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 instead be deciding what state’s law should apply 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 determine what law to apply. State laws sometimes vary significantly. The outcome of a case may sometimes 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 apply, a court will use 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 one state to another.
To provide a greater level of certainty and to remove a potential conflict between parties, they will often state in the contract what state’s law will apply. Parties in California and New York, for example, might choose 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 state 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 nonetheless 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 well 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.
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.