Swanson v. Image Bank, Inc.

SUPREME COURT OF ARIZONA
In Division

MARY VIRGINIA SWANSON, ) Arizona Supreme Court
) No. CV-02-0176-PR
Plaintiff/Appellee, )
) Court of Appeals
v. ) Division Two
) No. 2 CA-CV 01-0069
THE IMAGE BANK, INC., and )
SWANSTOCK, INC., ) Pima County Superior
) Court
Defendants/Appellants. ) No. C-335655
)
) O P I N I O N
_________________________________)

Appeal from the Superior Court of Pima County
No. C-335655
The Honorable Michael Brown, Judge (Retired)

AFFIRMED IN PART, REVERSED IN PART, REMANDED

Court of Appeals, Division Two
202 Ariz. 226, 43 P.3d 174 (App. 2002)

AFFIRMED IN PART, VACATED IN PART

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

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

J O N E S, 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.

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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

1
A.R.S. § 23-355 reads: “If an employer . . . shall fail
to pay wages due any employee, such employee may recover in a civil
action against an employer or former employer an amount which is
treble the amount of the unpaid wages.”

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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,

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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

2
TIB cites cases from jurisdictions that have held parties
may include language in a choice-of-law provision that precludes
the court from performing a § 187 analysis. See, e.g., Turtur v.
Rothschild Registry Int’l, Inc., 26 F.3d 304, 309 (2d Cir. 1994)
(enforcing parties’ agreement to be bound by choice-of-law
provision without regard to conflict of laws principles); Proctor
& Gamble Co. v. Bankers Trust Co., 925 F. Supp. 1270, 1288 (S.D.
Ohio 1996) (dismissing Ohio statutory claims because “the inclusion
of the phrase ‘without reference to the choice-of-law doctrine’
forecloses the application of Ohio law”). We reject this approach
as unsound and contrary to the intent of Restatement § 187.

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determine which state’s law should govern. Cardon, 173 Ariz. at

207, 641 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

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 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

3
Restatement § 188 provides as follows:

(1) The rights and duties of the parties with respect to
an issue in contract are determined by the local law of

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¶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

the state which, with respect to that issue, has the most
significant relationship to the transaction and the
parties under the principles stated in § 6.

(2) In the absence of an effective choice of law by the
parties (see § 187), the contacts to be taken into
account in applying the principles of § 6 to determine
the law applicable to an issue 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.

These contacts are to be evaluated according to their
relative importance with respect to the particular issue.

(3) If the place of negotiating the contract and the
place of performance are in the same state, the local law
of this state will usually be applied, except as
otherwise provided in §§ 189-199 and 203.

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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 that

parties may not determine by explicit agreement include questions

involving capacity, formalities, and validity. Restatement § 187

cmt. d. Thus, parties cannot vest themselves with capacity to

contract by so stating in an agreement, nor can they dispense with

the formal legal elements of a valid contract. See id. Generally

speaking, however, parties do have the power to determine the terms

of their contractual engagements. Restatement § 187 cmt. c. We

find this to be particularly true in this case where parties of

relatively equal bargaining power, both represented by counsel,

selected the law of the state to govern their contract.

¶13 Second, the plain language of § 23-355 neither expressly

nor impliedly prohibits modification or waiver of a statutory

remedy. Typically, when the Arizona Legislature intends to

preclude employers and employees from avoiding statutory rights or

remedies with an express contractual provision, the statute either

prohibits waiver or voids contractual provisions that limit an

employee’s rights or an employer’s liabilities.4 Section 23-355

4
See, e.g., A.R.S. §§ 23-328 (1995) (prohibiting payment
of unreasonable wages to minors); 23-734 (1995) (prohibiting
employee payment of employer contributions required under the
Employment Services Chapter); 23-783(A) (Supp. 2002) (prohibiting
an assignment, pledge, or encumbrance of the right to benefits that

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includes no language of prohibition and gives no indication that

the legislature intended to preclude the parties’ right as a matter

of contract to resolve by express language the damages available

upon breach of an employment contract.

¶14 Further, we note that under the plain language of the

statute, the award of treble damages for the bad-faith withholding

of wages is discretionary with the court. See Crum v. Maricopa

County, 190 Ariz. 512, 514-15, 950 P.2d 171, 173-74 (App. 1997)

(collecting cases in which “Arizona appellate courts have

repeatedly and uniformly interpreted the treble damages provision

of § 23-355 as discretionary”). When the court, by express

direction of the legislature, is given discretion to reject treble

damages, it follows that parties to a contract, at least arguably,

may likewise exercise discretion to choose a jurisdiction that does

not provide for them.

¶15 In light of the above, we hold that Arizona statutory law

does not preclude parties from agreeing by express contractual

provision in a negotiated contract to surrender the right to a

are or may become due or payable under the Employment Services
Chapter); 23-784 (Supp. 2002) (prohibiting agreements waiving,
releasing, or commuting an employee’s rights to benefits under the
Employment Services Chapter); 23-807(A) (1995) (prohibiting a
contract that enables an employer to exempt himself from any
liability under Employer’s Liability Law); 23-1025(A) (Supp. 2002)
(prohibiting an agreement by an employee to waive the employee's
rights to compensation under the Worker’s Compensation Law); 23-
1303(A) (1995) (prohibiting any provision in an agreement that
violates the Right to Work article); and 23-1341 (1995)
(prohibiting employment agreements from affecting a party’s right
to join, become, or remain a member of any labor organization or of
any organization of employers).
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statutory remedy under § 23-355.5 Because they may do so by

express provision, it follows, under the law, that they may do so

by adopting the law of another state. See Stromberg Metal Works,

Inc. v. Press Mech., Inc., 77 F.3d 928, 933 (7th Cir. 1996).

¶16 We further hold that the court of appeals erred by

collapsing the analysis of subsections (1) and (2)(b) of

Restatement § 187 by engaging in a discussion of state policy.

Therefore, because the disputed issue in the instant case is one

that the parties were able to resolve pursuant to the express

language of § 187(1), we need not address the question whether

application of the law of Texas, the state chosen by the

contracting parties, would violate a fundamental policy of Arizona.

See Stromberg, 77 F.3d at 933 (finding the court does not perform

a § 187(2) analysis where § 187(1) applies); Sheldon v. Munford,

Inc., 660 F. Supp. 130, 135 (N.D. Ind. 1987) (same); Armstrong Bus.

Servs., Inc. v. H & R Block, 96 S.W.3d 867, 872-73 (Mo. Ct. App.

2002) (same); see also Cardon, 173 Ariz. at 207, 209, 841 P.2d at

202, 204 (declining to apply a § 187(2)(a) analysis where § 187(1)

applied).

5
Unlike many employment relationships, we note that the
employment contract in this case is not a contract of adhesion.
Neither Swanson nor TIB can be described as unsophisticated or
inexperienced in business and commerce, and neither was in need of
protection from the other’s superior bargaining power. The
contract is a detailed document, negotiated and drafted by
competent counsel. We decline, therefore, to address the result
that may have followed had this been a contract of adhesion. That
issue is not raised and is thus not before us today.

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 DISPOSITION

¶17 We hold that parties experienced in business, represented

by counsel, and having relatively equal bargaining strength, may,

by express provision in a negotiated contract, surrender the

statutory remedy under A.R.S. § 23-355. We therefore validate and

give effect to the parties’ choice of Texas law to govern this

controversy. Accordingly, that portion of the court of appeals’

opinion addressing the treble damage award is vacated and the

matter is remanded to the superior court for further proceedings

consistent with this opinion.

¶18 The request for attorneys’ fees in this court set forth

in appellee Swanson’s Response to Petition for Review is denied.

________________________________________
Charles E. Jones, Chief Justice
CONCURRING:

____________________________________
Ruth V. McGregor, Vice Chief Justice

____________________________________
Michael D. Ryan, Justice

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