The Importance of Choice of Law and Jurisdiction Selection Provisions in Commercial Contracts

The Importance of Choice of Law and Jurisdiction Selection Provisions in Commercial Contracts

Most commercial contracts include ‘choice of law’ and ‘choice of venue’ clauses. These clauses allow the parties to choose which state’s or country’s laws will govern the terms of the contract and the location where the lawsuit or arbitration will take place. While ‘choice of law’ and ‘choice of venue’ are crucial in business and professional contracts, many people do not consider the implications of these provisions until there is a contractual dispute. At that point, it is usually too late.

Choice of Law

The parties to a commercial contract have the ability to choose in advance which state’s or country’s laws will apply in case of a contractual disagreement. For instance, the parties may agree in advance to use Pennsylvania law to settle any contractual disputes, even where one of them is not from Pennsylvania.

In some cases, the parties may even choose to apply the law of a jurisdiction unrelated to either of them. For example, the provision may require a California court to apply Pennsylvania law in a contract dispute between a California business and an Arizona business. Courts typically enforce agreements according to the ‘choice of law’ provision.

Where the parties do not include a choice of law provision in their contract, the court has discretion on what law to apply. The court’s decision is often based on several factors, including the location of the businesses, where the events under consideration took place, and the interest of justice and fairness. It is advisable to select a choice of law in advance to avoid unnecessary legal confusion and ensure, when possible, the choice of state law favors you.

Choice of Venue

The choice of venue provision is closely related to a contract’s choice of law. However, unlike the choice of law provision, choice of venue restricts the parties (businesses and/or individuals) to a specific jurisdiction or venue when resolving contractual disputes. The provision directs the parties to appear in a courthouse in a particular country, state, or even county.

The choice of venue is often unfavorable to one of the parties when the parties are located in different states or countries. A choice of venue can disadvantage you as an ‘outsider’ against a local. For example, as a Pennsylvanian business that contracted with a New York business, but with New York as the choice of venue, you risk losing some of your rights even before getting to court.

The requirement to travel to New York makes the contractual dispute costlier and more time-consuming for you compared to the New York resident. Additionally, the New Yorker has a ‘home field’ advantage over you. Besides travel considerations, you will need to find an attorney licensed to practice in New York. Most small businesses have a local attorney, if they have one at all. If your local attorney is not licensed in New York, you will have to find another attorney that is.

The choice of venue provision also provides for the mode of dispute resolution. Parties have the right to select arbitration as the method for settling disputes.

Where the contractual dispute is through litigation, the home-field advantage is more prominent than in arbitration. While you may include the right to choose an arbitrator in arbitration (and even the arbitration company), you cannot choose a judge in court. Additionally, arbitrations often conclude faster than lawsuits. The speed in resolution can help you save time and traveling expenses. At the same time, the costs are often higher because arbitration is private, meaning that the parties typically split the cost of arbitration. In state and federal court, the parties do not have to pay the cost of the judge, jury and other court costs.

Conclusion

Even though different states across America apply similar legal concepts, there are often critical differences in their applications and subsequent court outcomes. These differences often catch many people unaware. While many professional and commercial contracts include the choice of law and choice of venue provisions, many people do not understand their importance or simply ignore the impact of these clauses until there is a contractual dispute.

Even with the required information, a person might still be unable to secure their preferred ‘choice of law’ or ‘choice of venue’, particularly when one party is more powerful than the other or when a party does not have other options. Accordingly, it is advisable to work with an experienced business attorney to help you navigate these and other contractual provisions

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