Check the Governing Law and Court Selection
Written By Adam Yohanan
Many people ignore governing law and court selection clauses, which are usually buried at the end of the contract. This is a big mistake.
I’m always curious about the governing law and court selection because of two main concerns:
Courts tend to be more loyal to local litigants than out-of-town litigants.
The contract laws of different states are similar but not identical.
Home Court Advantage
If my client is from New York and they’re buying services from a Texas business, we want any dispute over the contracts or the services to be resolved in the New York courts, not in Texas.
Even within states, this would be a factor. Within New York or Texas, there are many judicial districts, and contracts can specify which county or section of the state will hear the case.
So, if you are a Brooklyn business doing a major transaction with a Rochester business, you want the court selection clause to read something like this:
Any dispute arising out of or relating to this agreement will be resolved exclusively in the state or federal courts in Kings County, New York.
However, make sure that a federal court actually exists in the county that you refer to. Almost all counties will have state courts, but federal courts only sit in certain counties of each state, usually in the major cities. In this case, we know that there is a federal court that sits in downtown Brooklyn, known as the Eastern District of New York.
Similarly, in any large state, you want to be as close as possible to local judges who may be sympathetic to your cause.
State-by-State Laws
At first glance, contract law is mostly the same across state lines, but some key differences can make all the difference in how the contract is interpreted and enforced. Therefore, merely changing the state in the governing law section of a contract can change the meaning of the contract’s substantive business terms.
Example 1: Statute of limitations for breach of contract. The statute of limitations is the deadline for filing a lawsuit after a breach of contract occurs or is discovered, depending on the state. Some states will start the clock upon the discovery of the breach but others will start the clock on the date of breach. Also, the statute of limitations for breach of contract varies in length by state. For example, California is generally 4 years and New York is 6 years, while Colorado and Delaware are 3 years.
Example 2: “Sole discretion” clauses. Contracts often give one party the discretion to take a particular action either in its “sole discretion” or its “reasonable discretion.” The meaning of “sole discretion” differs among states. In some states, such as California, sole discretion is interpreted literally, meaning the party with sole discretion can make decisions without acting reasonably. However, in other states, such as New York, courts still impose a strong duty to act in good faith, even if a company is exercising it’s sole discretion under a written contract.
Example 3: Punitive damages. In a state with punitive damages statutes, the courts have a right to add additional monetary damages as a punishment if the court determines that the losing party deserves to be punished for doing something egregious, like engaging in fraud. Some states are strict about when they award punitive damages for fraud, and other states are looser and more likely to award such damages. In New York, punitive damages for fraud in the context of a breach of contract claim are usually not an option. On the other hand, in California, courts are more willing to award punitive damages for fraud in a contractual relationship.
Bottom Line:
Remember that different jurisdictions have different judges and different laws. You want the jurisdiction where the judges and the laws favor you, not your counterparty. Don’t forget to ask your attorney about the pros and cons of each option.
Adam Yohanan is a transactional business lawyer with extensive experience representing companies, investors, and entrepreneurs in a wide range of high stakes business transactions.
Adam handles the small and large transactions in the life of a businesses, including mergers & acquisitions, entity formations, partnerships and joint ventures, investing and fundraising, commercial contracts, and dissolutions. His office can be reached at 212-859-5041.
Haley Kopp is a corporate lawyer focused on representing start-ups and small companies in formations, venture capital, angel investor financings, mergers and acquisitions, and general corporate matters.
Haley's diverse experience gives her a practical approach to solving complex business issues, whether guiding companies through financing rounds or corporate transactions. Her office can be reached at (619) 512-3652.
This guide is meant for educational and informational purposes only and should not be considered legal advice. It is essential to consult with an attorney or other advisors regarding all legal and other important matters.
