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Choice of Law Provisions in Contracts: When Tennessee Courts Might Not Enforce Them

In many Tennessee cases involving written contracts, the contracts will contain provisions whereby the parties agreed that the substantive law of a state other than Tennessee would apply in any litigation between them. (In the absence of such a provision, Tennessee follows the rule of lex loci contractus whereby it is presumed that the law of the state where the contract was signed applies).  Since there is substantial similarity between the laws of the States, especially the common law of breach of contract, which State’s law applies may not make a big difference in most cases. It can, however, make a big difference in some cases.

Where the parties have agreed that the law of a particular state will govern any litigation, a Tennessee court will enforce that agreement unless the jurisdiction whose law is chosen does not bear a material connection to the transaction or unless the law of the jurisdiction chosen is contrary to the fundamental policies of Tennessee. This blog focuses on the issue of when a Tennessee court might not enforce a choice of law provision because the law of the state chosen by the parties does not bear a material connection to the transaction.

There is scant published Tennessee case law that addresses this issue. In a 1931 opinion, Manufacturers Finance Co. v. B. L. Johnson & Co., 15 Tenn. App. 236, the Court of Appeals of Tennessee refused to apply the law of Delaware, which the parties had agreed would govern any dispute between them. In that case, the plaintiff was a finance company organized under Delaware law, but which had a principal place of business in Maryland.  The defendant was a Tennessee corporation with a principal place of business in Knoxville.  No part of the disputed transaction touched Delaware.  The court held that it would not apply Delaware law under those circumstances.

In a 2012 breach of contract case, the Tennessee Court of Appeals enforced a contractual provision whereby the law of Kentucky was to govern any litigation between the parties. In that case, the prospective buyer claimed that it was entitled to a refund of an earnest money deposit it had made to purchase land located in Kentucky from the seller. In that case, the buyer was from Tennessee, but the sellers were from Kentucky and the land being sold was in Kentucky.  Under those facts, the court held that there was a material connection between Kentucky and the transaction being litigated.

The question of whether or not the state whose law the parties have contractually agreed to govern in any lawsuit or arbitration has a material connection to the transaction will, obviously, be determined by the unique facts of the case before the court. The 1931 decision discussed above tells us that, if the only connection between the transaction and the state whose law has been chosen to govern is that one of the parties has organized under its laws, a Tennessee court will not enforce the choice of law provision.

Breach of contract lawyers litigating cases in Tennessee in which the substantive law of another state applies should remember that, for any case in a Tennessee state court, Tennessee procedural law will always apply.