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
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."