Swanson v. Image Bank, Inc.

• Decision Date: 06 October 2003
• Docket Number: No. CV-02-0176-PR.,CV-02-0176-PR.
• Citation: 206 Ariz. 264,77 P.3d 439
• Parties: Mary Virginia SWANSON, Plaintiff/Appellee, v. THE IMAGE BANK, INC., and Swanstock, Inc., Defendants/Appellants.
• Court: Arizona Supreme Court

77 P.3d 439

206 Ariz. 264

Mary Virginia SWANSON, Plaintiff/Appellee, v. THE IMAGE BANK, INC., and Swanstock, Inc., Defendants/Appellants.

No. CV-02-0176-PR.

Supreme Court of Arizona.

October 6, 2003.

Snell & Wilmer LLP, Tucson, by Tibor Nagy, Jr., Mark E. Konrad, Wade R. Swanson, for Plaintiff/Appellee.

Stinson Morrison Hecker LLP, Phoenix, by David A. Selden, Christine A. Bailey, for Defendants/Appellants.

OPINION

JONES, Chief Justice.

¶ 1 Appellants, The Image Bank, Inc. and Swanstock, Inc. (collectively "TIB"), sought review of the court of appeals' decision affirming the trial court's grant of partial summary judgment in favor of Appellee, Mary Virginia Swanson ("Swanson"). See Swanson v. Image Bank, Inc., et al., 202 Ariz. 226, 43 P.3d 174 (App.2002). The judgment awarded treble damages under Arizona Revised Statutes ("A.R.S.") § 23-355 (1995) for bad faith breach of an employment contract. We granted review to determine whether the contract's express choice-of-law provision assigning Texas substantive law to govern any controversy arising out of the contract precludes recovery of a statutory claim for treble damages under A.R.S. § 23-355. After full review, we hold that the contractual choice of Texas law governs the remedies available to Swanson for breach of the contract and we reverse the treble damage award. Jurisdiction is established under Article 6, Section 5(3) of the Arizona Constitution and A.R.S. § 12-120.24 (2003).

FACTS

¶ 2 From 1991 to 1997, Swanson owned Swanstock, Inc., an Arizona corporation that represented owners of fine art photography. She resided permanently in Arizona and operated Swanstock, Inc. from this state. The Image Bank, Inc. is a New York corporation with its home office in Texas. In June 1997, The Image Bank purchased Swanstock, Inc. and retained Swanson to operate the company as its president, creative director, and chief executive officer pursuant to a negotiated employment contract. The contract contained provisions regarding compensation to be received upon termination and the application of Texas law as the law under which the contract should be governed and construed. Each party was represented by counsel during the contract negotiations.

¶ 3 TIB terminated Swanson in July 1999 "other than for cause" but refused to make the severance payments required by the contract. Swanson filed suit, followed by a motion for partial summary judgment, alleging breach of the employment contract and claiming TIB violated A.R.S. § 23-352 (1995) which provides that "[n]o employer may withhold or divert any portion of an employee's wages...." In addition to damages at law for the breach, Swanson sought treble damages pursuant to A.R.S. § 23-355.¹ The trial court determined that TIB breached the employment contract with Swanson and awarded Swanson $150,000 in severance pay. Notwithstanding the parties' express agreement that Texas law should control, the trial court trebled the damages under § 23-355, finding that the statute set forth a "fundamental public policy" of Arizona and, as such, should supersede the choice-of-law provision in the contract. ¶ 4 TIB appealed on two grounds. First, the company contended Swanson was not entitled to receive severance pay because she failed to perform her duties and therefore anticipatorily repudiated the contract. The court of appeals disagreed and applied Texas law to this issue, concluding that Swanson's actions did not constitute an anticipatory breach. This court declined review of that issue.

¶ 5 Second, TIB asserted the treble damage award under § 23-355 was improper and based its argument on the choice-of-law provision requiring the application of Texas law to the contract. The court of appeals, again disagreeing with TIB, applied Restatement (Second) of Conflict of Laws § 187 (1971) (hereafter "Restatement") and upheld the treble damage award on the theory that Arizona law does not permit prospective contractual waiver of claims under § 23-355 in the case of unreasonable, bad-faith withholding of wages. The choice-of-law provision was held to be invalid as a violation of a "fundamental policy" of Arizona under both subsections (1) and (2) of Restatement § 187.

DISCUSSION

¶ 6 Arizona courts apply the Restatement to determine the applicable law in a contract action. Cardon v. Cotton Lane Holdings, Inc., 173 Ariz. 203, 207, 841 P.2d 198, 202 (1992). If a contract includes a specific choice-of-law provision, we must determine whether that choice is "valid and effective" under Restatement § 187. Id. at 208, 841 P.2d at 203. Choice-of-law issues are questions of law, which we decide de novo. See Garcia v. General Motors Corp., 195 Ariz. 510, 516, ¶ 19, 990 P.2d 1069, 1075 (App.1999).

A. Applicability of the Restatement

¶ 7 The choice-of-law provision in the employment contract reads:

This Agreement shall be governed by and construed in accordance with the internal laws of the State of Texas, without regard to the principles of conflicts [sic] of laws.

(Emphasis added.) TIB claims this provision forecloses the application of conflict of laws principles set forth in the Restatement because the parties, by including the last phrase, expressed their unequivocal intent that Texas law control the relationship. TIB argues the court of appeals improperly overrode that intent by engaging in a § 187 analysis. TIB further contends that absent fraud or overreaching, parties are always free to preclude a § 187 analysis by choosing the state whose law will govern their relationship and the available remedies. These arguments are not sound and we do not adopt them.²

¶ 8 When more than one state has a relationship to or an interest in a contract, courts apply a conflicts analysis to determine which state's law should govern. Cardon, 173 Ariz. at 207, 841 P.2d at 202 (citing Restatement § 187). However, neither a statute nor a rule of law permitting parties to choose the applicable law confers unfettered freedom to contract at will on this point. See Restatement § 187 cmt. d. Consistent with this principle, Restatement § 187, comment g reads:

Fulfillment of the parties' expectations is not the only value in contract law; regard must also be had for state interests and for state regulation. The chosen law should not be applied without regard for the interests of the state which would be the state of the applicable law with respect to the particular issue involved in the absence of an effective choice by the parties.

Section 187 provides a mechanism by which to balance the interests of both the parties and the states. Therefore, when parties include an express choice-of-law provision in a contract, we will perform a § 187 analysis to ascertain the appropriate balance between the parties' circumstances and the states' interests. By so doing, we determine as a matter of law whether the provision is valid and thus whether it should govern the parties' contractual rights and duties.

B. Restatement § 187 Analysis

¶ 9 Restatement § 187 outlines the test used to decide whether the parties' chosen law will govern:

(1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.

(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either

(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or

(b) 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 and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.

Restatement § 187(1) & (2).

¶ 10 In deciding whether the parties' choice will govern, we first determine whether the disputed issue is one which the parties could have resolved by an explicit provision in their agreement. Restatement § 187(1). As identified by the court of appeals, "[t]he `particular issue' here is whether parties may contractually waive any statutory right or claim to treble damages under § 23-355." Swanson, 202 Ariz. at 234, ¶ 25, 43 P.3d at 182. The parties agree, as do we, that Arizona law applies to this threshold issue. See Restatement § 187 cmt. c (the question whether the parties could have resolved a particular issue by explicit agreement directed to that issue is a question to be determined by the local law of the state selected by application of the rule set forth in Restatement § 188).³

¶ 11 The court of appeals held that Arizona law does not allow parties to an employment contract to preclude such recovery. The court did so on the basis that Arizona law prohibits waiver of the remedy in light of the underlying purposes and goals of Arizona's wage statutes and the legislative objectives sought to be achieved. Swanson, 202 Ariz. at 236, ¶ 36, 43 P.3d at 184. By implication, the court held that unless waiver is expressly permitted by the statute, it is necessarily prohibited. Our analysis, however, leads to the conclusion that the court of appeals erred in its interpretation of Arizona law and the proper application of Restatement § 187.

¶ 12 First, we do not find support for the court's implicit holding that an Arizona statute must expressly permit parties to resolve an issue in order to satisfy Restatement § 187(1). See Swanson, 202 Ariz. at 234-35, ¶¶ 26-29, 43 P.3d at 182-83. We do not interpret § 187(1) so narrowly. Section 187(1) places few limitations on parties' right to contract. Examples of issues...