With the rapid globalization of our economy many companies seek to expand their business to other states or countries to gain a larger piece of the market or reduce production expenses. There are numerous advantages to doing business internationally, but the risks may outweigh the gains if precautions aren’t taken to protect the business in its endeavors. When it comes to interstate or international contracts, it is important to include a choice of law clause to identify the laws that will govern the contract. Due diligence is your best friend when it comes to mitigating risk.
What is a Choice of Law Clause?
In a contract, a choice of law clause or governing law provision allows the parties to designate which state or country’s laws will dominate the interpretation of the contract, even if the contract was signed in or the party’s live in a different state.
A company may utilize many forms of interstate or international agreements, but the agreements them must clearly explain the rights and obligations of the parties involved.
Despite the fact that your contract is unique since it will reflect the demands and objectives of your organization, there are two elements in any agreement that you should always include:
- designation of governing law
- dispute resolution mechanism
Governing Law vs. Jurisdiction
While a governing law provision determines which state’s or country’s law will be used to decide the dispute, jurisdiction refers to where a dispute will be resolved, should it result in filing in court.
A disagreement will be settled according to the laws of the jurisdiction, whereas the governing law specifies which state’s laws will be applied. For example, a contract may provide that litigation must be filed in Florida but that the case will be reviewed under the laws of New York.
Not frequently is deciding which state’s legal system to use an important negotiation topic. However, the state in which jurisdiction is chosen may be more critical: if there’s a problem, everyone has to go there to get it resolved.
Advantages of a Choice of Law Clause
Choice-of-law clauses are now standard in most industries, and they have a number of benefits.
- There is no confusion as to which state’s laws control the agreement and any disputes that may arise when a contract contains a choice of law clause.
- A choice of law clause can save the parties money by speeding up the resolution of a dispute.
- Knowing the laws of the state where you intend to settle your case will give you peace of mind. A lot depends on how the matter is decided on the legislation of different states and countries. Utilizing state laws that you are familiar with provides you with greater assurance in the final result.
Absent a governing law provision, there will be additional time and costs involved in identifying which country, state, or province has jurisdiction if a disagreement develops. Ensuring a choice of law clause is placed in your contract means there are no surprises down the line, and expectations are clear if all parties to the contract correctly negotiate and mutually agree on the governing law in the beginning.
Determining the Most Acceptable Governing Law and Jurisdiction
The following questions should be considered as part of the study to determine the most acceptable governing law and jurisdiction/forum selection clause:
- If they’re in different countries/states, where are they located?
- If you ever have to enforce a judgment against a party, where are their assets located?
- Is it possible that the contract will be governed by a different country’s law? In Swiss/US practice, for example, a Swiss company may hire someone in the United States. It’s possible that the Swiss corporation wants to use Swiss law in the employment agreement.
A United States court in the state where an employee works is unlikely to use Swiss law even though that country’s laws are the governing ones. Similarly, unless the U.S.-based employee chooses to file the employment claim in Switzerland, a Swiss jurisdiction clause would not be enforceable in such an employment agreement’s jurisdiction clause.
- When and where are you going to perform the transaction?
- Is it arbitration or litigation that will be used to resolve this dispute?
Significance of the Language
The choice of law clause is frequently overlooked by dealmakers and their legal counsel. The provision may not have the desired effect if improper language is chosen. Those who work with contracts should ensure the phrasing is extensive and detailed in addition to carefully selecting the governing state.
Choice of law clauses has a standard form, even though the terminology used varies from industry to industry.
Writing contracts necessitate a thorough knowledge of how courts interpret choice-of-law clauses in various states. It’s a poor decision to use boilerplate language that may or may not be understood in the same way across the board. Other forms of claims that may occur within the relationship between the parties can be covered by a modified version of the standard language.
Restrictions to Using a Choice of Law Clause
Occasionally, the terms of a choice of law clause will collide with state or federal regulations. These differences, however, are rarely problematic during discussions.
- Choice of law clauses in insurance contracts is illegal in several states. State governments in the U.S., such as Massachusetts, care about enforcing their own consumer protection legislation.
- Certain sections in choice of law clause in cross-border contracts, such as those concerning secured transactions and/or the Uniform Commercial Code (UCC), may conflict with a choice of law clause at times.
- Contracts governing corporate activity are frequently subject to the laws of the state in which the organization is incorporated.
What Occurs if Governing Laws Are Not Identified in a Contract?
In situations where a dispute rises around a contract that is void a governing law provision, it usually results in a lengthy and expensive litigation to determine the governing law and court.
If there is a commercial dispute, the absence of governing law terms and jurisdiction clauses creates significant uncertainty. The possibility of successful completion of a contractual claim is likewise reduced in the absence of governing law.
For the most part, the choice of law clause in cross-border contracts that will govern a contract and which country’s courts will have jurisdiction can be chosen by the parties at the beginning of their commercial relationship. However, the ability to select a suitable governing law and jurisdiction must be carefully considered.
Seek Knowledgeable Legal Counsel
Should you need to devise, interpret, or dispute a contract containing a choice of law clause, seeking knowledgeable legal counsel is the first and most important step. Every company’s needs are unique and should be reflected in a custom contract to protect not only their current needs, but their anticipated needs.
The legal team at Boyer Law Firm stands ready to handle your contract needs. Our attorneys have in-depth experience in interstate and international agreements. Call us today to discuss what your company needs.