Every day, attorneys act as advisors to parties negotiating and drafting contracts. Among those terms often left to the lawyers are choice-of-law provisions.
Which state's law governs a dispute, in theory, should not matter. That's because the law should seek to do justice and equity by giving effect to the intent of sophisticated parties negotiating at arm's length. It often does. But a recent decision from a New York trial court serves as a reminder that the "intent of the parties" is not always a trump card, and that public policy can thwart the implementation of a choice-of-law provision that seeks to contract around the substantive law of the forum state.
In Samson Lending LLC v. Greenfield Management LLC, the plaintiff extended to the defendant a loan with an interest rate of 34%.1 The loan agreement was governed by Virginia law.1 After the plaintiff sued the defendant in New York state court, the defendant argued that the 34% interest rate violated New York's criminal usury statute, Penal Law § 190.40, which caps interest rates at 25%. As a result, according to the defendant, the entire agreement–not just the choice-of-law provision–was void and unenforceable.2
The court agreed. The court recognized that New York courts "generally enforce choice-of-law clauses and" interpret contracts "so as to effectuate the parties' intent."3 But there are limits. "Courts will not, for example, enforce agreements that are illegal or where the chosen law violates 'some fundamental principle of justice, some prevalent conception of good morals, some deep-rooted tradition of the common weal.'"4
When considering an invocation of that defense, New York courts first assess whether "New York has a sufficient nexus to the case" at bar "to allow [the] Court to consider" such an argument.5 In Samson Lending, there was such a nexus because the "plaintiff is a corporation authorized to conduct business in New York, is located in New York, [and] made all its business decisions relevant to the agreement in New York, and the loan was made in New York."6 Given that charging 34% interest is a felony under New York law, the court concluded that applying Virginia law, which permits loans that New York deems usury, "would be offensive to the fundamental public policy of" New York.7
Samson Lending is a stark reminder that liberty of contract and the intent of the parties are not absolute. Rather, public policy can thwart the intention of the parties when it is clear that one or more of the parties are attempting to contract around a fundamental policy of the forum. Drafters beware!
Footnotes
1. Id.
2. Id.
3. Id.
4. Id. (emphasis added) (quoting Cooney v. Osgood Mach., Inc., 81 NY2d 66, 78 [1993]).
5. Id.
6. Id.
7. Id.
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