You’ve seen it in many contracts, it is a contract clause that states something like:
This Contract is governed by South Carolina law.
You might have even debated with your client which state should be inserted into the clause. Many architect, engineers, contractors – and even some attorneys – do not understand the implication and importance of a choice of law clause.
Assume for example that you are located in South Carolina, but your client is located in North Carolina. Imagine that you signed and sent your proposal and its terms and conditions to your client by email in Charlotte and he accepts and signs the proposal and sends it back to your office in Charleston. If your contract includes the choice of law clause above, then South Carolina law applies, right?
No, and here’s why. The clause above, does not include the phrase “without regard to its choice of law principles” or other similar language. That means that not only does South Carolina law apply, but its choice of law rules also apply because they were not excluded in the contract.
When interpreting and enforcing a contract, South Carolina has adopted lex loci contractus – the law of the place of the contract. So, the law where the contract was made will apply. But where is a contract “made”. It is made where the last act to form the contract occurred. In our scenario above, the last act to create a binding contract was acceptance and signature of the client in North Carolina. Therefore, under this contract language, North Carolina law will apply to any contract issues.
Why does it matter?
It matters a lot if there is any dispute. Each state has adopted different laws relating to construction and professional negligence claims. For instance, South Carolina recognizes that architect and engineers impliedly warrant that their drawings are sufficient for their intended use. North Carolina does not recognize that implied warranty. So, in our scenario, if North Carolina law applies, breach of implied warranty would not be a valid legal claim.
What Should You Do?
You should carefully select which state’s law you want to apply to all of the claims that might arise between you and your client. Your choice of law clause should state which state’s law applies and that its choice of law rules do not:
This Contract is governed by South Carolina law, without regard to its choice of law rules.
If you have any questions about contract clauses or other risk management issues, call us at 864-327-5000. We would be glad to help you.