Intro by USLawforNordic
U.S. agreements can be overwhelming, to say the least. You need to be smart about where you put your negotiating efforts. Often, you have run out of energy by the time you get to the boilerplates in the end of the agreement. But as this blog will show you, it might actually make sense to spend some time on the choice of law and forum section. In the end, the agreement (that you spent all that time on negotiating!) isn’t worth anything at all, if you don’t have the money, expertise and time to go to court and get it executed, if your counter party doesn’t perform. – Oh, and did you know that you need to be far more specific than to refer to “U.S. law and courts”? This blog will teach you why.
Should I even spend time on negotiating the choice of law and forum section?
U.S agreements tend to be longer and more detailed than European contracts. When first negotiating these lengthy contracts, a foreign business may want to evaluate which terms are the most important and worth negotiating. No party wants to negotiate every term, especially if a good commercial deal is within reach. So, in this context, how important are the choice of law (i.e. what law should be used when interpreting the contract) and the forum selection clauses (which point to the place where any dispute will be settled)?
Not important, one might say, if all goes according to plan. For some agreements, where the risk of potential liability is low, and the stakes are not high, any U.S. state law will be fine for construing the contract. Also, if a dispute is highly unlikely, one might be willing to take the risk of travelling far to an unknown forum to litigate that unlikely dispute.
However, if the contract contemplates on-going obligations, or if the stakes are high, or intellectual property is involved, or if non-performance by the other party can cause harm (financial or otherwise), then the choice of law and the forum selection clauses become important. If a dispute arises, the ability to negotiate a settlement or enforce the rights bargained for may very well depend on those provisions.
Things to Consider When Picking Governing Law
For governing law, the parties want a state law that supports the substance of the contract and offers a predictable outcome. This may mean that a party uses different governing laws for different transactions. If concerned about product liability, a party might find that two different state laws allow for limitation of liability even in cases involving gross negligence; however, only one of the states may have case law on point and therefore offer more predictability. To complicate things, such limitation of liability involving gross negligence would be against public policy in many states, so the party would need to ensure the sales are not deemed to occur (and the contract not formed) in a state that may invalidate the agreement.
Or, a party may be looking for a state law with a particular concern or outcome in mind. For example, if an insolvent party is selling its business and the winning bidder offers the last chance at an exit, then the seller will want a governing law that allows it to force a closing of the sale should the buyer get cold feet, instead of having to litigate for monetary damages.
Each of the 50 U.S. states have their own set of laws. What is allowed in one state may not be permitted in other states. So, when selecting governing law, one should aim for a state law that supports the substance of the contract and its key provisions affecting liability, indemnities, etc. States approach contract formation issues, available damages, and risk allocation (risk shifting) differently. These differences allow for strategic choices, but can also create risk if the governing law is inconsistent with the negotiated terms or expressly prohibits a contract provision. For example, California prohibits most non-competes, which are popular in some places.
Certain aspects of a contractual relationship might be governed by local law (i.e., where the contract is performed), notwithstanding the governing law specified in the agreement. Some laws (shaped by public policy concerns, and often protective of classes like employees or investors) cannot be waived. For example, in California certain restraints on trade are unenforceable and deemed against the public interest. In the worst case, the inclusion of such a provision might render the entire agreement illegal even when the governing law allows such restriction. To minimize such risk the parties may want to consider a clause saying that if a clause is deemed invalid then the rest of the contract will survive.
It should also be noted that certain laws such as fraud, fiduciary duties, or securities laws might impose obligations outside the contract. In other words, selecting a governing law different from the state where the contract activities take place may create a risk of contract and non-contractual issues being litigated under different laws. If that is a concern, then the choice of law clause should be carefully drafted to govern not only contract rights and duties, but also to the extent permissible extra-contractual matters.
Also, for predictability’s sake, if the contract involves sale of goods and one party does business outside the U.S., then the parties may want to exclude the “UN Convention on the International Sale of Goods (CISG).” CISG pre-empts U.S. state law unless expressly excluded in the contract.
Things to Consider When Selecting Forum
For the forum selection clause, the business considerations tend to focus on convenience and cost: (a) the ability to get business people and witnesses to the forum at a reasonable cost and without too much business disruption; (b) places where the preferred law firm is licensed to practice; or (c) prior experience with the courts or arbitrators. One important consideration is to avoid the court that may be inclined to favor a domestic party over foreign business.
In most cases, the parties agree on a forum that either has strong connection to the place where the contract will be performed or where one or both parties are located. If there is no such connection, there is risk that the forum selection clause will not be enforced. Courts are more likely to disregard a forum selection clause if there is no connection between the parties or the transaction and the forum; or where the forum may create significant inconvenience and burden to one or both parties. Some states prohibit a different forum when contracts are deemed entered into in those particular states.
Some court systems, like California, are often back logged, which means it can take years before a case reaches finality. As an alternative, many parties prefer the faster process offered by arbitration. To further shorten the time-period and lessen the expense of arbitration, the parties can agree on special rules for the arbitration (e.g., set time limits, limit number and lengths of briefs, streamlined discovery, fix the font used in briefs, etc). Arbitration is not always low cost, but is generally considered cheaper than court litigation and the arbitrators are often seen as bringing relevant industry expertise to the proceedings.
Conclusion
In conclusion, the choice of law and forum selection clauses are rarely ever deal killers, but may directly impact the rights and risks associated with, and the value of, an agreement.
