The basic facts of the case are an individual entered into an agreement with a bank located in Georgia to borrow money to purchase her home. It is not clear whether the individual even signed the contract or where the contract was signed but it ends up not mattering because the bank sued in California District Court under diversity jurisdiction. Note: in California, if a contract contains an attorney fees clause provision, both sides of the dispute get to use it. That’s not the law in Georgia. The Bank wanted to be able to enforce its attorney fee clause against litigants but to not allow other litigants to use that clause against the bank!
California law was applied to this contract in two instances.
First, the choice of law clause had to be interpreted. It would be circular logic to apply the choice of law clause in determining which states’ laws applied to the choice of law clause. The Court held that in diversity jurisdiction cases, such as this one, it would “apply the substantive law of the forum in which the court is located, including the forum’s choice of law rules.” Since the lawsuit was in California, California’s choice of law clause applied to the case.
California follows restatement second of Conflict of Laws § 187 to determine the law that applies to a contract with a choice-of-law clause. Under § 187, a California court begins its analysis by determining “whether the chosen state has a substantial relationship to the parties or their transaction, or … whether there is any other reasonable basis for the parties’ choice of law. If so, the court then determines whether California would “be the state of the applicable law in the absence of an effective choice of law by the parties.” If the chosen forum has a substantial relationship to the parties or their transaction but California law would apply in the absence of a choice-of-law provision, the court then determines whether the relevant portion of the chosen state’s law is contrary to a fundamental policy in California law.
If there is such a conflict, the court finally determines whether California has a materially greater interest than the chosen state in the determination of the particular issue.
Since California’s Supreme Court has yet to rule on the matter, the 9th Circuit had to predict whether California’s reciprocity law, § 1717, embodies a fundamental policy of the state. The 9th Circuit decided it did and thereby affirmed the lower court’s decision to award attorney fees to the individual.
The case can be found here.