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Avoiding conflict-of-law disputes with choice-of-law provisions

Business agreements between companies operating in different jurisdictions often have "choice of law" provisions that govern which jurisdiction's laws will apply to the business relationship. If a dispute arises, then a choice-of-law provision usually resolves the issue of which law is to be applied to address any issue or dispute. We touched on a slightly related matter in our previous post on choosing the appropriate state in which to form your business.

Without carefully drafted choice-of-law provisions in their contracts, California companies doing business with organizations in other states may encounter significant legal obstacles. Matters can become more complicated, especially if one of the companies is based in another country. To address some of these conflict-of-law issues, the Uniform Law Commission revised the 1984 Uniform Fraudulent Transfer Act (UFTA), which is now known as the 2014 Uniform Voidable Transactions Act (UVTA).

In particular, the changes discussed here pertain to fraudulent transfers by debtors. As the Uniform Law Commission puts it, "A fraudulent transfer occurs when a debtor intends to hinder, delay, or defraud a creditor, or transfers property under certain conditions to another person without receiving reasonably equivalent value in return."

So, in the absence of a choice-of-law provision, how do you determine which jurisdiction's laws will apply in cases involving allegedly fraudulent transfers? Under the new rules drafted by the Uniform Law Commission, the answer is fairly straightforward. The applicable laws are the ones of the jurisdiction where the debtor is located at the time of the transfer. The question, then, is how to define a debtor's location. If the debtor is an individual, then the debtor's location is his or her primary residence. If the debtor is a company that does business at only one location, then the debtor is located where the business is conducted. If the debtor is a company doing business at numerous locations, then the debtor's location is the company's chief executive office.

Of course, you can avoid conflict-of-law disputes by ensuring that your contracts contain choice-of-law provisions.

For more on resolving business disputes, please visit our commercial litigation overview.

Source: Forbes, "The Uniform Voidable Transactions Act and Conflict of Laws," Jay Adkisson, July 22, 2014

Source: Uniform Law Commission, "Fraudulent Transfer Act Summary," 2014

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