Understanding “Choice of Law” Contract Provisions

January 23rd, 2015

by Leonard A. Bellavia, Esq.

Many contracts that a business will enter into will address choice of law, jurisdiction and venue.  Surprisingly, many companies often ignore these provisions when negotiating the terms of the contract.  Vendors often draft these provisions to make it extremely difficult for the business to prevail in litigation should disputes arise.  Businesses that acquiesce to the vendor’s wishes pertaining to choice of law, jurisdiction and venue do so at their own risk.

A court deciding a case between parties residing in different states must determine which state’s law applies.  This determination is often referred to as “choice of law.”  Typically, if the contract does not address choice of law, the court will use the law of the state in which the transaction was consummated or where a substantial portion of the subject matter of the agreement shall occur.  However, if the contract stipulates which state’s laws govern disputes, courts will adhere to these provisions.   Interestingly, parties to a contract that reside within the same state can instruct courts to apply the law of a different state to govern disputes.

A similar analysis applies to venue and jurisdiction questions, which address which court is appropriate for either party to bring suit.  Again, if the contract is silent on the appropriate venue and jurisdiction, the location of the defendant and where the transaction takes place is generally determinative.  But, if the contract stipulates a particular venue and jurisdiction the parties must use for litigation, courts will compel parties to adhere to these provisions.

Here is an example of how these provisions work.  Suppose a Californian company contracts with a New York company, and the contract states that California law controls the agreement (choice of law) and either party must litigate any disputes in a particular California court (jurisdiction and venue).  If a dispute arises, the Californian business can file suit in California, forcing the New York business to seek local counsel in California.  Also, the New York business may not be as familiar with Californian law as New York law.  Without understanding applicable differences, the New York business may learn that California law resolves the dispute in unexpected ways.  If the New York business wishes to file suit against the Californian vendor, the business would have to do so in courts thousands of miles away from his home state.  Clearly, such limitations put the New York business at a distinct disadvantage and may ultimately discourage the business from pursing his rights.

Choice of law, venue and jurisdiction provisions are often negotiable, just like any other provision of a contract.  Vendors often try to ‘slip’ these provisions by unwary businesses.  A vendor who conducts business in your state should have to comply with your state’s laws and commence or respond to litigation in courts of your state.  If a vendor refuses to negotiate these terms and instead seeks to bind your business to laws and courts of another state, you should evaluate whether the relationship contemplated by the agreement is worth the potential risk.

Have a question about “choice of law” or any other provision of a contract? Please call 631-234-7000 and we will advise you on the best ways to protect your interests.

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