Opting Out of Regulation: A Public Choice Analysis of Contractual Choice of Law

Abstract

This Article uses public choice theory to analyze the function of choice-of-law clauses in contracts. Choice-of-law clauses are now quite common and are increasingly enforced, especially with the proliferation of international and Internet transactions. Because these clauses can be used by parties to avoid regulation, academics are now vigorously debating the extent to which this contractual opt out should be permitted. The Article presents a positive political theory of the interplay of legislative action and the enforcement of choice of law. It demonstrates that the important normative debate over choice of law is somewhat misguided because both sides fail to fully understand the effect that these clauses can have on interest group bargaining in the legislature. Once the issue is fully understood, seemingly counterintuitive posturing can result: Regulatory proponents may actually favor choice-of-law clauses, and Libertarians can find themselves opposing their enforcement.