Will Alabama Honor Your Choice of Law Provisions?

Corporate & Securities Update

Firm Alert

Author(s)

Amendment 884 calls into question the validity and enforceability of the choice of law provisions in contracts brought before Alabama courts.

In November of 2014, Alabama voters ratified Amendment 884 to the Alabama Constitution. Entitled the “American and Alabama Laws for Alabama Courts Amendment” when passed through the state Senate and House of Representatives, Amendment 884 relates to the application of “foreign law” in Alabama courts. This amendment may be of interest to corporate lawyers due to the choice of law provision found at the end of most contracts.

A choice of law provision allows contracting parties to agree which body of law they would like to govern their contract. Generally parties are free to choose whose law will govern their contract, be it that of Alabama, another state, or even another country. Parties choose different bodies of law to govern their contracts for various reasons. For example, German law may be more familiar to the parties, or Delaware law may be more robust in its interpretation and application of the type of transaction in question.

Amendment 884 provides that Alabama courts “[S]hall not apply or enforce a foreign law if doing so would violate any state law or a right guaranteed by the Constitution of this state or of the United States.” It further states that if the enforcement of a choice of law provision violates a right guaranteed by the Alabama Constitution, the court may modify or amend the agreement as necessary to preserve the constitutional rights of the parties. In other words, Alabama courts will apply foreign law – so long as that law is consistent with Alabama law. The definition of “foreign laws” is broad enough to include the laws from all jurisdictions outside of Alabama, from Mississippi to Japan. Furthermore, contrary to the description of the Amendment printed on the voters’ ballots, the language of the Amendment has no clear and definite exception for business entities that contract to be subject to foreign law.

The risk raised by Amendment 884 is further compounded by the volume of amendments to the Alabama Constitution. In addition, a close reading of Subsection C of Amendment 884 says courts shall not enforce a foreign law which violates Alabama law or a right guaranteed by the Constitution of Alabama of the United States. A strict interpretation of Subsection C does not give courts the discretion to choose which law to enforce if the application of foreign law would violate any Alabama law. This is particularly troubling for international parties who desire to contract with Alabama companies without being subject to unfamiliar Alabama law.

Professor Paul Horwitz at The University of Alabama School of Law argues that the Amendment actually does nothing. Case law in Alabama already prevents Alabama courts from having to enforce foreign law if the result violates Alabama public policy.1 While conceptually true, the ambiguous language of Amendment 884 creates numerous questions about its use and interpretation which may, when applied, expand the circumstances under which an Alabama court may ignore a contract’s choice of law provision in favor of Alabama law.

As a result, we enter 2015 with greater uncertainty about the ability for contracting parties to choose the governing law of their contractual relationship. Amendment 884 and the uncertainties it raises affect the drafting of choice of law provisions, the analysis of contractual dispute resolution, and rendering of legal opinions regarding enforceability. Practitioners and those considering choice of law provisions should continue to monitor the application of this Amendment.

[1] Read Paul Horwitz’s article “Amendment One is useless, costly, and wrong: reader opinion,” which first appeared in AL.com on October 30, 2014.