Choice of law refers to what jurisdiction's law is to be applied when there is a dispute in a transaction. Contracts often include a choice of law clause to indicate the law that will apply in the event of a dispute.
Choice of laws refers to the area of law in which the court where an action is brought determines whether to apply the law applicable in that court (forum state law) or apply the law applicable in another jurisdiction which has an interest in the controversy. This situation often arises in contract disputes in which the state in which the contract was entered into is different from the state in which the wrong occurred. Generally, the courts will apply their own procedural rules regardless of the choice of state law on the substantive issues.
A federal court must apply the choice of law principles of the forum state. When a final judgment has been rendered, the choice of law principles applied cannot be challlended in another state unless the full faith and credit doctrine would permit such a challenge. Courts faced with a choice of law issue generally choose between the law of where the lawsuit was brought, usually chosen for procedural matters, or the law of the site of the transaction, or occurrence that gave rise to the litigation in the first place, which usually is chosen for substantive matters.
Choice of law decisions affect important issues such as the statute of limitations, statute of fraud, or whether punitive damages are available, which all depend on which state's law is used. The rules that federal courts must obey regarding which laws to apply are extremely complex and are embodied in the Federal Rules of Civil Procedure. Internet activities cause a special problem for choice-of-law analysis, because most traditional choice-of-law rules are based the locations where activities take place.
The following is an example of a state statute involving choice of law:
- "The following rules apply unless the affected parties otherwise agree or subsection (c) applies:
- The rights and obligations between the sender of a payment order and the receiving bank are governed by the law of the jurisdiction in which the receiving bank is located.
- The rights and obligations between the beneficiary's bank and the beneficiary are governed by the law of the jurisdiction in which the beneficiary's bank is located.
- The issue of when payment is made pursuant to a funds transfer by the originator to the beneficiary is governed by the law of the jurisdiction in which the beneficiary's bank is located.
- If the parties described in each paragraph of subsection (a) have made an agreement selecting the law of a particular jurisdiction to govern rights and obligations between each other, the law of that jurisdiction governs those rights and obligations, whether or not the payment order or the funds transfer bears a reasonable relation to that jurisdiction.
- A funds-transfer system rule may select the law of a particular jurisdiction to govern (i) rights and obligations between participating banks with respect to payment orders transmitted or processed through the system, or (ii) the rights and obligations of some or all parties to a funds transfer any part of which is carried out by means of the system. A choice of law made pursuant to clause (i) is binding on participating banks. A choice of law made pursuant to clause (ii) is binding on the originator, other sender, or a receiving bank having notice that the funds-transfer system might be used in the funds transfer and of the choice of law by the system when the originator, other sender, or receiving bank issued or accepted a payment order. The beneficiary of a funds transfer is bound by the choice of law if, when the funds transfer is initiated, the beneficiary has notice that the funds-transfer system might be used in the funds transfer and of the choice of law by the system. The law of a jurisdiction selected pursuant to this subsection may govern, whether or not that law bears a reasonable relation to the matter in issue.
- In the event of inconsistency between an agreement under subsection (b) and a choice-of-law rule under subsection (c), the agreement under subsection (b) prevails.
- If a funds transfer is made by use of more than one funds-transfer system and there is inconsistency between choice-of-law rules of the systems, the matter in issue is governed by the law of the selected jurisdiction that has the most significant relationship to the matter in issue."