Opinion ID: 2640812
Heading Depth: 2
Heading Rank: 2

Heading: The parties' contractual choice of Washington law is effective

Text: ¶ 26 The Agreement includes a choice-of-law provision, in which the parties agreed to have any disputes decided by Washington law, and a forum selection clause, through which the parties agreed to litigate those disputes in the jurisdiction of Washington. [12] The parties dispute whether the Agreement's choice-of-law provision is effective. [13] Choice of law is a question of law that we review de novo. Seizer v. Sessions, 132 Wash.2d 642, 650, 940 P.2d 261 (1997) (reviewing de novo the Court of Appeals choice-of-law determination); Ito Int'l Corp. v. Prescott, Inc., 83 Wash.App. 282, 288, 921 P.2d 566 (1996) (whether a contract's choice-of-law provision is invalid . . . is a question of law that we review de novo.). ¶ 27 This case does not present a classic conflict of laws problem in which the forum state undertakes a conflict of laws analysis to determine whether the contractually chosen law or forum law will govern. Here, although the parties chose Washington law and the forum is Washington, Cotter argues that the law of Californianeither the parties' chosen law nor the law of the forumshould apply. ¶ 28 Nor does either party argue that the contractual choice of law is a product of the parties' unequal bargaining power or some other unconscionable condition. This case involves a freely negotiated contract between Cotter and Erwin, two highly experienced and successful business people who explicitly selected Washington law to govern their contract. Other terms included in the Agreement reflect that Cotter understood the potential ramifications of this choice. For example, anticipating that the Agreement might extend to SHC facilities located in a state other than the state of Washington, Cotter expressly acknowledge[d] that he was not knowingly entering into an agreement which [was] illegal by contracting with [a] real estate broker . . . not licensed in [the] state where facilities [were] located. Ex. 8, ¶ 9. Cotter also agreed to waive any such provision that would allow for a contest of fees based on the fact that [Erwin was] not licensed as a real estate broker in the state where facilities [were] located. [14] Ex. 8, ¶ 9. As Erwin suggests, the explicit terms of the Agreement readily evidence that the parties wanted to create an enforceable relationship and tried diligently to do so. Suppl. Br. of Resp'ts at 10. ¶ 29 Erwin argues that this court should enforce the parties' contractual choice of Washington law. Cotter argues that California law should govern, notwithstanding the contractual choice-of-law provision. Resolving this dispute requires that we determine (1) whether there is an actual conflict of laws and, if so, (2) whether the Agreement's choice-of-law provision, selecting Washington law, is effective.
¶ 30 When parties dispute choice of law, there must be an actual conflict between the laws or interests of Washington and the laws or interests of another state before Washington courts will engage in a conflict of laws analysis. Seizer, 132 Wash.2d at 648, 940 P.2d 261 (citing Burnside v. Simpson Paper Co., 123 Wash.2d 93, 100-01, 864 P.2d 937 (1994)). If the result for a particular issue is different under the law of the two states, there is a `real' conflict. Id. at 648, 940 P.2d 261 (citing Pac. Gamble Robinson Co. v. Lapp, 95 Wash.2d 341, 344-45, 622 P.2d 850 (1980), overruling on other grounds recognized by Haley v. Highland, 142 Wash.2d 135, 12 P.3d 119 (2000)). [W]here laws or interests of concerned states do not conflict, the situation presents a `false' conflict and the presumptive local law is applied. Id. at 648-49, 940 P.2d 261 (quoting Burnside, 123 Wash.2d at 101, 864 P.2d 937). ¶ 31 There is an actual conflict between the laws of Washington and the laws of California with respect to Erwin claiming fees under the Agreement for his services as a real estate broker. Both Washington and California law make it unlawful to operate as a real estate broker within each state, respectively, without possessing an in-state license. [15] If Erwin and Cotter were both California residents and all of the events material to this dispute had occurred in California, then the Agreement would be unenforceable because Erwin lacked a California broker's license. See In re Estate of Baldwin, 34 Cal.App.3d 596, 110 Cal.Rptr. 189, 194 (1973) (California contract employing a person without a California broker's license as a real estate broker is illegal, void and unenforceable). By contrast, if Erwin and Cotter were both Washington residents and all material events had occurred in Washington, the Agreement would be enforceable because Erwin did have a Washington broker's license. ¶ 32 These results are differentthus an actual conflict exists. [16]
¶ 33 Having determined that an actual conflict of laws exists, we must now determine whether the parties' contractual choice of Washington law is effective. Since 1967, Washington has followed the most significant relationship test of the Restatement (Second) Conflict of Laws (1971) (hereinafter Restatement ) when resolving contractual choice-of-law problems in which the parties did not make an express choice of law. [17] Mulcahy v. Farmers Ins. Co. of Wash., 152 Wash.2d 92, 100, 95 P.3d 313 (2004). Section 187 of the Restatement provides the rule for conflict of laws problems in which the parties have made an express contractual choice of law. See O'Brien v. Shearson Hayden Stone, Inc., 90 Wash.2d 680, 685, 586 P.2d 830 (1978) (invalidating contractual choice of New York law that permitted charging interest rate deemed usurious in Washington). We adopt section 187 as the law of Washington when resolving conflict of laws issues in which the parties have made an express contractual choice of law to govern their contractual rights and duties. [18] We apply section 187 here to decide whether the parties' contractual choice of Washington law is effective. ¶ 34 Restatement section 187 provides as follows: § 187. Law of the State Chosen by the Parties (1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue. (2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties. (3) In the absence of a contrary indication of intention, the reference is to the local law of the state of the chosen law. O'Brien, 90 Wash.2d at 685, 586 P.2d 830 (quoting RESTATEMENT § 187). ¶ 35 Erwin argues, incorrectly, that if section 187 applies, then section 187(1) provides the rubric for our analysis. Section 187(1) governs if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue. (Emphasis added.) Erwin asserts that the parties included an explicit provision in their Agreement directed at resolving the particular issue . . . generated by Cotter's agreement to pay Erwin to arrange a series of . . . transactions. Erwin, 133 Wash.App. at 152, ¶ 22, 135 P.3d 547. But section 187(1) does not apply simply because the parties included language in their contract purporting to resolve a particular issue by an explicit provision. ¶ 36 Section 187(1) applies only when the particular issue is one that the parties  could have resolved by contract. (Emphasis added.) It provides for incorporation by reference, allowing parties to adopt in a comprehensive fashion the gap-filling contractual rules of the chosen state's law. RESTATEMENT § 187 cmt c. By contrast, section 187(2) applies to particular issues that the parties could not have determined by explicit agreement, such as those involving capacity, formalities[,] and substantial validity. Id. cmt. d (emphasis added). The particular issue here involves the substantial validity of the parties' agreement for Cotter to pay Erwin fees arising from Erwin's services as a real estate broker  it therefore falls under section 187(2), not section 187(1). ¶ 37 Section 187(2) directs that the parties' choice of law will still be applied even if the particular issue is one which the parties could not have resolved by an explicit provision[,] . . . unless either of two exceptions is satisfied. Cotter contends that the section 187(2)(b) exception is satisfied [19] and that analysis thereunder dictates that California law, rather than the parties' choice of Washington law, should apply. ¶ 38 Under the section 187(2)(b) exception three questions are posed, all of which must be answered in the affirmative for the exception to apply. O'Brien, 90 Wash.2d at 685, 586 P.2d 830. To wit, application of the parties' chosen law must be [(1)] contrary to a fundamental policy of a state [(2)] which has a materially greater interest than the chosen state in the determination of the particular issue and [(3)] which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties. RESTATEMENT § 187(2)(b). Inserting the facts presented here, we must inquire (1) whether applying Washington's real estate broker licensing law is contrary to a fundamental policy of California; (2) whether California has a materially greater interest than Washington in the determination of the contract validity issue; and (3) whether, under the rule of Restatement section 188, California would be the state of applicable law in the absence of an effective choice of law by the parties. As explained below, questions one and two must be answered in the negative. Because all three questions are not answered in the affirmative, the section 187(2)(b) exception is not satisfied, and the parties' choice of Washington law remains in effect. ¶ 39 First, applying Washington's real estate broker licensing law is not contrary to the fundamental policy of California. Cotter asserts that the policy underlying California's licensing requirements is `to protect the public from the perils incident to dealing with incompetent or untrustworthy real estate practitioners.' Br. of Appellants at 35 (quoting Schantz v. Ellsworth, 19 Cal.App.3d 289, 96 Cal.Rptr. 783, 785 (1971)). However, Cotter fails to demonstrate that applying Washington law here contravenes that policy  Cotter neither claims that Erwin was incompetent or untrustworthy nor claims that his interests were harmed through his dealings with Erwin. California also recognizes a policy that its real estate broker licensing law should not be so literally construed as to require exact compliance `if it would transform the statute into an unwarranted shield for the avoidance of a just obligation.' Baldwin, 110 Cal.Rptr. at 195 (quoting Schantz, 96 Cal.Rptr. at 785). ¶ 40 Cotter also argues that [a]pplying Washington law offends California policy because the [A]greement and Erwin's services are illegal in California. Reply Br. at 13. This argument is unsound because it is circular  Cotter assumes his conclusion, that California law applies, as a premise in his argument that applying Washington law is contrary to California policy and therefore California law applies. Services that Erwin performed in Washington are not illegal in California. California's broker licensing statutes do not regulate out-of-state acts performed by a broker licensed in another state, even when those acts relate to California realty. Consul Ltd. v. Solide Enters., Inc., 802 F.2d 1143, 1149-51 (9th Cir.1986) (reaching conclusion based on California statutes' use of within this state language and comprehensive review of foreign authority). The trial court determined that Erwin performed a good deal of work in Washington. CP at 38, COL 10. California has no interest in this matter to the extent that Erwin seeks to collect fees for that work. ¶ 41 Second, California does not have a materially greater interest than Washington in the determination of the contract validity issue. Cotter claims that California's interest in the resolution of this contract dispute is `obvious'  the Agreement provides for a `business practice' that is unlawful in California, contrary to California's detailed statutory scheme . . . to `regulate' brokerage activities in the state and `deter' unlicensed brokerage activities. Br. of Appellants at 32. This argument, too, is circular  Cotter's conclusion, that California law applies, is a necessary prerequisite to Erwin's business practice being illegal in California, the premise supporting Cotter's conclusion that California law applies. Moreover, applying Washington law to resolve the fee dispute between Erwin and Cotter does not interfere with California's interest in regulating brokerage activities in California. The California Real Estate Commissioner remains free to pursue penalties against Erwin for the unlawful provision of real estate broker services in California if doing so were deemed appropriate. ¶ 42 Cotter additionally argues that Washington has little interest in the application of its statutes governing real estate brokers because Washington's contacts with the transaction are minimal. Br. of Appellants at 33. But weighing the relative interests of California and Washington does not involve merely counting the contacts. Potlatch No. 1 Fed. Credit Union v. Kennedy, 76 Wash.2d 806, 810, 459 P.2d 32 (1969). `[T]he interest of a state in having its contract rule applied in the determination of a particular issue will depend upon the purpose sought to be achieved by that rule and upon the relation of the state to the transaction and the parties.' Id. (quoting RESTATEMENT (SECOND) CONFLICT OF LAWS § 188 cmt. c (Proposed Official Draft 1968)). ¶ 43 With respect to purely California interests, California's interest in deterring unlicensed brokerage activities to protect the California public from incompetent or untrustworthy real estate practitioners, Schantz, 96 Cal.Rptr. at 785, carries relatively little weight because Cotter, the real party in interest receiving the services at issue here, is not a California resident. California's prohibition on unlicensed brokers bringing suit to collect commission in California, see California Business and Professions Code § 10136 (West), evidences an interest in reducing the burden on California's courts. However, this interest is not triggered because the instant litigation is occurring in Washington courts. And, as stated above, California's interest in regulating the provision of brokerage services in California is untouched because California remains free to prosecute Erwin should doing so be deemed appropriate. ¶ 44 Both California and Washington have interests in protecting the justifiable expectations of the contracting parties. The Restatement, expounding on core choice-of-law principles, explains that in applying section 187, protecting the justified expectations of the parties . . . come[s] to the fore. RESTATEMENT § 6 cmt. c. Generally speaking, it would be unfair and improper to hold a person liable under the local law of one state when he had justifiably molded his conduct to conform to the requirements of another state. Id. cmt. g. Likewise, [p]redictability and uniformity of result are of particular importance in areas where the parties are likely to give advance thought to the legal consequences of their transactions. Id. cmt. i. Here, the justifiable expectations of Cotter and Erwin were memorialized in the Agreement, a freely negotiated contract between two highly experienced and successful business people who defined in advance the terms of their business relationship and explicitly chose Washington law to govern any disputes. ¶ 45 Finally, Washington has a strong interest in providing Washington residents, such as Erwin and Healthcare Properties, Inc., with a forum for recovering compensation for services they render pursuant to contract. Comparing California's and Washington's interests in this particular issue, it cannot be said that California's interests materially outweigh those of Washington. ¶ 46 Third, under the rule of Restatement section 188, California would not necessarily be the state of applicable law in the absence of an effective choice of law by the parties. However, assuming for the sake of argument that, as Cotter asserts, [a]bsent the choice of law provision, California law would govern this transaction, Br. of Appellant at 30, Cotter would have succeeded in establishing only the third of the three requirements necessary to satisfy the section 187(2)(b) exception. As explained above, applying Washington's real estate broker licensing law is not contrary to a fundamental policy of California. Nor does California have a materially greater interest than Washington in the determination of the contract validity issue. Since, at minimum, requirements one and two of the section 187(2)(b) exception are not satisfied, the parties' choice of Washington law remains effective. ¶ 47 The [p]rime objectives of contract law are to protect the justified expectations of the parties and to make it possible for them to foretell with accuracy what will be their rights and liabilities under the contract. RESTATEMENT § 187 cmt. e. These objectives may best be attained in multistate transactions by letting the parties choose the law to govern the validity of the contract and the rights created thereby. In this way, certainty and predictability of result are most likely to be secured. Id. As the Court of Appeals concluded, here the interests of the parties are best served by leaving them exactly where they placed themselves  litigating this dispute in Washington and under Washington law. Erwin, 133 Wash.App. at 154, ¶ 30, 135 P.3d 547. We hold that the parties' contractual choice of Washington law is effective.