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Breach of Contract Cases: When Does Tennessee Law Apply?

As much as any other area of the law, the common law related to contractual rights and to breach of contract cases seems to be generally pretty consistent from state to state, but there can be differences. Sometimes, those differences might make a critical difference in a breach of contract case.

So, when might Tennessee substantive law not apply to a breach of contract case filed in a Tennessee court?  There are two scenarios under which Tennessee substantive law will always apply in breach of contract cases. Those scenarios are pretty common. The first is where the parties have an enforceable written contract which states that Tennessee law applies. The second is where everything about the contract involves Tennessee and no other state. For example, where two parties who are both residents of Tennessee enter into a contract which is to be performed only in Tennessee, Tennessee substantive law will apply.

In some situations, whether Tennessee law will apply is not so clear. For example, in situations where a Tennessee party has a contract with a New York resident and some of the contract performance occurs outside of Tennessee, Tennessee substantive contract law might not necessarily apply. This is so even where the Tennessee resident can properly file its breach of contract claim in a Tennessee court.

Tennessee follows the traditional lex loci contractus rule.  Under that rule, there is a presumption that the parties intended Tennessee contract law to apply if the contract was entered into in Tennessee. If the contract was entered into in another state besides Tennessee, even if the breach of contract case is in a Tennessee court, there is a good chance that the law of the other state will apply.

An example of the lex loci contractus rule in action can be found in Solomon v. FloWARR Management, Inc. (Tenn. Ct. App. 1989).  In that case, the plaintiff was an executive from Nashville who signed his employment agreement in Tennessee.  After a dispute arose, the Tennessee plaintiff traveled to Alabama where he executed a release with his former employer. The plaintiff filed suit in Tennessee to rescind the release. He claimed that Tennessee contract law applied because he signed his employment agreement in Tennessee. The court disagreed. It held that Alabama contract law applied because the release had been signed in Alabama.

Two federal cases demonstrate that the lex loci contractus rule can bend in certain circumstances where the court determines that the facts demonstrate that the law of the state where the contract was performed should apply.  In Nordahl v. Studer Revox America, Inc., (Sixth Cir. 1996)(unpublished), the plaintiff apparently signed an employment contract with the defendant at a meeting in Switzerland.  Two of the defendants were located in Nashville, and one in California.  The plaintiff was based in Nashville while he was employed, but was Norwegian.

The plaintiff in the Nordahl case filed suit in federal district court for the Middle District of Tennessee. The plaintiff asserted that either Swiss or California law applied.  The court held that the law of Tennessee applied because “in certain situations, the law of the place of performance will be applied.”   In Nordahl, the court pointed out that the Supreme Court of Tennessee had acknowledged that the law of the place where the contract was signed should not govern where  the contract “was entered into … with reference to the law of some other state.”

A similar result was reached in Dryair 2000, Inc. v. Blue Winged Olive, LLC (Sixth Cir. 2009)(unpublished), a case involving a Tennessee based company and a non-Tennessee based company, where the court held that Mississippi contract law applied to a case brought in a federal district court in Tennessee because the machinery at issue was to be delivered in Mississippi.

For Tennessee Uniform Commercial Code (“UCC”) breach of contract cases involving the sale of goods, the lex loci contractus rule does not apply.  In such cases, the Tennessee UCC statutory provisions related to choice of law will govern.