(a) The parties in their agreement may choose the applicable law. However, in a consumer transaction, the choice is not enforceable to the extent it varies a consumer protection rule that which cannot be varied by agreement under the law of the jurisdiction whose law would apply in the absence of the agreement.

(b) Except as otherwise provided by an enforceable choice-of-law term, the following rules apply:

(1) In aAn access contract or a contract providing for electronic delivery of a copy, the contract is governed by the law of the jurisdiction in which the licensor is located when the agreement is entered into between the parties.

(2) A consumer transaction contract that not governed by subsection (b)(1) which requires delivery of a copy on a physical medium to the consumer is governed by the law of the jurisdiction in which the copy is delivered or, in the event of nondelivery, the jurisdiction in which delivery was to have occurred.

(3) In all other cases, the contract is governed by the law of the jurisdiction with the most significant relationship to the contract.

(c) If the jurisdiction whose law governs govern under subsection (b) is outside the United States, the laws of that jurisdiction govern only if they provide substantially similar protections and rights to a the party not located in that jurisdiction as are provided under this article. Otherwise, the law of the jurisdiction in the United States which has the most significant relationship to the transaction governs.

(d) A party is located at its place of business if it has one place of business, at its chief executive office if it has more than one place of business, or at its place of incorporation or primary registration if it does not have a physical place of business. Otherwise, a party is located at its primary residence.

Uniform Law Source: Restatement (Second) of Conflicts 188; U.C.C. §§ 1-105; 9-103.

"Access contract". Section 2B-102. "Agreement". Section 1-201. "Consumer". Section 2B-102. "Contract". Section 2B-102. "Copy". Section 2B-102. "Delivery". Section 2B-102. "Electronic". Section 2B-102. "Licensor". Section 2B-201. "Party". Section 1-201. "Rights". Section 1-201. "Term". Section 1-201.

a. Voted 9-1 to use consumer, rather than mass market.

b. Voted 8-5 to validate contract choice of law. (Feb. 1997)

c. Voted 11-0 to adopt significant relationship test as back-up rule. (Feb. 1997)

d. Voted 10-0 to make contract ineffective to alter mandatory consumer protections (Nov. 1997)

e. Reviewed without substantive change. (Feb. 1998)

1. Contractual Choice of Law: General Rule. This section addresses two questions. The first concerns the enforceability of contract terms choosing the applicable law. Choice of law clauses are routine in commercial licenses and are important in how parties structure commercial deals. The information economy accentuates that importance through expanded communications capabilities and, with respect to transactions in information, the fact that remote parties frequently engage in contract formation and performance through remote systems spanning two or more jurisdictions and not dependent on the physical location of either party or of the information itself.

In light of the commercial importance of the practice, Article 2B adopts a contract choice position validating choice of law agreements. A rule that validates choice of law agreements states an important policy in a context where an increasing number of modern information transactions occur in cyberspace, rather than in fixed locations. Because many transactions in information are not related to tangible locations, the ability to choose an applicable law provides an important commercial premise. In the absence of that right, even the smallest business entity on the Internet is subject to the law of all fifty states and all countries in the world. Because that risk would have long term adverse effects on electronic commerce, this Section is one of the most important contributions of Article 2B to development of electronic commerce.

Common law generally enforces contractual choice of law in transactions in information. See Finch v. Hughes Aircraft Co., 57 Md. App. 190, 469 A.2d 867, 887, cert den 298 Md. 310, 469 A.2d 864 (1984), reh. den. 471 U.S. 1049 (1985); Medtronic Inc. v. Janss, 729 F.2d 1395 (11th Cir. 1984); Universal Gym Equipment, Inc. v. Atlantic Health & Fitness Products, 229 U.S.P.Q. 335 (D. Md. 1985); Northeast Data Sys., Inc. v. McDonnell Douglas Computer Sys. Co., 986 F.2d 607 (1st Cir. 1993). The major exception is if the choice contradicts a fundamental, mandatory policy of the state that would otherwise have its law apply; the reported cases applying this theory are typically consumer protection cases.

The Restatement allows contract terms to govern in any case where the issue could be resolved by contract. In addition, even if contract rules might not otherwise govern, under the Restatement, the contract choice is presumed to be valid, subject to limited exceptions. Restatement (Second) of Conflict of Laws 187 (may be invalid if not resolvable by contract and either there was no "reasonable basis" for the choice of that state's law, or "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.").

2. Contract Choice: Consumer Contracts. In an information economy, there are strong reasons to allow contract choice; those reasons include the reasons that led to the Restatement position years ago, but go further because of the increasing nationalization and internationalization of commerce. Despite strong reasons for enforcing all contract choices, Article 2B takes the position that the contract cannot override mandatory consumer protections that otherwise apply. A mandatory rule is a rule that, under applicable law, cannot be altered by agreement. Such rules exist in most states, but their content varies widely. The reference to consumer protections includes under both the UCC and non-UCC law (see 2B-104(a)(3)). Within Article 2B, it includes mandatory consumer protection rules whether phrased in terms of consumer or "mass-market" rules.

3. Contract Choice: Rejected Limitations. Article 2B rejects current Section 1-105 which allows choice of law only if the chosen state has a "reasonable relationship" to the transaction. This rule is more restrictive than the Restatement and the law of most states outside Section 1-105. It reflects law that existed when the UCC was adopted five decades ago, but that has little merit in modern electronic transactions and does not fit with modern scholarship about choice of law as reflected in the Restatement (Second) and elsewhere.

It also rejects Article 2A-106 which, for consumer leases, restricts the contract choice to the jurisdiction in which the lessee resides on or within thirty days after the contract becomes enforceable. That rule is inappropriate for the intangible property and would create a situation in which an on-line provider would be subject to the law in all fifty states even though the states themselves have not designated their particular rules as mandatory. That would be true even though no discernible consumer protection interest justifies the contractual choice limitation. The residence rule does not exist under Article 2, Article 1 or the Restatement. As a consumer protection, it assumes that the domicile is more protective than any other state law. As a matter of logic, that cannot be true in all cases. In an information marketplace and especially in cyberspace transactions, the residence rule harms the consumer as often at it helps the consumer. In cyberspace environments, it frustrates goals of providing uniformity and being able to control the number of divergent laws with which a contract must comply.

4. Default rule: no contract provision. The second issue in this Section involves choice of law in the absence of contract terms and is covered in subsection (b). The purpose of stating choice of law rules is to enhance certainty against which the parties can bargain if they so choose and a basis for planning transactions with a reasonable understanding of the applicable risk. Under current general law, choice of law principles are often driven by litigation concerns and refer to questions about "reasonable relationship", "most substantial contacts", and "governmental interest." In the online environment, this does not support commercial development and creates substantial uncertainty. While Article 2B adopts the modern Restatement (Second) of Conflicts as a general rule, it provides two specific, commercially useful and discernable rules that supersede the general background concept.

5. Default rule: Internet Transactions. The most important rule is in subsection (b)(1). It deals with electronic transactional environments and creates a presumptive choice of law based on the location of the licensor. Where an on-line vendor automatically provides direct marketing to the world through Internet, any other formulation would require the vendor to comply with the law of fifty states and 170 countries since it will often not be clear where the information is being sent. Some states or countries mandate such compliance through local laws, such as for example, recent amendments to California warranty law applicable to the sale of goods. Opting for a more stable and identifiable choice of law is an important in facilitating electronic commerce in digital products.

In this section, the licensor's location refers to its chief executive office (as in Article 9), rather than the location of the computer that contains or provides the information. Unlike other choices (such as the licensee's location, the location of the data), this choice provides a single, routinely identifiable background for commerce. 6. Default Rule: Consumer Deliverables. Subsection (b)(2) creates a consumer rule for cases of physical delivery of tangible copies (not involving online contracts). The rule focuses on the location where the copy is received. In most, but not all cases, this will be the state in which the consumer resides. That location would typically be chosen under any choice of law regime, but this section makes the choice clear. Thus, for example, a consumer acquiring software in Chicago will be subject to the law of Illinois in the absence of contract terms. That rule is consistent with concerns about the "place of performance" and similar considerations under current law. It is also followed in many European consumer protection rules relating to contract choice of law involving sales of goods and services. This rule deals with situations in which the licensor will know where delivery will occur because it delivers a physical copy and is not engaged in an electronic communication. This allows electronic transactions to be governed by a choice of law rule that enables commercial decision-making based on an identifiable body of law and does not impose costs on the transaction by requiring that the electronic vendor determine what physical location corresponds to an electronic location.

The Section, of course, only deals with contract issues. It does not affect tax or similar concerns. In Quill Corp. v. North Dakota, 504 U.S. 298 (1992) the Supreme Court held that no adequate nexus for tax purposes was established where the only contact of an entity with a state was advertising and delivery through common carrier. This Article, of course, deals only with contract issues.

7. Default Rule: Restatement Concept. The residual rule adopts the Restatement (Second) test and case interpreting it. The Restatement (Second) of Conflicts uses a "most significant relationship" standard to be judged by considering a variety of factors that include: (a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicile, residence, nationality, place of incorporation and place of business of the parties. (f) the needs of the interstate and international systems, (g) the relevant policies of the forum, (h) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue, (i) the protection of justified expectations, (j) the basic policies underlying the particular field of law, (k) certainty, predictability and uniformity of result, and (l) ease in the determination and application of the law to be applied. Restatement (Second) §§ 6, 188.

This rule is not uniformly accepted in current practice. Many states use principles from the Restatement (First) or theories evolved by academic authors. Indeed, one text states: "[C]hoice-of-law theory today is in considerable disarray - and has been for some time. [It] is marked by eclecticism and even eccentricity. No consensus exists among scholars.... [Like] revolutionaries who can unite only to eliminate the existing government, they cannot agree on the establishment of a new one. The disarray in the courts may be worse. Four or five theories are in vogue among the various states, with many decisions using - openly or covertly - more than one theory." William Richman & William Reynolds, Understanding Conflict of Laws 241 (2d ed. 1992). The disarray argues for giving guidance for contracts in cyberspace.

8. Default Rule: Foreign Jurisdictions. Subsection (c) provides a rule in cases of foreign choices of law where the effect of using the licensors location would be to place the choice of law in a harsh, under-developed, or otherwise inappropriate location. This is intended to protect against conscious selections of location designed to disadvantage the other party and forum shopping by U.S. companies who have virtually free choice as to where to locate. It is especially important in context of the global Internet context.