Friday, November 9, 2012

Which State for Governing Law or Venue?

Dear Rich: I am working on a contract where one party (the one providing the services and technology) is based in Texas and the client is based in California. Both parties want the governing law and venue to be in their respective states. Any advice? You're dealing with two concepts: (1) A “choice of law” or “governing law” provision in which the parties agree that a particular state’s laws will be used to interpret the agreement, and (2) we think when you refer to "venue," you're talking about a "jurisdiction" provision—sometimes called forum-selection clauses— require the parties consent in advance to the jurisdiction of a specific court and give up the right to complain about jurisdiction in other locations.
What really matters? Both provisions are important but of the two, we think the venue/jurisdiction provision is more important. That's because state laws may differ on some issues -- for example, Delaware favors corporations, etc.-- but for the most part choice of law doesn't make much difference. But jurisdiction provisions can create more expense and inconvenience because they determine where you must travel to in the event of a dispute. For example, a resident of California may not want to spend several weeks conducting business from a Texas hotel room, and vice versa. Despite the fact that the chances of triggering the provision are statistically very low -- so few contracts devolve into lawsuits -- lawyers like to puff up their chests and "stand their ground" on this issue with the "bigger" party usually getting its way.
Compromise? There are a couple of workarounds. You can leave out jurisdiction entirely and then either party may file where they live (assuming they can get personal jurisdiction over the other party). Or you can set up an either/or provision such that the party filing the lawsuit can choose the state law and jurisdiction. So the Texans can file in Texas, and if the Californians are suing, they can file in Cali. If you can't reach a compromise, you may have to bite the bullet and hope that you're never dragged into a lawsuit.
FYI, DR readers, two states, Idaho and Montana, refuse to honor forum selection provisions. In some other states, courts enforce these provisions only if the parties have some contact with the state beyond the contract provision—for example, they must do business with the state’s citizens even if they live (or the agreement is signed) in a different state.

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