adapted in its entirety by all states except Louisiana, which adopted only parts of it. One must therefore take note that Restatement (Third) of Conflict of Laws provides guidance only for contracts that do not concern the sale of goods.

For treaties, the most pertinent is the United States Convention for the International Sale of Goods.Footnote 6 As with the domestic Uniform Commercial Code, this provision is treated as though it governs alongside the Restatement (Third) and other components of state and federal law.

The chapter on contracts attempts to chart a line between what was described above as the two ends of a spectrum tailored for the purpose of contractual choice of law. The chapter is written to respect the impulse for parties to create private rules among themselves. At the same time, the chapter is also drafted to respect assertions of sovereign power to govern matters that offend a jurisdiction’s deeply held policy prohibitions. Stated differently, the chapter is designed to respect and to reinforce party autonomy and to support transaction planning as well as economic efficiency, while also providing due regard for the legitimate power of sovereigns to govern what sovereign law regards as objectionable private behavior. Although few challenge this general approach, disagreement arises as to precisely where to chart the line between those two poles.

Chapter 8 of the Restatement (Third) of Conflict of Laws is divided into two topics: Topic 1 sets forth general rules for choosing the law governing contracts and Topic 2 covers choice of law rules for specific topics, such as capacity to contract and formalities of contracting. These specific choice of law rules apply to all contracts. As of the date of this writing, the American Law Institute Council has approved all the general rules of Topic 1. The next step in the process is for the entire membership to American Law Institute to approve these draft rules. As of this writing, the only section to be brought before the membership is section 8.01, which the membership approved—without objection—as representing the position of the American Law Institute as a whole in March 2023. This approval is significant because section 8.01 sets out the procedure for resolving a choice of law issue pertaining to the parties, including the sequence of analysis to be followed.Footnote 7

The chapter divides the general rules of choice of law into two areas: contracts without a choice of law clause and contracts with a choice of law clause. For contracts without an effective choice of law clause that pertains to a specific issue in dispute, the chapter divides its guidance between choice of law rules for contracts within certain common subject matter areas: service contracts, life insurance contracts, contracts for liability and property insurance, contracts for the sale of real property interests, and contracts for the sale of real property interests.Footnote 8

If a contract is not covered by these subject matter rules, then the chapter instructs that the governing law is the law of the predominant place of negotiating and performing the contract, if those places overlap in the same jurisdiction.Footnote 9 The rule is motivated by the purpose of encouraging transaction planning and honoring party expectations. Taking into account contracting behavior now strongly influenced by contemporary technology, the following reasons support the rule: (1) when the parties definitively negotiated a contract in one place and intended to perform the contract in the same place, they likely expected the law of that place to govern; and (2) the place where a contract is predominately negotiated and performed generally has a dominant stake in regulating the validity and terms of enforcing the contract. If the predominant place of contracting and performing the contract are not in the same place, then the place of making the contract and the predominant place where it is performed will apply when two activities occur in the same state, unless the place of making or place of performance is ambiguous or arbitrary. This requirement is also designed to support transaction planning and honoring party expectations. Finally, if either of these alternatives does not cover the circumstances pertaining to the contract, then the chapter provides a list of six contacts pertaining to the contract and six polices to evaluate for the purpose of identifying the governing law.Footnote 10

This final provision is the most indeterminate and yields the least predictable results. It is for that reason the provision offers the last resort option, which should be used less than the other provisions for resolving conflict of laws questions when a contract has no choice of law clause. By contrast, the provision in the contracts chapter that will most probably be used is section 8.02 governing enforceability of choice of law clauses, addressed in the next section.

C. Rule Governing the Enforceability of Choice of Law Clauses: Section 8.02

The structure and content of the Restatement (Third) of Conflict of Laws on the enforceability of contractual choice of law clauses section 8.02 hews close the provision on the same subject in the Restatement (Second) of Conflict of Laws, section 187. Section 187 of the Restatement (Second) is generally regarded as one of the most successful sections of that restatement. Under the practice of the American Law Institute, a restatement is not meant to send thunderbolts of change into the body of the law,disrupting a functional status quo. To preserve what we regard as a generally well-functioning approach to contractual choice of law clause enforcement, we concluded that—with refinements—most of section 187 merited preserving.

Section 187 reflects the balance between democratic sovereign governance and party autonomy. Before settling on that section as our guide, we thought it important to give due consideration to whether the new Restatement (Third) approach should place greater emphasis on party autonomy. In this regard, we looked at the experience of those responsible for amending the Uniform Commercial Code. The official version of the Code in place before 2001 permitted parties to select the law that governs their rights and duties provided that their transaction bears a “reasonable relation” to the state or nation whose law is selected.Footnote 11 As part of the Revised Article 1 to the Uniform Commercial Code promulgated in 2001, the proposed UCC Section 1-301 emphasized much greater party autonomy than the preceding code. The revised UCC Section 1-301 accomplished this by striking the “reasonable relation” language from the section governing choice of law provisions in non-consumer transactions.Footnote 12 Almost every jurisdiction in the United States rejected this change and retained the earlier approach. States objected to different portions of the amendments, concerned that its approach would negate the role of sovereign rules to curtail private behavior. Given the rejection, the Uniform Law Commission amended the revised section in order to go back to wording similar to the original provision.Footnote 13 The only caveat in non-consumer transactions was “where the parties’ choice would contravene a fundamental policy of the jurisdiction whose law would otherwise apply.”Footnote 14

Given this overwhelming rejection of a policy skewed considerably toward party autonomy, we chose to adhere to the long-accepted section 187 approach, which reflects more of a balance between party autonomy and democratic governance amendable to the mainstream sensibility of U.S. legal thinking. We have nonetheless identified troublesome topics and fraught analysis accompanying portions of section 187 that have proven difficult for judges, practitioners, and other analysts to use. The sections below delve into those changes after explaining the general structure of our suggested analytical approach in the Restatement (Third)’s section 8.02.

I. Outline of the Contractual Choice of Law Process

Although Chapter 8’s Topic 1 contains twelve separate rules, the chapter is oriented toward emphasizing choice of law clauses. Indeed, the chapter instructs that, when confronted with a contractual choice of law issue, an analyst’s first step is to ascertain whether the contract contains a choice of law clause. If not, then the analyst must turn to the various provisions laid out in Section A of this Article, evaluating what law applies according to the subject matter or the parties’ actions and intent in creating the contract. If, however, the contract does have a contractual choice of law clause, then the next step is to ascertain whether the language of the contractual choice of law clause encompasses the choice of law problem that the analyst confronts. For this purpose, the Restatement (Third) contains an entire section devoted to interpretation of the language of contractual choice of law clauses, section 8.03.Footnote 15 The analyst must also consider whether the law chosen in the choice of law clause is the subject of a statutory directive or is otherwise limited in scope. If the law chosen by the parties is limited in scope or is otherwise subject to a statutory directive, that may be the end of the inquiry. When these two matters do not provide an obstacle, the analyst must evaluate this limitation’s effect under section 8.04. After the language interpretation and scope limitations steps are completed, the analyst then moves to evaluating the choice of law clause under the various components of section 8.02. This section 8.02 analysis will ultimately reveal whether the parties’ chosen law governs the issue or issues in dispute.Footnote 16

II. Language and Scope of the Section

Like all the general rules set forth in Title 1 of Chapter 8, section 8.02 has been approved by the Council of the American Law Institute.Footnote 17 Section 8.02 applies only in situations when the forum court is satisfied that the parties have chosen a law that applies to the issue in dispute. An analyst evaluating whether the clause will apply must consider each component in the section, including the issue of whether an applicable state statute controls a court’s ability to enforce a choice of law clause. The precise language of the section provides as follows:

§ 8.02. Enforceability of Choice-of-Law Clauses

  1. (1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied to resolve an issue if the issue is one within the parties’ contracting power.

  2. (2) Subject to subsection (3) of this Section, the law of the state chosen by the parties to govern their contractual rights and duties will be applied to resolve an issue, even if the issue is not one within the parties’ contracting power, so long as either:

    1. (a) the chosen state has a substantial relationship to the parties or to the transaction, or

    2. (b) there is otherwise a reasonable basis for the parties’ choice.

  3. (3) The law of the chosen state shall not apply if:

    1. (a) it is contrary to a fundamental policy of the state that would provide the governing law in the absence of the parties’ choice, or

    2. (b) the parties have chosen the law of a state other than the forum and a local statutory directive requires that forum law be applied.

After evaluating the interpretation and statutory preemption issues, an analyst’s next step in applying § 8.02 is to determine whether the case is a § 8.02(1) case or a § 8.02(2) case. If the case concerns an issue within the parties’ contracting power, then § 8.02(1) controls the choice of law decision and the parties’ chosen law applies. If, however, the case is not within the parties’ contracting power, then § 8.02(2) applies and a more complicated inquiry ensues: (1) the analyst must determine if a statutory directive requires that forum law applies; (ii) the analyst must evaluate whether the chosen state has a reasonable relationship with the case or whether there is a reasonable basis for the parties’ chosen law; and (ii) the analyst must evaluate whether the chosen law is contrary to a fundamental public policy of the state that would provide the governing law if the parties had not chosen an applicable law. Further details on this order of inquiry appear below.Footnote 19 The following flow chart demonstrates the interpretative process that § 8.02 requires. In many cases, the following concepts pose the greatest difficulty for those who apply the statute: identifying default rule versus mandatory rule, analyzing the details of statutory directives that may require that forum law be applied, and applying the concepts of substantial relation, reasonable basis for the parties’ choice as well as fundamental policy. These topics are explored in the sections immediately below.

Figure 1.

Process for Identifying Whether to Apply a Contractual Choice of Law ClauseFootnote 18

III. Mandatory Rules Versus Default Rules

Crucial to the choice of law clause analysis is choosing whether the issue in the case is a choice of law rule subject to section 8.02(1) or section 8.02(2). Making the choice requires characterizing rules as a mandatory rule or a default rule., which as explained above, can be a difficult undertaking.Footnote 20 One can come at the topic from different angles.

One way to start the understanding is to describe default rules (section 8.02(1)), which are the contrast to mandatory rules (section 8.02(2). For many issues, parties have power to determine the terms of their contracts independent of legal regulation: these are default rules. The law does not impose on default rules a required position, standard, or policy that the parties must follow. Although a default rule applying to the parties may be one covered by existing law, that law governs only if the parties have not prescribed their own rule on the topic that governs their relationship. In other words, the legal rules are gap-fillers, applicable only if the parties themselves have not filled in the gap with a provision in their contract or a reference to a law of another jurisdiction. The legal rules act as a sort of “rules of the road,” seeking to ensure that the parties interact smoothly with others (and with society in general), even though they did not specify how they should interact in their contract. When parties include a provision covering the same issue as the legal rule, the parties’ preference will prevail even if it differs from a default rule that would likely apply in the absence of the parties’ preference.

Making analysis even more complicated for rules within the parties’ contracting power, the parties may incorporate these rules into the contract by reference to a designated state’s law. The forum should apply the relevant provisions of the law of the designated state. In doing so, the forum would simply be effectuating the intentions of the parties.

Diverse examples exist of rules for which the parties enjoy the freedom to choose without restriction. One typical default rule example is a law providing a particular meaning to common contract provisions. In providing this definition of a term, the purpose is simply to articulate a meaning that should apply in the absence of contract language to the contrary. Nonetheless, the parties may choose to write language into their agreement indicating that they want the term to have a different meaning. This is permissible because the law provides a definition only to ensure that one exists, because the parties have not specified one themselves. Other examples of default rules are rules relating to conditions precedent and subsequent, sufficiency of performance, the timing of payment, and excuse for nonperformance. On occasion, contract provisions may be deemed a default rule if it is drafted to fit within a window of compliance with the mandatory rule, but a mandatory rule if it deviates from that window of compliance. This phenomenon is explored in detail below.Footnote 21

As explained above, once a forum determines that the principle is a default rule, the forum will apply the chosen principle without regard to any connection between the parties or the transaction and the chosen law or any other justification for designating the chosen law. In other words, the parties may choose the laws of a remote jurisdiction to serve as the source of a default rule, even where that jurisdiction lacks a connection between the parties or their transaction. Mandatory rules, however, require a much more complicated analysis, thus raising the stakes on whether the choice of law clause will be honored when a law at issue is designated as a mandatory rule.

Mandatory rules are those motivated by a specific public policy rationale that the parties are not at complete liberty to contradict in their contract. Often the subject matter of the law will flag the law’s status as a mandatory rule supporting a deeply held public policy. For example, a law that provides “surrogate parenthood contracts are forbidden in this state” is a mandatory rule.Footnote 22 Other times, the characterization of as a default rule or a mandatory rule can depend on the context in which a rule would be applied. Here is a classic example:

In State X, A establishes a trust and provides that B, the trustee, shall be paid commissions at the highest rate permissible under the local law of State Y. A and B are both domiciled in X, and the trust has no relation to any State but X. In X, the highest permissible [legal] rate of commissions for trustees is five percent. In Y, the highest permissible rate is four percent. For the purpose of this context, this provision is likely deemed a default rule. Even though the commission rule of State X acts as a simple mandatory rule to the extent that it prohibits commissions over a certain rate, the rule operates as a default rule in this instance because the commission rate chosen is below the maximum rate allowable. That is, the law permits commission rates under five percent and the parties exercised their prerogative to choose a rate that falls within that permitted range. For these reasons, the [commission law is a default rule and the] court will give effect to a choice-of-law provision designating State Y law, allowing B to receive commissions at the rate of four percent.

Now assume the same facts, except that the highest permissible [legal] rate of commissions in X is four percent and in Y is five percent. The court will likely not conclude that the choice-of-law provision concerns a default rule because, under X local law, the parties lacked power to provide for a rate of commissions in excess of four percent. Under these facts, the commission law is treated is a mandatory rule.Footnote 23

IV. Order of Analysis of Section 8.02(2)–(3)

Once one determines that the rule at issue in a particular case is a mandatory rule,Footnote 24 it is then necessary to determine whether the rule satisfies all the obstacles in section 8.02. One might logically choose to begin this inquiry with section 8.02(3)(b), which requires a local statutory directive mandating that forum law should take precedence over a choice of law clause designating the law of a state that is not the forum. If one finds such a valid local statutory directive, efficiency counsels starting by applying the statutory directive and not honoring the choice of law clause. To follow this order of inquiry could dispense with what could be a cumbersome analysis of the other obstacles to applying the parties’ choice of law clause reflected in section 8.02(2)(a)–(b) as well as section 8.02(3)(a).

If section 8.02(3)(b) does not dispose of the question of whether to apply the choice of law clause, the next inquiry would focus on section 8.02(2)(a)–(b). One can view the formulations in section 8.02(2) in both negative and positive form. Here are the two alternative formulations for evaluating whether the parties’ choice of law applies for a mandatory rule:

*The negative formulation: the parties’ choice of law governs unless the chosen state has no substantial relation to the parties and no reasonable basis for being chosen by the parties.

*The positive formulation: the parties’ choice of law governs if: The chosen state has a substantial relation to the parties or there is a reasonable basis for the parties’ choice.

Finally, once the obstacle of section 8.02(2)(a)–(b) is surpassed, one must then consider the restriction of section 8.02(3)(a). Under this restriction, the law chosen by the parties may not be applied if it is contrary to the fundamental policy of the state that would provide the governing law in the absence of the parties’ choice of law clause. This fundamental policy evaluation is potentially the most cumbersome of all provisions of section 8.02(2) and is therefore recommended to come last in case the earlier inquiries dispose of the issue of whether to apply the choice of law clause. This complication arises from the necessity of first inquiring into what law will otherwise apply in the absence of a choice of law clause in order to identify if the chosen law violates a fundamental policy of that state. To determine what law would otherwise apply, the analyst must consult the process described above in Section A, which conceivably requires consideration of eight other sections. We tried to avoid this analysis, which resembles a similar requirement in the counterpart provision in the Restatement (Second) of Conflict of Laws section 187. In our view, this cumbersome requirement was worth avoiding because it injects additional work and uncertainty into the choice of law clause analysis: it effectively imposes on the analyst a double-barreled analysis. We ultimately concluded, however, that the requirement was necessary to honor the sovereignty of the state with the most claim for governing the issue.

V. Substantial Relationship and Reasonable Basis

Like many others in section 8.02, the concepts of “substantial relationship to the parties or to the transaction” and “otherwise a reasonable basis for the choice” appeared in the Restatement (Second) of Conflict of Laws section 187. Since the concepts were listed in the alternative, courts generally treated the two concepts as discrete. The concepts are similarly treated as alternatives in the Restatement (Third)’s section 8.02.

The requirement of a substantial relationship to the parties focuses on the contacts that the parties and their transaction have with the parties’ chosen state. Examples of when this requirement is satisfied are (1) when the chosen state is where performance by one of the parties is to take place, (2) where one of the parties is domiciled, or (3) where one of the parties has a principal place of business. The same may also be true when the chosen state is the place of contracting, although its importance is diminished by the increased use of technology rendering the place of contracting indeterminate or wholly fortuitous, in which case this contracting place may bear no real connection either to the transaction or to the parties.

For some types of contacts, some courts sometimes use the contact as a substantial connection with the chosen state while other courts use that same contact as a reasonable basis for the parties’ choice of governing state law.Footnote 25 This raises the question of how the two concepts are different. By its focus on contacts between the chosen state and the parties or their transaction, the concept of substantial connection has an objective character. The reasonable basis standard, however, often involves more subjective considerations, including the parties’ motive for choosing a particular law. So, for example, when contracting in countries with legal systems that are unfamiliar to them or relatively underdeveloped, the parties might choose the law of another jurisdiction on the grounds that they know it well or that it is well-settled. Likewise, if a jurisdiction has unusual expertise in one area of law, such as corporate lawFootnote 26 or commercial law, the parties may choose to designate the law of that State even if they have no relationship with the State. The well-developed nature of the law may allow them to project the consequences of their contracting terms and business interactions as well as to plan their affairs more knowledgeably. Courts have also recognized that the parties may have a reasonable basis for their choice in instances when a party is a multi-jurisdictional actor and—for efficiency and planning purposes—wishes to designate one law that will govern its business.Footnote 27 To allow such reasons to justify the parties’ choice of law is deemed to appropriately honor the concept of party autonomy, to promote planning, and to support economic efficiency. Nonetheless, the other end of the balance—protecting democratic sovereignty—suggests it is appropriate to scrutinize whether the parties’ choice is primarily motivated by a desire to avoid the law of a state with a strong claim for governing the parties or their transaction.Footnote 28

VI. Fundamental Policy

The fundamental policy exception to honoring the parties’ choice provides a mechanism for the forum to override the parties’ choice of law, when that choice would contravene a fundamental policy of the state whose law would apply in the absence of a choice of law clause—that is, the state whose law would apply under sections 8.05–8.12.Footnote 29 Sections 8.05–8.12 are crafted with the purpose of providing bright-line rules whenever possible and of identifying the state with the greatest interest in providing governing law to the parties’ or the transaction. In this way, the fundamental policy exception gives due weight to democratic sovereign governance in those instances when the law at issue has particularly significant meaning to a jurisdiction.

A fundamental policy must be a substantial one. The forum should not refrain from applying the chosen law merely because doing so would lead to a different result than would be obtained under the otherwise applicable, local law. The mere difference between a forum court’s preferred law and the parties’ chosen law will not render the chosen law contrary to fundamental policy. On the other hand, a fundamental policy need not be as strong as would be required to justify a forum court’s refusal to entertain a lawsuit based on foreign law.Footnote 30

A fundamental policy may be gleaned from case law or may be embodied in a statute. An example of a statute expressing a fundamental public policy is one that makes a contract illegal or is designed to protect against oppressive use of superior bargaining power. Examples of other subject matters addressed in statutory and case law that have been deemed to express a fundamental public policy include non-reciprocal attorneys’ fees, protections for workers, non-compete agreements, protections for franchisees, and usury.Footnote 31 Finally, the language is clear from the fundamental policy provision itself that the law that governs whether a law is a fundamental policy capable of displacing the parties’ chosen law is the law of the state that would apply in the absence of the parties’ choice. For that reason, previous court decisions applying forum law to the determination of whether a policy is fundamental are inconsistent with the Restatement (Third)’s approach.

C. Interpretation of Choice of Law Clauses: Section 8.03

A substantial part of the litigation in the United States pertaining to choice of law clauses does not focus on enforceability. Instead, litigation arises because of disputes about whether the parties’ clause applies to resolution of a particular dispute. Section 8.03 is devoted to attempting to reduce these interpretive problems providing guidance to parties in their drafting as well as rules for those who must interpret choice of law clauses.Footnote 32

The main approach of section 8.03 is to enunciate rebuttable presumptions for how to interpret perennial problems arising from common ambiguous words in contractual choice of law clauses: “govern,” ”relating to,” “arising in connection with,” “law/laws,” ”interpreted,” and “construed.” Building on experience with recent case law, the section reflects the best of contractual choice of law clauses and illustrates some of the worst.

To the extent that section 8.03 serves as a set of instructions for those engaged in contract drafting, the section could be useful for triggering inquiry about the types of potential interpretation problems to anticipate and for instructing ways to avoid them.Footnote 33 Perhaps the most common problem that occurs with wording pertains to the scope of the clause and questions whether the clause is meant to govern non-contract claims that arise as a consequence of the parties’ transaction. In this regard, the section provides that a clause stating that the law of a specific jurisdiction shall “govern” the contract will be presumed to govern only the parties’ contract disputes. By contrast, if the clause refers to claims “relating to” or “arising in connection with” the contract then non-contract claims pertaining to the contract are covered by the choice of law clause.

D. Chosen Laws Limited in Scope: Section 8.04

States of the United States have a limited, but growing, set of rules that limits the reach of certain state laws. These limitations direct courts to use a particular law only in certain circumstances, to allow parties to select a state’s law for certain transactions, or to restrict a state’s law from governing certain transactions. Section 8.04 of the Restatement (Third) of Conflict of LawsFootnote 34 pertains to these limitations, instructing that these law limitations apply regardless of what a choice of law clause may choose to accomplish. The section covers three different limitations pertinent to the question whether a court would be free to apply the parties’ chosen law.Footnote 35 One set includes provisions directing courts to use the state’s law to govern certain transactions, such as insurance contracts payable to state residents or payday loan contracts where the borrower is domiciled in the state.Footnote 36 The second type of provision, called an inbound choice of law statute, provides that parties may select the state’s law to govern only those contracts with particular specifications. Finally, the third set of statutes limit the scope of a state’s law, providing that the statute’s terms govern only certain persons or events specified in the statute. As a diverse country with an increasingly diverse constellation of state governments, the United States has seen an increase in these types of law.

When statutes are limited in scope in one of these ways, the parties cannot expand the law’s coverage. In other words, “they cannot give themselves a right” that a state has chosen to withhold.Footnote 37 For this reason, when parties select a law that is limited in scope, an issue that is outside the scope of the selected law is not governed by the choice of law clause. Instead, the law governing that issue is determined by the choice of law principles set forth in sections 8.05–8.12, providing the choice of law principles governing an issue not covered by an effective choice of law clause.

E. Conclusion

The law governing contractual choice of law clause provisions in the United States is complicated, addressing an octopus-like collection of issues. For each issue, however, a constant balance of values informs the resolution: party autonomy and economic efficiency on one hand and respect for democratic sovereign governance on the other hand. So far in the drafting process of the Restatement (Third) of Conflict of Laws, the balance has shifted differently for different provisions. For example, one sees an orientation toward party autonomy and economic efficiency at play in the section 8.02, which embraces the starting point of seeking to honor these values unless a compelling exception presents itself. As for democratic sovereign governance, one sees that value dominating when a state with the greatest claim for resolving a dispute has a fundamental public policy implicated in the issue at play between the parties. Given the shift in the balance of these values depending on the issue, the value of predictability is not fully realized. Nonetheless, the Restatement (Third) of Conflict of Laws adheres to the balance itself as the guiding principle for contractual choice of law clauses.

Acknowledgements

In drafting Section C of this Article and section 8.03 of the Restatement (Third) of Conflict of Laws, I acknowledge our debt to Professor John Coyle of the University of North Carolina Law School, Chapel Hill, whose exhaustive scholarship on the language of contractual choice of law clauses informed our drafting. I have submitted the section to the American Law Institute Council, which heartily approved the draft subject to the comments that accompanied discussion of that approval. I will make changes in accordance with those comments before submitting the section for final approval by the membership of the American Law Institute.

Competing Interests

The author declares none.

Funding Statement

The author declares none.

Author Biographical Information

Professor Laura E. Little serves as the James G. Schmidt Chair in Law at Temple University School of Law. She specializes in federal courts, conflict of laws, and constitutional law. She is the author of numerous books and articles, including a sole-authored casebook and two treatises. The American Law Institute appointed Professor Little in 2014 to serve as Associate Reporter, Restatement (Third) of Conflict of Laws.

References

1 Other sections that inspired controversy among the American Law Institute members, advisors, and council members were the sections on domicile, the corporate internal affairs doctrine, and torts.

2 See Restatement (Third) Conflict of Laws § 8.02, cmt. b, Illus. 3 & 4 (A.L.I. Draft No. 5, Sept. 20, 2021); Little, infra note 23. See also Mattias Lehmann, The Methodology of Overriding Mandatory Provisions in Modern Conflicts of Laws, Eur. Ass’n Priv. Int’l L. Blog (Apr. 16, 2021), https://eapil.org/2021/04/16/the-methodology-of-overriding-mandatory-provisions-in-modern-conflicts-of-laws/

U.S. legal thinkers also use the term “overriding mandatory rules.” These rules are differentiated from other legal rules because of their preeminent importance for public order. It can be said that overriding mandatory rules are those that “the legislator intends to be respected even where a case is governed by foreign law under ordinary conflict-of-laws rules.”.

See also sources cited infra note 22 and accompanying text (discussing the overriding mandatory rules in the context of the term “fundamental public policy,” which appears in the black-letter language of the Restatement (Third) of Conflict of Laws § 8.02 (A.L.I. Draft No. 5, Sept. 20, 2021)). See also sources cited infra note 36 and accompanying text (discussing “fundamental public policy” in connection with § 8.4).

3 Joseph H. Beale, Treatise on the Conflict of Laws § 332.2 (1935).

4 See infra notes 19–20, 22 and accompanying text (discussing the difference between default rules and mandatory rules). See also Restatement (Third) Conflict of Laws § 8.02, cmt. b, Illus. 3 & 4 (A.L.I. Draft No. 5, Sept. 20, 2021) (explaining that a provision can be a mandatory rule in one context and a default rule in another context).

5 Presumably “chopped salad” approach refers to legal rules that list of many factors that can be included in the final product (decision), and consequently make it likely that the ultimate outcome of that product (decision) is entirely unpredictable.

6 U.N. Convention on Contracts for the International Sale of Goods, Apr. 11, 1980, 1489 U.N.T.S. 3 [hereinafter CISG].

7 Restatement (Third) of Conflict of Laws § 8.01 (A.L.I. Draft No. 5, Sept. 20, 2021) [hereinafter Restatement (Third) of Conflict of Laws]:

Contract issues are resolved by the law chosen by the parties under the rule of § 8.02. In the absence of an effective choice of law by the parties, contract issues are resolved under the provisions of §§ 8.05–8.12.

In other words, the section directs analysis to start with any choice of law clause that appears in the contract, and only in the absence of an effective choice of law clause, to then refer to the general contract rules. These general contract rules are discussed immediately below in connection with footnotes 8–10 and accompanying text.

8 Restatement (Third) of Conflict of Laws §§ 8.6-8.10 (A.L.I. Draft No. 5, Sept. 20, 2021).

9 Restatement (Third) of Conflict of Laws § 8.11 (A.L.I. Draft No. 5, Sept. 20, 2021).

10 Restatement (Third) of Conflict of Laws § 8.12 (A.L.I. Draft No. 5, Sept. 20, 2021) (listing the following contacts relevant to evaluating a state’s interest in having its law applied:

  1. (a)

    (a) Predominant place of performance for the contract;

  2. (b)

    (b) Predominant place of negotiating the contract;

  3. (c)

    (c) Places where the parties have their domiciles;

  4. (d)

    (d) Predominant place of the subject matter of the contract;

  5. (e)

    (e) Place of making the contract; and

  6. (f)

    (f) Place that is designated in the parties’ enforceable choice-of-court clause in the contract.

The section lists the following policies to evaluate in identifying the governing law:

  1. (a)

    (a) giving effect to the parties’ justified expectations concerning which state’s law will apply;

  2. (b)

    (b) giving effect to a state’s interest in regulating the contract;

  3. (c)

    (c) giving effect to the law of the state designated in the parties’ enforceable choice-of-court clause;

  4. (d)

    (d) protecting one party from another party’s unfair use of bargaining power;

  5. (e)

    (e) upholding and enforcing contractual commitments; and

  6. (f)

    (f) providing due consideration for party autonomy and transaction planning).

11 See U.C.C. § 1-105 (A.L.I. & Unif. L. Comm’n 1999) (superseded 2001).

12 See U.C.C. § 1-301 (A.L.I. & Unif. L. Comm’n 2001) (amended 2008) (providing that in non-consumer transactions an agreement between parties as to the state or nation whose law will govern “is effective, whether or not the transaction bears a relation to the State designated.”). See also Mo Zhang, Rethinking Contractual Choice of Law: An Analysis of Relation Syndrome, 44 Stetson L. Rev. 831, 835 (2015)

(“Basically, under Section 1-105, the contractual parties may choose as the governing law the law of a particular state or nation if the parties’ transaction bears a reasonable relation to the state or nation. The revised Section 1-301, to a limited extent, allows the parties to choose the law of any state or country to govern any or all of their rights and obligations, regardless of the relation between the transactions and the state or country designated, so as to afford the parties greater autonomy.”).

13 See generally Jack M. Graves, Party Autonomy in Choice of Commercial Law: The Failure of Revised U.C.C, § 1-301 and a Proposal for Broader Reform, 36 Seton Hall L. Rev. 59 (2005); Lance Liebman, Amelia H. Boss, & Neil B. Cohen, Proposal to Amend Official Text of § 1-301 (Territorial Applicability; Parties Power to Choose Applicable Law) of Revised Article 1 of the UCC, 85 A.L.I. Proc. 8 (2008). See also U.C.C. § 1-301(a) (A.L.I. & Unif. L. Comm’n 2022) (“Except as otherwise provided in this section, when a transaction bears a reasonable relation to this state and also to another state or nation the parties may agree that the law either of this state or of such other state or nation shall govern their rights and duties.”).

14 Graves, supra note 13, at 61.

15 See Restatement (Third) Conflict of Laws § 8.03, (A.L.I. Draft No. 5, Sept. 20, 2021). (displaying the language on interpretation of choice of law clauses submitted to the American Law Institute Council).

16 The portion of the analysis pertaining to laws subject to a statutory directive is listed at the end of § 8.02 and the section covering the related concept of laws limited in scope is in an entirely different section listed in § 8.04, which follows § 8.02. This order is purposeful given that both concepts depend to some extent on whether the law listed is a mandatory rule or an overriding mandatory rule—a concept introduced earlier than the two concepts and helpful for applying them. In other words, the placement of consideration of statutory prohibition and scope limitations is tricky given the dependence of this analysis on several concepts. That said, if one can easily conclude that the statutory prohibition or scope limitation questions disqualify the parties’ choice of law, then one might avoid the somewhat complicated analysis of § 8.02(2), § 8.02 (3)(1), and of § 8.04. See Restatement (Third) Conflict of Laws § 8.03 (A.L.I. Draft No. 5, Sept. 20, 2021)..

17 See generally Restatement (Third) of Conflict of Laws § 8.01 (A.L.I. Draft No. 5, Sept. 20, 2021) (Section 8.01 has been approved by the entire membership of the American Law Institute, thereby taking on the status of a current position of the Institute as a whole.).

19 See infra notes 24–25 (detailing the order of processing the various requirements of Restatement (Third) of Conflict of Laws § 8.02(2)).

18 This figure is adapted from Laura E. Little, Conflict of Laws: Cases, Materials, and Problems 434 fig.2-2 (Aspen 3d ed., 2025).

20 See generally Matthais, supra note 2; Beale, supra note 3; Little, supra note 19. See also sources cited infra note 22 (discussing the difficulty of distinguishing between mandatory and default rules); Restatement (Third) Conflict of Laws § 8.02, cmt. b, Illus. 3 & 4 (A.L.I. Draft No. 5, Sept. 20, 2021) (explaining that a provision can be a mandatory rule in one context and a default rule in another context).

21 See Restatement (Third) Conflict of Laws § 8.02, cmt. b, Illus. 3 & 4 (A.L.I. Draft No. 5, Sept. 20, 2021) (explaining that a provision can be a mandatory rule in one context and a default rule in another context).

22 Because the term “overriding mandatory rule” is not used frequently in U.S. law, the concept is not essential to the operation of section 8.02. Note that in contract theory and in the laws of countries other than the United States, there are two types of mandatory rules: simple and overriding. For the purpose of choice of law clause analysis, a simple mandatory rule is one that the parties are not at liberty to unilaterally vary by a term in their contract, but may be able to vary by a choice of law clause. Overriding mandatory rules are those that the parties may vary neither by agreement nor avoid with a choice of law clause. Although U.S. case law rarely discusses this distinction explicitly, U.S. law has been consistent with the concept of overriding mandatory rules. See, e.g., Minn. Stat. § 80C.21 (“Any condition, stipulation or provision, including any choice of law provision [that waives compliance with the Franchise Act] is void.”); N.C. Gen. Stat. § 58-3-1 (“All contracts of insurance on property, lives, or interests in this State shall be deemed to be made therein, and all contracts of insurance the applications for which are taken within the State shall be deemed to be made within this State and are subject to the laws thereof.”); Tex. Ins. Code Ann. art. 21.42 (West 1987) (“Any contract of insurance payable to any citizen or inhabitant of this State by any insurance company …. doing business within this State shall be …. governed by [the laws of this State].”). See generally Symeon C. Symeonides, Codifying Choice of Law Around the World: An International Comparative Analysis 293–99 (2014); Symeon C. Symeonides, The Scope and Limits of Party Autonomy in International Contracts: A Comparative Analysis, in The Continuing Relevance of Private International Law and Its Challenges (F. Ferrari & D. Fernandez Arroyo eds., 2019).

23 See Restatement (Third) Conflict of Laws § 8.02, cmt. b, Illus. 3 & 4 (A.L.I. Draft No. 5, Sept. 20, 2021).

24 As may be obvious, the characterization of whether something is a mandatory rule or a default rule can determine the outcome of a choice of law inquiry. For that reason, the state that would provide the governing law in the absence of a choice of law clause arguably has the greatest stake in the potentially outcome determinative characterization. Logic therefore suggests that it is that state that should control the designation of whether something is a mandatory rule or a default rule.

25 State of incorporation can be an example of such a contact. Compare 3D/Int’l, Inc. v. Romano, 811 Fed. Appx. 244, 248 (5th Cir. 2020) (observing that the plaintiff “is a Texas corporation, and that fact alone is sufficient to demonstrate a reasonable basis for the choice-of-law provision.”), and Huawei Techs. Co. v. Huang, Civil Action No. 4:17-CV-00893, 2019 U.S. Dist. LEXIS 74484, at *13 (E.D. Tex. May 2, 2019) (applying Texas conflict-of-laws principles) (“[Plaintiff] is a Texas corporation so there is, at the very least, a reasonable basis for the Parties’ choice [of Texas law to govern an employment contract].”), with York Risk Servs. Grp. v. Couture, 787 Fed. Appx. 301, 309 n.2 (6th Cir. 2019) (applying Michigan choice-of-law rules) (concluding that Delaware had a “substantial relationship” to the parties because one party’s parent corporation was incorporated in Delaware and the contract granted the parent company the right to seek injunctive relief), and Kipling v. State Farm Mut. Auto. Ins. Co., 159 F. Supp. 3d 1254, 1270–71 (D. Colo. 2016) (applying Colorado choice-of-law rules) (determining that a substantial relationship existed between Minnesota and the parties because the defendant was incorporated there, the plaintiffs lived there, the plaintiffs purchased insurance from the defendant there, and the plaintiffs’ insured vehicles were routinely used there).

26 See, e.g., Worley Claims Servs. v. Jefferies, 429 F. Supp. 3d 146, 156 (W.D.N.C. 2019) (applying North Carolina conflict-of-laws principles and finding a reasonable basis in selecting Delaware law in employment contracts when (1) the employer was incorporated in Delaware and (2) Delaware had “well-established and robust corporate law precedents.”).

It bears emphasis that no provision in the Restatement (Third) of Conflict of Laws is not intended to displace the internal affairs doctrine. This doctrine is a pillar of corporate law in the United States. The doctrine acts a choice of law principle ensuring that the law of the incorporating state governs corporate issues such as distributions of corporate property, voting rights of shareholders, and the fiduciary obligations of management.

27 See, e.g., King v. Bumble Trading, Inc., 393 F. Supp. 3d 856, 866 (N.D. Cal. 2019) (applying California conflict-of-law rules and upholding the selection of New York law as reasonable because a mobile software application provider has “an interest in identifying a single body of law to govern its users in different states” and the software had many users in New York).

28 Forum law generally governs what choice-of-law principles apply to a particular dispute. Accordingly, logic suggests that the law that governs the substantial relationship and reasonable basis considerations is generally forum law.

29 See sources cited supra notes 26–27 and accompanying text (describing these rules).

30 Restatement (Third) of Conflict of Laws § 5.4 (A.L.I. Tentative Draft No. 3, 2022) (clarifying and further expanding on the strength of fundamental policy).

31 See Restatement (Third) Conflicts of Laws Reporter’s Note 6, at 37–43 (A.L.I. Draft No. 5, Sept. 20, 2021) (discussing cases that apply the fundamental policy exceptions to these subjects and many other subjects).

32 See generally Restatement (Third) Conflict of Laws § 8.03, (A.L.I. Draft No. 5, Sept. 20, 2021).

33 See Restatement (Third) Conflict of Laws § 8.03, (A.L.I. Draft No. 5, Sept. 20, 2021) (displaying the section language on interpretation of choice of law clauses submitted to the American Law Institute Council):

§ 8.03. Interpretation of Choice-of-Law Clauses

Courts interpret choice-of-law clauses according to the following principles when questions regarding their meaning arise:

  1. (1)

    (1) The law that governs the interpretation of a choice-of-law clause is the law of the state named in the clause.

  2. (2)

    (2) The following presumptions govern the interpretation of a choice-of-law clause:

    1. (a)

      (a) A statement that the laws of a particular state “govern” the contract is presumed to select only the law of that state to govern issues of contract law.

    2. (b)

      (b) A statement that the laws of a particular state govern claims “relating to” and “arising in connection with” the contract is presumed to select the law of that state to govern issues of both contract and noncontract law relating to the contract.

    3. (c)

      (c) A reference to the “law” or “laws” of a particular state is presumed to select only the internal law, not the whole law, of that state.

    4. (d)

      (d) A reference to the “law” or “laws” of a particular state is presumed to select only the substantive law, not the procedural law, of that state.

    5. (e)

      (e) A reference to the “law” or “laws” of a particular State of the United States is presumed to include relevant provisions of federal law.

    6. (f)

      (f) The words “interpreted” and “construed” are presumed to be synonymous.

  3. (3)

    (3) Parties may rebut any of the presumptions listed in subsections (2)(a), (2)(b), (2)(c), and (2)(f) with evidence showing contrary intent.

34 See Restatement (Third) Conflict of Laws § 8.04, (A.L.I. Draft No. 5, Sept. 20, 2021)

If the parties choose a state’s law to govern their contract, and some parts of the state’s law contain limits on scope that exclude some or all of the relevant issues, the choice is ineffective as to those issues. Issues outside the scope of the selected law will be governed by the law that would govern in the absence of the effective choice of law. Courts may interpret a reference to a scope-limited law as an attempt by the parties to incorporate the substance of that law into their agreement.

35 See Restatement (Third) of Conflict of Laws § 8.4, cmt. a (A.L.I. Draft No. 5, Sept. 20, 2021).

36 The Restatement (Third) of Conflict of Laws describes these provisions as “overriding mandatory rules” because they cancel or override the law that would apply under ordinary choice of law analysis and are not within the parties’ power to vary by agreement. For examples of mandatory overriding rules in the form of statutory provisions directing that a state’s law must govern certain issues. See, e.g., Minn. Stat. § 80C.21 (“Any condition, stipulation or provision, including any choice of law provision [that waives compliance with the Franchise Act], is void.”); N.C. Gen. Stat. § 68-3-1 (“All contracts of insurance on property, lives, or interests in this State shall be deemed to be made therein, and all contracts of insurance the applications for which are taken within the State shall be deemed to be made within this State and are subject to the laws thereof.”); Tex. Ins. Code Ann. art. 21.42 (West 1987) (“Any contract of insurance payable to any citizen or inhabitant of this State by any insurance company …. doing business within this State shall be …. governed by [the laws of this State].”).

37 See Restatement (Third) of Conflict of Laws § 8.4, cmt. b (A.L.I. Draft No. 5, Sept. 20, 2021).

Figure 0

Figure 1. Process for Identifying Whether to Apply a Contractual Choice of Law Clause18