Commercial Litigation and Arbitration

Contractual Choice of Law — Erie Implications

The contractual choice of law provision in Schwan’s Sales Enters. v. SIG Pack, Inc., 2007 U.S. App. LEXIS 2933 (8th Cir. Feb. 9, 2007), dictated the application of Wisconsin law. This diversity action was filed in the District of Minnesota. There was no dispute that the rights and obligations of the parties would be determined under Wisconsin law. But, after judgment was entered in the amount of about $525,000, what law governed the question of prejudgment interest? Under Minnesota law, the prevailing party was entitled to about $100,000 in prejudgment interest — perhaps nothing under Wisconsin law. Did the contractual choice of law provision dictate application of the Wisconsin prejudgment interest statute? The Eighth Circuit held that it did not, observing that ‛[a]lthough we consider prejudgment interest a matter of substantive law for the purposes of Erie..., this does not answer the question of whether prejudgment interest is a matter of substantive or procedural law for the purposes of determining which state's law to apply.“

Exploring the reach of the contractual choice of law provision, the Schwan’s Court quoted § 186 of the Second Restatement of Conflict of Laws, which provides: ‛The reference, in the absence of a contrary indication of intention, is to the ‘local law’ of the state of the applicable law and not to that state's ‘law,’ which means the totality of its law including its choice-of-law rules....[I]n the contracts area the forum, in the absence of a contrary indication of intention, will not apply the choice-of-law rules of another state.“ Minnesota choice of law rules mandated application of the Minnesota prejudgment interest statute, leading the Court to conclude that ‛Minnesota's prejudgment interest statute applies in the absence of an choice-of-law provision that expressly governs procedural matters.“ Held, ‛the parties did not expressly provide that Wisconsin's choice-of-law rules would apply in interpreting the scope and effect of their contract. Thus, the district court did not err in applying Minnesota law to ascertain the effect of the choice-of-law provision in their contract.“

Note that the same result obtains under the common form of contractual choice of law provision now in use, which expressly disclaims application of the choice of law rules of the state whose law governs the contract.

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