Why You Should Care About Choice of Law, Jurisdiction, and Venue Provisions in Your Company’s Contracts
For many companies, especially larger ones or those that do significant business through the internet, their endeavors cross state lines, and their customers, vendors, or suppliers may be located thousands of miles away from their principal place of business. Just as each state has its own flag, motto, flower, or bird, every state has its own set of laws that governs commercial transactions and the full spectrum of other matters that businesses deal with every day. Similarly, each state has a court system that has spent decades or centuries issuing rulings that interpret and enforce those laws.
This means that a judge in Michigan may approach an issue or resolve a dispute based on an entirely different set of laws and jurisprudence than a judge in Florida, California, or Indiana would. When disputes involving commercial agreements between parties from different states devolve into litigation — whether those states are next door or on the other side of the continent — which jurisdiction’s laws apply and where the case will proceed can have profound impacts on the matter’s outcome. The location and the law may also dramatically change the calculus of litigation by affecting the disruption, expense, and risks of proceeding to trial.
That is why parties to commercial agreements usually include provisions that designate which state’s laws will apply in the event of a dispute – choice of law – and where any lawsuit involving the agreement must be filed – choice of jurisdiction and venue.
Notwithstanding how much these provisions can change the course of a lawsuit, they are often relegated to the back pages or trailing paragraphs of a lengthy agreement, tucked among other provisions that a party may easily dismiss or gloss over as boilerplate. Here’s why treating choice of law and choice of jurisdiction/venue provisions so cavalierly can be a grave and consequential mistake for business owners.
Choice of Law
As noted, a choice of law provision sets forth which state’s law will be applied to the interpretation and enforceability of the contract and to any disputes that arise from the agreement. Usually, but not always, the selected state will be where one of the parties maintains its principal place of business.
How much the choice of law between different states will matter in a given lawsuit or dispute depends on the nature of the issue and the divergence in the applicable law in both relevant states. But unless the law and the way the two states’ courts have viewed and applied that law are the same or similar, the choice of law can provide one side with a distinct advantage, while it makes the road tougher for their opponent if a dispute devolves into litigation. Additionally, a party whose lawyers practice in the state selected will presumably be more familiar with the law than their counterparts, who will need to get themselves up to speed, costing their client more money to pay for their lawyers’ learning curve.
Choice of Jurisdiction and Venue
While a choice of law clause controls how a judge will decide the legal issues in a lawsuit, choice of jurisdiction and venue provisions determine where that lawsuit will proceed. While the concepts of jurisdiction and venue are closely related, they are distinct.
Jurisdiction means the power and authority of a court to hear and adjudicate a matter. Often, multiple states can have jurisdiction over a dispute, such as the home state of either party or the state where the actions or decisions at the heart of the lawsuit took place. Without a choice of jurisdiction provision in which the parties agree to submit to the exclusive jurisdiction of the chosen state, costly and lengthy battles can ensue in which each side seeks “home-field advantage,” arguing that applicable legal principles favor their home turf over another jurisdiction.
Venue is more a matter of geography than authority. A choice of venue provision identifies the specific court where any litigation must occur. For example, a choice of jurisdiction provision can provide that Michigan has exclusive jurisdiction over the dispute, while the choice of venue clause can identify the Third Judicial Circuit of Michigan sitting in Wayne County as the specific location where the case will be heard.
The aforementioned “home-field advantage” manifests in several ways. This includes the “home team” having the ability to use their own attorneys who practice in a familiar courthouse with familiar rules (written and unwritten) and familiar judges whose individual proclivities they know well. Not only will those attorneys be comfortable in their own well-traversed backyard, but they won’t have to pack their bags and bill their client for travel time and expenses. Nor will the local party have to fly witnesses or key employees to testify or appear in court, which costs even more money and causes even more disruption and lost productivity.
If a party needs to hire local counsel in a far-flung location, those lawyers won’t know the client or matter and will need to spend time and client money to understand the facts, issues, and the client’s objectives. Additionally, juries may be more inclined to support a local business in a dispute with one from far away, whether they do so consciously or otherwise. An out-of-town party will also bring a different, perhaps more amenable calculus to the possibility of settlement, knowing that if a matter goes to trial, they face the prospect of increased costs in attorney’s fees, expenses, and lost productivity.
Given the potential significance that choice of law, jurisdiction, and venue clauses have on the parties to a commercial agreement, businesses should not treat them as mere boilerplate and ensure experienced counsel reviews and evaluates their implications before they sign on the dotted line.
If you have questions or concerns about the choice of law and choice of jurisdiction/venue provisions in your company’s agreements, please contact Mike Hamblin at Maddin Hauser.