New York Governing Law in US-Style Commercial Agreements

June 09, 2020

The laws governing a commercial agreement fundamentally determine the enforcement of that agreement’s provisions. Surprisingly, US-style commercial agreements place this important concept all the way in the back of the agreement along with other “boilerplate” provisions. This publication shares a New York transactional legal perspective on potentially overlooked or misunderstood practice points and considerations when engaging a governing law provision in a commercial agreement.

Each US state is a sovereign entity in its own right and is granted the power to create laws and regulate them according to its needs. Every state also has unique characteristics in terms of their historical operations of business, commerce, and industry as well as their public policies and community standards.

From a strictly US perspective, another state’s laws could vary in a meaningful way with New York’s laws. For example, the analysis a lawyer would perform on the enforceability of a non-competition provision varies depending on whether such provision is governed by the laws of California or New York. That means a contract that begins with a provision enforceable under New York law and later negotiated to be governed by California law may very well not be enforceable with respect to at least such provision. Mechanically, changing “New York” to “California” in an agreement takes only a few seconds while drafting the agreement. The practical implications of that change could result in years of time, energy and money needlessly spent disputing its enforceability.

New York law stands out as one of the most popular choices for domestic and cross-border commercial agreements. New York law provides transacting parties with certainty in the event of a dispute because it is one of the most tested and developed bodies of law in the world. For example, the New York Uniform Commercial Code (“NY UCC”) provides a high degree of outcome predictability to parties purchasing and selling goods. The rules governing offer, acceptance and rejection under the NY UCC promote commercial efficiency when goods are non-conforming because the NY UCC shapes the limited universe of next steps the transacting parties may take. Yet another advantage is that New York is globally recognized as the leader in business activity and political influence. Naturally, New York’s laws and judiciary maintain the same reputation.

There are two elements that a New York court will analyze when New York law governs a contract – the value of the contract and whether the contract bears a reasonable relation to New York. If the value of the contract is at least $250,000, then generally the parties may use New York law regardless of whether the contract bears a reasonable relation to New York. This is a particularly salient point for any party, whether transacting in or outside of New York, which wants the many benefits of New York law. If the value of the contract is less than $250,000, then generally the contract must bear a reasonable relation to New York as determined by the court. In determining a contract’s reasonable relation to New York, New York courts will look at one or more of the following: the transaction, the subject matter, the cause of action and one of the parties. A lesson to learn from this reasonable relation analysis is that transacting parties should not assume that New York law governs merely because the agreement provides the same. If a transaction is valued at less than $250,000 and bears no reasonable relation to New York, then generally a court will not apply New York law even if that commercial agreement states that New York law governs.

From a cross-border perspective, other bodies of law and their default applicability should be considered in a commercial context even if New York is the governing law. One such consideration is the United Nations Convention on Contracts for the International Sale of Goods (“CISG”). CISG automatically governs the cross-border sale of goods between parties whose countries (including US trading partners) are signatories to this international treaty, unless it is expressly waived in whole or in part in the operative agreement. A common mistake made by businesses and attorneys alike is to assume that a standard choice of law clause is sufficient to opt out of CISG. However, simply stating that New York law governs the agreement, without expressly opting out of CISG, will not exclude CISG’s applicability to the agreement.

Failing to appreciate CISG’s express waiver requirement could have devastating consequences to a transacting party. Consider the NY UCC which requires any contract for the sale of goods priced at $500 or more to be evidenced in writing. CISG does not require contracts to be evidenced in writing.   Best practice dictates that a transacting party contractually carve out at least the non-writing requirement provision of CISG, so that the party is not caught by surprise for having entered into an oral contract that, under the NY UCC, it would have never entered into in the first place. Omitting a line as simple as “The entirety of the United Nations Convention on Contracts for the International Sale of Goods, as amended from time to time, does not apply to this Agreement” could result in substantially different rights and obligations that a seasoned client and New York attorney might otherwise take for granted in a purely domestic context, including offer and acceptance.

The high deal flow and sophisticated matters handled by the Corporate Law Group at my law firm, Farrell Fritz, require us to regularly take into account the extent to which provisions are enforceable under a commercial agreement’s governing law. New York law may very well be the best choice depending on several legal and business factors. If you have a question about a choice of law provision in US-style commercial agreements or any other provision of an agreement, please do not hesitate to contact me.