Spoiler alert: choice of law provisions matter

Published April 17, 2018 by Dustin Paul

There is a small group of pleasure readers who will flip to the final chapter of a novel and read the conclusion first. As odd as you might find the behavior, research from University of California-San Diego professor Nicholas Christenfeld suggests that “spoiling” the plot can actually lead to increased enjoyment while reading.  As to whether you should consider the technique the next time you grab a military-thriller or mystery novel, I can offer no advice.  But, I do recommend the technique the next time you must read a contract.    

On the last page or so of most contracts, you will find a clause selecting the law under which the contract will be enforced. Often labeled a “choice of law” provision, its placement as one of the concluding paragraphs can probably be attributed to custom and historical practice. But with its potential importance, perhaps it deserves a more prominent position.  

In many situations, a choice of law provision plays an important, but minor, role.  Different jurisdictions apply different rules in deciding what law governs a contract. Some apply the law that has the most significant relationship to the contract. Others apply the law where the contract was formed. 

Depending on where the suit is filed, and how a particular judge views a particular contract, the same contract could potentially be interpreted under the law of multiple different jurisdictions. A choice of law provision offers the parties certainty as to which law will be applied. By establishing in the contract itself that it is governed by the law of New York, Virginia or even England, the parties can nearly eliminate this particular source of uncertainty.    

But a choice of law provision can have far greater implications if not carefully considered during negotiation. Here’s an example. One of the more interesting uses of choice of law provisions occurs in the international bunker fuel market. Cargo ships calling at ports throughout the world need fuel. But regardless of where in the world the ship may need to be refueled, you are likely to find a choice of law provision, drafted by the fuel supplier, requiring application of U.S. law.  

The inclusion of a U.S. choice of law provision allows the fuel supplier to rely upon a U.S. statute called the Commercial Instruments and Maritime Lien Act.  Under traditional U.S. maritime law, the supplier of certain products and services to a vessel, called necessaries, is entitled to a lien against the vessel itself for the cost of the materials supplied.  The Act defines and expands this necessaries lien. Necessaries include fuel, food, dockage and most vessel repairs.

This necessaries lien is an extremely powerful collection tool: It allows the arrest of the vessel in a U.S. port.  After arrest, if the supplier is not paid, it can have the Court sell the vessel to satisfy the unpaid debt.  Plus, the lien continues against the ship even if the vessel changed owners after the materials were supplied. Absent the choice of law provision, a foreign supplier in a foreign port would not have this remedy because only a handful of other countries provide such a broad and powerful lien to those supplying ships. Thus, selection of U.S. law to govern a supply transaction can materially change the character of the agreement by providing such a powerful remedy to suppliers when it would otherwise be unavailable. 

For U.S.-based suppliers, including those who operate in the Port of Virginia, the reverse is true. For example, if your contract to supply a vessel calling at the Virginia International Gateway terminal includes a choice of law provision selecting English law, you no longer have the protection of the U.S. necessaries lien. 

The choice of U.S. law and the use of the Commercial Instruments and Maritime Lien Act is just one example of how a choice of law provision can materially alter a contractual relationship. How the provision might affect your contract, your business or your industry varies by the particular circumstances. 

So, the next contract you receive from a supplier or customer, skip to the end and go ahead and spoil the surprise. Take a look at the choice of law provision and see what law applies. If the clause adopts foreign law, or just the law from a state other than where you typically do business, that should change the way you read the rest of the contract. This is one area where spoilers are encouraged.