Understanding Contract Terms (post 7): Choice of Law and Venue
We continue the Understanding Contract Terms series by explaining choice of law and venue clauses, also called “forum selection” clauses. You see choice of law and venue terms in many contracts, because they can be important terms worth significant money. You will often see choice of law clauses and choice of venue clauses grouped together in a single paragraph. Here is an example of a typical choice of law and venue clause:
Section ____ Governing Law; Jurisdiction. To the maximum extent permitted by applicable law, the provisions of this Agreement shall be governed by and construed and enforced in accordance with the laws of the State of ___________, without regard to principles of conflicts of law. Each of the parties hereto irrevocably and unconditionally confirms and agrees that it is and shall continue to be (i) subject to the jurisdiction of the state courts of the State of ___________, and (ii) subject to service of process in the State of ___________. Each party hereto hereby irrevocably and unconditionally (a) consents and submits to the exclusive jurisdiction of any state court located in the State of ___________ (the “___________ Courts”), including the ___________ Court of ___________ in and for ___________ County, for any actions, suits or proceedings arising out of or relating to this Agreement or the transactions contemplated by this Agreement (and agrees not to commence any litigation relating thereto except in such courts), and (b) waives any objection to the laying of venue of any such litigation in the ___________ Courts.
In certain situations, you or your business may require even more detailed language than the language above. But absent specific circumstances, we opt for a more straightforward approach and help our clients understand why they might prefer one way over another. Our forum selection or choice of law and venue clauses often look like:
Choice of Law and Venue. The laws of the state of Washington will govern any dispute arising from or relating to this Agreement. The parties submit to the exclusive jurisdiction of the state of Washington and federal courts for or in Seattle, King County, Washington, and agree that any legal action or proceeding relating to this Agreement must be brought in those courts.
In our example, the first sentence governs generally choice of law, and our second sentence governs generally venue. To understand the importance of the choice of law and venue clause, you will need to understand each part:
Choice of Law
Choice of law determines (i) what laws will apply to the contract once the parties sign the contract, (ii) what laws will apply to the interpretation of contract terms during the term of the contract, and (iii) what laws will apply to the enforcement of the contract should enforcement become necessary.
Some laws cannot be modified by contract and are enforceable despite the choice of law clause. So the choice of law clause is designed to make certain the parts of contract law that can be assigned in the contract.
The choice of law clause determines upfront the law each party will look to if they need to understand how to interpret the contract they entered into. As a result, if your lawyer is in Washington and your lawyer is drafting the agreement, you will generally want a Washington business lawyer to draft the contract. Even if you do not have a lawyer, your familiarity with contract law will generally be with local contract law, and contract law can vary (sometimes widely) between states. Therefore, you will generally want your local law to apply to the contract–but so will the other party.
The choice of law clause is almost always important and can sometimes be contested. But it rarely holds up a deal from closing. And most often it comes back to haunt only those who did not consider it fully, and then only when the contract is contested. Most of the time one party or the other will either give away or negotiate away the choice of law and then protect themselves by becoming familiar with what they are getting into under the applicable law through research or local counsel.
One often misunderstood aspect of the choice of law clause is that it is independent of venue. Therefore, you could have Washington law apply to a contract that would be decided by a court in Delaware. You could also have Delaware law apply to a contract decided by a court in Washington. There are reasons you would want to avoid this result. But separating the law that will be applied to the contract from the venue of the contract is an option (and sometimes happens without choice). That is why the choice of law and venue clause includes both parts, and why it is important to understand venue:
Choice of Venue
Choice of venue determines where the legal proceedings will be held in the event you (or the other party) has to appeal to the court system. In addition, the choice of venue clause will often apply to where any arbitration or mediation proceedings will be held. Choice of venue does not always assign the type of court, only the location. But sometimes you will see both the type of court and the location assigned. Not all types of actions allow for the assignment or choice of venue. For example, in many real estate transactions, the venue is by default the location of the real estate.
Venue can be a very valuable term in any contract. If venue is nearby, then your witnesses, evidence, and lawyers will also be nearby. This generally means that any dispute will be considerably less expensive for you when you have local venue. By having a local venue, you can significantly increase your bargaining power in any contract dispute. On the other hand, if venue is distant, you will often have to travel (and may have to pay for others to travel) to the distant location. You will also likely have to hire a (new) lawyer in the distant location, or at least become familiar on your own with the procedures of the courts of the distant location. And if your opponent is a local in the distant location, you will also have to deal with the “home field advantage” the other side may enjoy, or as one judge put it:
“ As long as I am allowed to redistribute wealth from out-of-state companies to in-state plaintiffs, I shall continue to do so.”
Venue clauses can often be hotly contested because the practical effect can be substantial. And you will often see a compromise regarding venue that assigns the venue to the jurisdiction where the defendant has their principal place of business. This discourages litigation, because the party who starts the litigation has to travel. You will also sometimes see this clause assigning a “neutral third party” jurisdiction, though there are specific rules governing when assignment to a third jurisdiction is permissible. You may also see “dual” venue clauses that allow for venue in more than one location at the plaintiff’s option.
Anyone who is contracting should understand choice of law and venue clauses and how it will affect their position, particularly during contested negotiations or a dispute. Since all businesses contract, all businesses should understand this important “boilerplate” clause.