The North Carolina General Assembly has decided to legislate choice of law in commercial transactions. The new statute, enacted in June, is called the "North Carolina Choice of Law and Forum in Business Contracts Act." It will be codified at N.C. Gen. Stat. §1G-1.

The Statute Applies Only To "Business Contracts"

The statute applies only to "business contracts." That term is defined as: "[a] contract or undertaking, contingent or otherwise, entered into primarily for business or commercial purposes." Specifically excluded from that definition are "consumer contract[s] or . . .. employment contract[s]." N.C. Gen. Stat. §1G-2(1). If you had any doubt about what constitutes a "consumer contract," that term is defined as well. It is "[a] contract or undertaking, contingent or otherwise, entered into by an individual primarily for the individual's personal, family, or household purposes." N.C. Gen. Stat. §1G-2(2).

It seems like the General Assembly could have gone without bothering to define an "employment contract," but it didn't. An "employment contract" is "A contract or undertaking, contingent or otherwise, between an individual and another party to provide labor or personal services by that individual to the other party, whether the relationship is in the nature of employer-employee or principal-independent contractor." N.C. Gen. Stat. §1G-2(3).

So, what are the benefits extended to those who are party to a "business contract"? The short answer is that they can choose North Carolina law to govern their contracts and they can select North Carolina as a forum to resolve their disputes. You might be thinking: "big deal, couldn't they do that anyway"?

This Represents A Big Shift In NC Law On Choice Of Law Provisions

Before the new statute, you were always subject to the opposing party who had agreed to apply NC law being able to squirm out of its commitment. The opposing party could do that by saying that North Carolina was improperly chosen as the State's law which should apply -- because the dispute does not bear a "reasonable relation" to this State, or could also argue that the application of North Carolina's law would violate a "fundamental policy" of the State whose law would apply in the absence of the choice of law provision (call that the "public policy exception") .

Those arguments have long been recognized by NC appellate courts. See below

The new statute does away with those types of attacks on a choice of law provision. It says that parties to a business contract may agree that North Carolina law will govern their relationship:

whether or not any of the following statements are true:

(1) The parties, the business contract, or the transaction that is the subject of the business contract bear a reasonable relation to this State.

(2) A provision of the business contract is contrary to the fundamental policy of the jurisdiction whose law would apply in the absence of the parties' choice of North Carolina law.

N.C. Gen. Stat. §1G-3(a)(emphasis added).

The approach of the new statute is directly contrary to what the widely accepted doctrine is on the validity of an agreement to apply the law of a particular State. The North Carolina appellate courts have long followed the principles set out by the Restatement (Second) Conflict of Laws §187. See, e.g., Behr v. Behr, 46 N.C. App. 694, 266 S.E.2d 393 (1980); Cable Tel Services, Inc. v. Overland Contracting, Inc., 154 N.C.App. 639, 574 S.E.2d 31 (2002). The Restatement says that choice of law should be deemed invalid for the reasons that are permitted in the new statute. It says that a choice of law provision should not be applied if:

(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or

(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of [section] 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.

Restatement (Second) Conflict of Laws §187.

Why Did We Need This Statute?

Did North Carolina need its Legislature to intrude in this area of the law? According to the Business Law Section of the North Carolina Bar Association, there were "many sound reasons" for the legislation. Those are detailed in a Report from the Legal Opinion Committee of the Business Law Section.

They seem to boil down to making North Carolina more "business friendly." The report says:

The General Assembly’s enactment of statutes that give effect to choice of North Carolina law and forum provisions in business contracts will enhance the perception of North Carolina as a business friendly state. Businesses are attracted by such freedom and clarity, and the proposed legislation will provide certainty to businesses and the attorneys who counsel them as to the applicability of North Carolina law and the ability to have disputes resolved by North Carolina courts. Such legislation will, in effect, place North Carolina on an equal footing with states such as Delaware, New York, Illinois and California.

Report at 4.

Every one of the States mentioned in the Report have legislated that choice of law provisions are valid even if the matter has "no reasonable relation" to that State. Delaware's statute is here, New York's is here, Illinois' is here, and California's is here.

Will this statute be enough to make North Carolina the choice of lawyers as the State within which to incorporate, or whose law to choose, as opposed to Delaware? Or New York, Illinois, and California? I doubt it, but it is probably at least a step in that direction.

But none of the four States mentioned in the Report have included in their statute a provision rejecting the public policy exception.

Effective Date And A Question

Drafters of business contracts don't need to do anything to revise previously drafted choice of law provisions. The new statute says that it "is effective when it becomes law and applies to business contracts entered into before, on, or after that date."

I have at least one question about the force of this statute. Although the title of the statute professes to "validate choice of North Carolina law and forum [selection] provisions in business contracts," the operative provision of the statute does not use the word "validate" or to make any suggestion that they must be enforced. It says simply that the parties to a business contract "may agree" that North Carolina law will control their relationship.

You will note that I did not discuss the "choice of forum" aspect of this statute at all. The choice of law part was much more interesting to me.