Potential for disparate results in the application of Law 75 in different U.S. jurisdictions

I’ve been writing for some time that, what parties stipulate in a contract matters, particularly forum and choice of law provisions in the event of disputes or litigation. In fact, this can be outcome determinative in many cases.

For stateside suppliers, the standard protocol should be an integrated written agreement with stateside choice of law provisions to the exclusion of Puerto Rico law and arbitration with both a locale and arbitrator selection in a state or dispute resolution in a state or federal court. What arbitration does is that it adds finality to the award. If the arbitrator gets it right or wrong, the parties have to live with that result. But the reward that a stateside arbitrator may enforce the contract and apply U.S. state law excluding Law 75, a decision that would generally be final under the FAA, is sufficiently attractive for suppliers to insist on those types of provisions in their dealer agreements. As the First Circuit ruled recently in a case, challenging an award under the FAA is figuratively “like climbing Mount Everest.” Dealers can and should be expected to resist this during contractual negotiations.

For Puerto Rico dealers, the standard protocol should be no written contract at all (this approach carries some uncertainty and risks) or if there’s a written contract requirement, apply Puerto Rico law to the exclusion of other laws and dispute resolution in Puerto Rico courts. For Puerto Rico dealers, arbitration is not necessarily an option that should be off the table as long as the arbitrator is selected from a list of Puerto Rico arbitrators, is required to apply Puerto Rico substantive law to the agreement or its termination, and the locale of the arbitration is in Puerto Rico.

There is no uniformity in U.S. state law on the question whether a choice of law provision in a dealer agreement selecting state law without regards to conflict of law rules will apply or exclude Puerto Rico law as a matter of public policy. Some states will apply Puerto Rico law and override state law because that state’s choice of law rules, patterned after the Restatement on Conflict of Laws, require applying the law of the state or territory that is vested with public policy. On the other hand, other states will honor the selected choice of law clause regardless of the public policy of another state, though there are exceptions for fraud or tort claims (on plain statutory language, a violation of Law 75 is a tort). When you add an arbitrator and not a court as the decision-maker on the question of what law applies, this adds another level of highly deferential scrutiny or finality to such determinations because the Federal Arbitration Act’s main policy is to enforce arbitration awards as written.

In Premium Tire v. Cooper Tire Company, AAA CASE No. 01-18-0002-4469, a single arbitrator in an arbitration supervised by the AAA in Ohio ruled that Law 75 applied to override an Ohio choice of law provision included within an arbitration provision in the dealer agreement because the termination claim alleged in the dealer’s counterclaim had a significant connection to Puerto Rico and Ohio choice of law rules required the application of Puerto Rico law to the arbitration proceedings as a matter of public policy. This is an example where state law directs the application of Law 75.But that may not be the case in other more business-friendly jurisdictions, like New York and Delaware, where freedom of contract overrides the public policy of other states or territories.

In the circumstances of the Ohio arbitration, a Puerto Rico court would probably also disregard the stateside choice of law provision, if it allows for termination of a dealer’s contract without just cause, because Law 75 expressly provides that such a waiver of Law 75 rights is illegal as a matter of public policy. Further, the FAA’s pro-arbitration policy does not compel an arbitrator to apply foreign law regardless of Law 75’s public policy. The FAA does not enlarge or subtract from the substantive rights of the parties, but enforces the agreement to arbitrate. The validity of contractual provisions is determined by state or Puerto Rico law, not the FAA. The FAA does not validate, without more, a choice of law provision included within an arbitration agreement simply because the FAA’s policy is to enforce the arbitration agreement as written.

Where the parties do not select Puerto Rico law expressly as the applicable law governing their agreements or choose to apply a state choice of law to a dealer’s contract that otherwise would be governed by Law 75, there is a potential for legal uncertainty and what substantive law governs can vary depending on the intricacies of different state laws.

Pick your state law wisely.