Choice of Law Clauses

A contract is to be interpreted according to the law and usage of the place where it is to be performed; or, if it does not indicate a place of performance, according to the law and usage of the place where it is made. (West's Ann.Cal.Civ.Code § 1646) The parties to any contract, agreement, or undertaking, contingent or otherwise, relating to a transaction involving in the aggregate not less than two hundred fifty thousand dollars may agree that the law of California shall govern their rights and duties in whole or in part, whether or not the contract, agreement, or undertaking or transaction bears a reasonable relation to the state. (West's Ann.Cal.Civ.Code § 1646.5)

Choice of law provisions are usually respected by California courts, which is consistent with the modern approach of Rest. 2d, Conflict of Laws section 187 subdivision (2). Smith, Valentino & Smith v. Superior Court (1976) 17 C. 3d 491, 131 C.R. 374, 551 P. 2d 1206.

The Conflicts of Law Restatement relied upon by the court in the Smith case, requires the court to recognize the law of a foreign state if either: (1) the chosen state has a substantial relationship to the parties or their transaction, or (2) there is any other reasonable basis for the application of the law. However, if either test is met, the court must next determine whether the chosen state's law is contrary to a fundamental policy of California. If there is a fundamental conflict with California law, the court must then determine whether California has a materially greater interest than the chosen state in the determination of the particular issue.