California’s First District Court of Appeal issued an interesting new ruling that will affect contracts calling for another state’s laws to govern.

In Rincon EV Realty LLC v. CP III Rincon Towers, Inc. (Cal. Ct. App., Jan. 31, 2017, No. A138463) 2017 WL 429267, the plaintiffs borrowed $110 million to finance the purchase of a San Francisco apartment complex.  After the plaintiffs defaulted on the loan, the lender commenced foreclosure proceedings.  One of the defendants, CP III Rincon Towers, Inc., purchased the property at a nonjudicial foreclosure sale.  In an effort to set aside the sale, the plaintiffs sued the purchaser, the lender, and others involved in the transaction for breach of contract, fraud, unfair competition, slander of title, violation of California’s Uniform Trade Secrets Act, and accounting.

The plaintiffs demanded a jury trial.  However, the contracts at issue had two key provisions:

1. A New York choice-of-law clause, including a waiver of any claim that any other state’s law would govern, and
2. A waiver of the right to a jury trial.

After the trial court held that New York law applied and that the jury waiver was enforceable under New York law, the plaintiffs appealed.

In its decision, the appellate court noted that contractual choice-of-law provisions are not always enforceable. Indeed, in Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, the California Supreme Court ruled that, to be effective, (1) there has to be a rational nexus to the chosen state; (2) the other state’s law cannot deprive California citizens of important rights or impugn significant California public policy; and (3) California cannot have a “materially greater interest” in enforcing its laws over those of another state.

Employing the Nedlloyd test, the Court determined that New York had a substantial relationship to the parties and the transaction. However, it held that the right to a trial by jury was “inviolate” in California and that New York law on the enforceability of jury waivers was contrary to fundamental California public policy.  Finally, the Court held that California had a “materially greater interest than New York” in determining how legal proceedings are conducted in California courtrooms. Hence, it concluded that the contractual jury waiver – enforceable in New York – was unenforceable under California law.

The Rincon decision reminds parties and legal practitioners alike to give considerable thought to choice-of-law provisions in contracts.  If the contract involves California parties and the chosen state’s laws deprive them of important California rights, the choice-of-law provision might not be enforceable.