Please contact Keith Paul Bishop at Allen Matkins for more information kbishop@allenmatkins.com
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Ninth Circuit Strikes Down Choice Of State Of
Incorporation Law
By Keith Paul Bishop on February 10, 2012
No one puts a choice of law provision at the beginning of a contract. They are nearly
always relegated to the boilerplate provision at the end. This placement often belies their critical
importance. Cases are lost or won on the basis of the choice of law.
It’s no secret that a great many corporations located in California are incorporated in Delaware. Is the
fact of Delaware incorporation sufficient to uphold a Delaware choice of law? In Ruiz v. Affinity
Logistics Corp., (9th Cir. Case No. 10-55581, Feb. 8, 2012), the Court of Appeals said no.
The case involved an “Independent Truckman’s Agreement and an Equipment Lease
Agreement. These agreements purported to establish an independent contractor relationship and
stipulated that Georgia law applied (the state in which the defendant was incorporated and had its
principal office). The plaintiff claimed that California law should be applied and that the agreement
established an employer/employee relationship.
Citing Nedlloyd Lines B.V. v. Superior Court, 834 P.2d 1148 (Cal. 1992), the Court of Appeals found
that California courts will apply the parties’ choice of law unless the analytical approach set forth in
Section 187(2) of the Restatement (Second) of Conflict of Laws dictates a different result. While the
Court found that as a threshold matter the chosen state had a substantial relationship (by virtue of the
defendant’s incorporation and principal office location), the analysis should not end there.* A court
should next ask whether the chosen state’s law is “contrary to a fundamental policy of California” and
whether California has a materially greater interest in resolution of the issue. Applying this rubric, the
Court invalidated the parties’ contractual choice of law.
The Court’s opinion glosses over a key analytical point. Section 187 deals with two different
situations. Subdivision (1) concerns issues that the parties to a contract could have resolved by
specific reference in the contract. For these type of issues, a court is not required to address the two
additional questions above. Subdivision (2) concerns issues that parties could not have resolved
through an explicit contractual provision. For example, an incompetent party can’t agree that it is
competent. The Ninth Circuit’s opinion provides no analysis as to why it thought that Subdivision
(2) applied (and thus further questions must be asked and answered).
