Opinion ID: 775519
Heading Depth: 3
Heading Rank: 4

Heading: The safety valve, or saving provision, of &#167 203

Text: 24 Because the application of &#167 195 ends the case by allowing the rate of interest charged, we do not need to resort to &#167 203. But because plaintiffs vigorously argue that &#167 203 requires the application of California law, we explain our view of &#167 203. Section 203 provides: 25 The validity of a contract will be sustained against the charge of usury if it provides for a rate of interest that is permissible in a state to which the contract has a substantial relationship and is not greatly in excess of the rate permitted by the general usury law of the state of the otherwise applicable law under the rule of &#167 188. 26 Restatement &#167 203. If the local law applicable under &#167 195 forbids the rate of interest charged as usurious, then &#167 203 provides a safety valve, thereby upholding the contract in certain cases. This reading of &#167 203 as a saving provision is supported by its stated rationale: 27 Upholding a contract against the charge of usury by the application of the local law of one state, which has a substantial relationship to the transaction and the parties, can hardly affect adversely the interest of another state when the stipulated interest is only a few percentage points higher than would be permitted by the local law of the other state. Under these circumstances, the courts deem it more important to sustain the validity of a contract, and thus to protect the expectations of the parties, than to apply the usury law of any particular state. 28 Restatement &#167 203, cmt. b. 29 Under &#167 203, a rate that would be usurious under the law of the state with the most substantial relationship may nevertheless be charged if (a) there is another state with a substantial relationship (emphasis added) that allows the higher rate of interest, and (b) the interest rate is not greatly in excess of the rate allowed by the law of the state with the most substantial relationship. Although &#167 203 refers to the state with the most substantial relationship as the state of the otherwise applicable law under the rule of &#167 188, the reference to the general rule of &#167 188 appears to incorporate the more particularized provisions of &#167 195. This interpretation of the reference to &#167 188 is supported by Introductory Note to Title B, quoted above, which explains that the sections following &#167 188 provide precise rules, based on the general principles of &#167 188, for determining choice of law for particular types of contracts. It is also supported by a cross reference from &#167 195 to &#167 203 in comment a to &#167 195, 4 and by a cross reference from &#167 203 to &#167 195 in Illustration 3 to &#167 203. 5 30 Under this reading of &#167 203, Nevada is the state with the most significant relationship to the contract under &#167 195, and is therefore the state of the otherwise applicable law under &#167 203 and &#167 195. Since Nevada has no usury statute, the rate of interest on the loans is permitted under Nevada law. And since the saving provision of &#167 203 is necessary only when the law of the state of the otherwise applicable law  invalidates the interest rate, &#167 203 is inapposite.