Inadvertent Consequences Arise from a Deficient Choice of Law Clause

A choice of law provision enables parties to designate the governing law for contract interpretation and dispute resolution, crucial when parties are from different states with varying laws. A recent United States Court of Appeals for the First Circuit case demonstrates the perils of poorly drafted choice-of-law clauses.

In the case, an insurance policy for a sailing vessel contained a choice-of-law provision that seemingly applied New York law to any disputes arising from the policy. However, a dispute arose when the insured, after suffering damage in international waters, accused the insurer of bad faith settlement practices under Massachusetts law. The insurer contended that the New York choice-of-law provision should bar the insured's claim.

The court ruled in favor of the insured, deeming their claim as "extra-contractual," separate from a policy breach. The court further found ambiguity in the choice-of-law provision due to differing wording and construed it in favor of the insured. This meant that only claims related to the policy's terms or interpretation fell under New York law.

This case highlights the importance of precision in drafting choice-of-law provisions to avoid potential disputes.