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Location, Location, Location: 7 Questions to Ask About Your Contract’s Choice of Law and Forum Clauses

“The selection of forum and choice of law are separate but related questions, each of which can have a different impact on any future dispute.”

Which state’s law will govern your next contract? Where will any litigation take place? For many companies, the answer may seem obvious — they choose the state where they are headquartered or incorporated. The law of the company’s “home” state may be more familiar and, if any disputes arise, choosing a nearby forum means that company leaders and employees won’t have to travel far for legal negotiations and court hearings.

“On forum, it’s often largely an issue of, ‘We don’t want to go halfway across the world to get our matter heard,’” said Michael Charlson, a V&E partner in Shareholder Litigation & Enforcement.

But companies don’t have to limit themselves to their home states, either with respect to the choice of forum or of the law that will control. For one thing, there are two or more parties to that contract; and each may want disputes resolved in their own home courts applying their home state’s law. So it may well be a matter for negotiation.

Choice-of-law and forum-selection clauses included in many contracts generally allow companies to select any state’s law and courts. That selection is worth careful deliberation, said Marisa Antos-Fallon, a Commercial & Business Litigation counsel at V&E.

“People may put the choice-of-law and forum-selection clause in their contracts without giving it a lot of thought,” Antos-Fallon said. “But from the litigation perspective, when a client comes to us, one of the first things we’ll do is look at these provisions — what law governs the contract and where a case will be litigated will be important if there’s a dispute.”

So how do companies decide which state to choose? The selection of forum and choice of law are separate but related questions, each of which can have a different impact on any future dispute, and the interplay between the two can be complex. That’s why it’s a good idea to consult with counsel on this decision. Here are a few questions that company leaders should ask themselves and their attorneys to get the conversation started.

1. Which state has the most developed case law relevant to your business?

Delaware and New York are the two most popular states designated in commercial choice-of-law clauses, in part because both have highly developed bodies of case law with respect to commercial disputes. “When drafting a contract, parties generally want certainty. You want to have a good idea about how a dispute is likely to play out,” Antos-Fallon said. “If you choose New York or Delaware, there’s a greater likelihood that courts have dealt with the contractual issue that may come up for you.”

But Delaware and New York aren’t the obvious choices when it comes to developed case law for companies in every industry. For instance, California, home to Silicon Valley, has more case law related to the tech sector, and Texas has a deep body of law related to the oil and gas industry.

2. Which state’s judges are likely to be more knowledgeable about your industry?

With respect to choice of forum, judicial experience with certain industries vary by state. A company may prefer to have disputes resolved in courtrooms where judges are more likely to have a decent degree of knowledge about their business landscape. In California, for example, in addition to technology cases, judges in certain parts of the state often hear cases concerning agricultural, entertainment, venture finance or intellectual property licensing matters, noted Charlson, who is based in V&E’s San Francisco office.

“Judges in parts of the state are more familiar with the practicalities of licensing agreements or of contracts in the agricultural sector because they see a lot of those contracts,” Charlson said. Likewise, courts in New York have deeper experience in the securities and financial services area than courts in many parts of the country.

3. How quickly do you want a potential dispute resolved?

In a “time is money” world, the answer to the question above might be “immediately.” But if you’re more likely to be the party accused of breaching the contract (rather than the party alleging a breach), you may prefer a state where adjudication takes time. Adjudication delays can make settling a more attractive option. “If you’re the party in arguable breach, you may want to put pressure on the counterparty to settle for less than 100 cents on the dollar,” Charlson said. “It depends on which side of the case you’re on.”

Time to adjudication varies widely from state to state, and from court to court within a state. California’s overwhelmed state court system is infamous for its delays, for instance. In contrast, Delaware’s Court of Chancery has a reputation of moving far more quickly and has the capacity to resolve matters in weeks or months where the situation requires it. Various federal courts, including the Eastern District of Virginia and the Eastern District of Texas, are known for having so-called “rocket dockets,” with judges who push parties to move their cases quickly to trial.

4. How easy should it be to get injunctive relief?

Many companies want to ensure that they can quickly put a stop to a counterparty’s actions that they believe violate the contract, particularly in commercially sensitive areas such as confidentiality or licensing agreements. “To do that, we might include a provision in our contract saying, ‘If either party violates the confidentiality agreement, we agree that irreparable harm will result and the aggrieved side will be entitled to an injunction,’” Antos-Fallon said.

But Antos-Fallon noted that whether such a provision is enforced as written varies by state. New York, she said, is less likely to order an injunction based solely on an agreement of the parties. “Judges in New York are going to need to independently satisfy themselves that injunctive relief is appropriate and that there’s irreparable harm,” she said. Delaware’s judges, in contrast, are more likely to defer to the parties’ agreement and order an injunction. With or without such contractual provisions, the difficulty of securing injunctive relief varies depending on the forum, and that can be an important factor in negotiating forum-selection provisions.

5. Do you prefer a shorter or longer statute of limitations?

When one party breaches a contract, the aggrieved party only has so much time to sue over that breach before the claim is barred by a statute of limitations. Statutes of limitations for breach of contract claims vary by state. New York’s, for example, is six years, while Delaware’s is three and California’s is four (for written contracts). These time periods typically run from when a party could, with reasonable diligence, have discovered the breach — a fact-specific inquiry that can vary depending (among other things) on the industry and the type of contract. Companies may prefer a shorter limitations period to give them more certainty as to what potential claims might be raised against them and attempt to avoid a situation where a counterparty raises a years-old breach in an attempt to exert leverage (for example, to renegotiate a contract). On the other hand, a company may want the flexibility that comes with a longer limitations period, leaving more time to investigate an issue or negotiate a business resolution that avoids litigation.

6. Is your agreement limited to the “four corners” of the contract?

While not always a great practice, companies may in some circumstances have informal agreements and understandings with their counterparties that are not clearly embodied in the primary contract itself. The question of whether informal aspects of a business deal are enforceable by a court, or even whether informal understandings between the parties can be raised in connection with a dispute, depends on a state’s approach to what’s known as the parol evidence rule. The parol evidence rule generally prohibits the introduction of evidence outside of a contract to interpret a contract’s meaning. In many states, parol evidence is admissible only if the meaning of a contractual provision in dispute is ambiguous.

In California, courts are more liberal about applying the rule, Charlson said, while courts in New York and some other states restrict their look to “the four corners of the contract” — meaning they seek to enforce the contract as it is written. “If you’re a company entering into the contract negotiation, and you would prefer more flexibility, you might be inclined to pick California over New York,” Charlson said.

7. Can choice of law be a bargaining chip?

Some companies may be indifferent to choice-of-law or forum-selection provisions, while their counterparties have specific preferences. In such cases, companies may offer to agree to the counterparties’ preferences while requesting different contract provisions that they view as more critical. Imagine, for instance, a small biotechnology company negotiating a technology license with a New Jersey pharmaceutical giant. “The big pharma company may have some negotiating leverage. And because they’re based in New Jersey, that’s where they want to litigate,” Charlson explained. “The smaller biotech company, which wants a broader relationship with big pharma might say, ‘Okay, we’ll give on that if we can get some accommodation on a different term of the agreement.’”

Choice-of-law and forum-selection provisions “won’t supplant the basic quid pro quo of a contract,” Charlson added, “but they can be important negotiating tools.”

Antos-Fallon and Charlson stressed that there’s no “one-size-fits-all” solution for which state’s law and which forum works best for any given company or contract. When considering choice-of-law or forum-selection clauses, Charlson said, “the most important thing is to get counseling from a lawyer who knows what they’re doing.”