If a lawsuit
was like a football game and there was a coin flip just before the case began,
we wouldn’t choose whether to receive the kickoff or defend a goal. We might instead2 be
deciding what state’s law should apply3 to the case and where
the case should be litigated.
There is no
coin flip at the outset of a lawsuit, but many times we do nonetheless have an
opportunity to make those exact choices. And to the surprise of many people,
deciding where to litigate and what state’s law to apply, are two different decisions.
Choice of
Law
It’s not
unusual for business disputes to involve parties in two or more different
jurisdictions. When that happens and the
case ends up in court, the judge must determine4 what law to
apply. State laws sometimes vary significantly. The outcome of a case may sometimes5 depend on which
state’s law applies to a critical issue in the litigation.
In the absence of a contractual
provision saying what law will apply6, a court will use7
conflicts of law principles in determining what law should be used when two or
more different laws might be applicable. Even conflicts
of law principles may vary from one8 state to another.
To provide a greater level of
certainty and to remove a potential conflict between parties, they will
often9 state in the contract what state’s law will apply. Parties in California and New York, for example, might choose10
when entering a contract to agree that in the event of a dispute, California
law will apply.
They need to be careful, however
Depending on the facts, it is possible that California’s conflicts of law
principles would state11 that New York law should apply in a
given case. So many
parties will specify that a given state’s law will apply regardless of that
state’s conflicts of law principles. In other words, if the contract says
California law will apply, then California law really will apply and there will
be no opportunity for someone to argue that California’s conflicts of law
principles actually call for New York law to apply.
A note of caution: if the case is
heard in one state and the law of another state is supposed to apply, a court may
nonetheless12 refuse to apply the other jurisdiction’s law if
that law conflicts with a key public policy of the state where the case is
being heard.
Choice of
Venue
While choice
of law is a very common term in contracts, choice of venue does not seem to be
quite as prevalent. And some people are not aware that just because you say
that one state’s law applies, that does not mean the case has to be heard in
that state.
A New York
court, for example, can certainly apply California law in deciding a case. A
court may be most comfortable applying the law of its own state, but courts are
sometimes called upon to apply the law of another state. Suppose that in our
example the two parties specify that California law is to apply, without regard
to conflicts of law principles. But the party domiciled in New York files suit
first – in New York. If jurisdiction is
proper in New York, that court might well13 end up hearing
the case but in accordance with California law pursuant to the choice of law
term in the contract.
So parties
frequently also specify where a case will be heard. Sometimes they even specify
that the courts in a specific county will hear the case, rather than just
saying the case will be heard somewhere in the state. It’s a good practice for
that provision to also state that both parties agree to submit themselves to
the jurisdiction of the chosen court. That’s to prevent the California party,
for example, from arguing that the New York court has no jurisdiction over it.
Many years
of casual observation suggest that, historically at least, companies would more
often include a choice of law provision than they would use a choice of venue
provision. We think that’s a curious choice, and both should be used when
possible.
Advantages
If one knows at the time they are
negotiating a contract what some future dispute might be about and if
one researched the law of all states whose law might potentially apply
to see how they would treat that dispute and the facts involved, then
choosing what law applies could be very helpful. You could knowingly predict the issue and influence the outcome
by choosing what law applies. But absent that prescient knowledge, it would
seem the primary benefit of a choice of law provision is to remove an issue
about which parties in litigation might fight. It might save them time and
legal fees to avoid that fight, but it would not give them particular comfort
that they would have an advantage over the other party in the litigation.
Selection of
venue, on the other hand, offers additional advantages. Similar to a choice of
law provision, it can avoid the time and cost of a fight over where the case
should be heard. The bonus is that the party that is able to prevail in
negotiations over a choice of venue term can give itself a better chance that
the case will be heard in their chosen location. Usually, that will be at the
site of their home office or the location of a branch office that is involved in
the case.
Lawyers talk
of the “hometown” effect. If you’re a New York company, what judge and jury
would you like to hear your case: one in New York? Or one in Texas, Louisiana,
California or many other jurisdictions, some of which are considered by some
observers as being poor places to litigate.
And where
would you like the trial to take place: in the location where your records and
witnesses are located? And where your usual corporate lawyers are based? Or
would you want to have to transport witnesses and engage counsel you’ve never
worked with before in a distant jurisdiction? Or even use two firms, one at the
distant case plus your normal firm, with the attendant cost?
There seem
to be many potential benefits flowing form a venue selection provision. If your
client is able to swing the negotiation their way, it’s a great term to have in
the contract. If your client doesn’t have the negotiating whack to get their choice,
maybe it’s best not to bring it up as long as the other side doesn’t; if they
do bring it up, maybe your client can get the provision dropped altogether.
Explanation
:
Shall we play = polite
question to make a suggestion
- We might
instead2 be deciding what state’s law should apply3
to the case and where the case should be litigated.
Might instead = less than 50% certainly
- We might instead2 be deciding
what state’s law should apply3
to the case and where the case should be litigated.
Should apply = advisability
- When that happens and the case ends up in court,
the judge must determine4
what law to apply
Must determine = 95 % certainty
- The outcome of a case may sometimes5 depend on which state’s law
applies to a critical issue in the litigation.
May sometimes = less than 50% certainly
- In the absence of a contractual provision saying
what law will apply6,
a court will use7 conflicts of law principles in
determining what law should be used when two or more different laws might be applicable
Will apply = polite request
Will use = 100% certainty
Might be applicable = less than 50% certainty
