Choice of Law as a Precommitment Device
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Description
Bruce Kobayashi and Larry Ribstein's essay provides an interesting and valuable contribution to the literature on interstate economic relations and the interaction between public and private incentives. The authors propose the optimistic theory that effective party choice of applicable law and/or applicable forum will substantially counteract the problem of in-state interests expropriating wealth from out-of-state counter-parties in a federal system. Thus the ability of the parties to select the governing law and forum can effectively "trivialize" state law. Kobayashi and Ribstein envisage a "multistage" process in which (a) in-state interests obtain favorable legislation, (b) out-of-state interests exit by means of choice-of-Iaw/choice-of-forum clauses, (c) states allow enforcement of these clauses, and (d) the original legislation is effectively nullified. In proposing this theory, Kobayashi and Ribstein present two" competing" hypotheses in the economic debate over the efficiency of a federal system: first, that a state can impose costs on (or provide inadequate benefits to) out-of-state interests because such interests lack influence in the state's political process relative to the influence of in-state interests; and second, that states are limited in their ability to impose such costs because of interstate competition: if a given state attempted to impose excessive costs on an out-of-state interest, that interest could simply flee to a more congenial location at minimal cost. In this comment, I attempt to expand on some of the efficiency considerations set forth in the Kobayashi and Ribstein essay by framing the analysis in terms of the elasticity of demand for a state's legal services, and by considering in detail some efficiency implications of respecting or not respecting privately negotiated choice-of-Iaw or choice-of-forum clauses. I will then address a potential problem with the essay identified by Michael Klausner, namely that choice of law and forum works only when the parties have the ability to set the terms of their relationship by contract, and since the parties can contract, they can simply adjust the payment terms of their contract to reflect the possibility of expropriation by in-state interests. I will try to connect this observation with another difficulty in the Kobayashi-Ribstein essay: the problem of explaining why state legislatures would allow parties to select the law of another state to govern their affairs, given that doing so reduces the ability of politicians in the state to provide valuable benefits to their constituents. I will suggest that state recognition of contractual choice-of-Iaw and choice-of-forum clauses represents a form of precommitment by the state and the affected interest groups, to tie their hands against the temptation to engage in ex post opportunism that is wealth reducing ex ante. Finally, I will suggest some ways in which the Kobayashi-Ribstein theory might be applied in the international context.
Source Publication
The Fall and Rise of Freedom of Contract
Source Editors/Authors
F. H. Buckley
Publication Date
1999
Recommended Citation
Miller, Geoffrey P., "Choice of Law as a Precommitment Device" (1999). Faculty Chapters. 2029.
https://gretchen.law.nyu.edu/fac-chapt/2029
