19 Nov 3 Contract Provisions to Home Court Advantage in Contract Disputes
No one likes to think about any deal or business relationship going bad and ending in a dispute. Fortunately, small business owners should have someone else worry about deals going bad–that is what lawyers are for, right? The boilerplate language in contracts, all those provisions at the end usually under the heading of Miscellaneous terms, should not be disregarded as just any form language. When a dispute happens, the boilerplate can help you control the terms and conditions of the dispute resolution.
The boilerplate contains provisions that affect the substantive rights of the parties. If you are preparing a form contract for use by your small business or (SHAMELESS PLUG ALERT) having a lawyer like me do it, there are three provisions that you should have in your contract that allows you to control the rules regarding dispute resolution.
#1 Governing Law Provision
Sometimes called Choice of Law Provision, this clause allows you to select which state’s body of law will govern the interpretation and enforcement of the contract. The general rules of contract interpretation are fairly similar across the states on big issues. But some states have specific interpretations of contract provisions that can be advantageous to your small business contract, particularly in regulated industries. Choosing the governing law provision is the first step the process of controlling how a contract might get interpreted in the event of a dispute.
#2 Venue Selection
For the most part, any court in America is capable of interpreting a contract according to the law of any other state. A court in Maryland is perfectly capable of applying, for example, New Mexico law to a contract and vice versa. But wouldn’t it be better for a small business to not have to expend money traveling to some far away court to have a contract interpreted? Better to choose a “home court” advantage (pun intended). A business can write into the contract a provision that says all disputes will be heard in a given court in a specific state. For example, for clients in Frederick, MD, I might say that any dispute will be heard in the Maryland state courts for Frederick County or the United States District Court for the District of Maryland in Baltimore. The only caveat is that there has to be a reasonable connection to the parties, but if you are located in a given state, that connection is clear. So selecting a specific court or courts keeps any dispute resolution process close to home.
While I am speaking of dispute resolution in a a court, I prefer mediation first. The venue selection clause can also state that meditations will take place in a given locale as well.
#3 Personal Jurisdiction
For small business who might be doing business with clients out-of-state, it is not simply enough to have the governing law and venue be in a given court or location. You have to be sure that you can get the clients into court on your home field. That is where personal jurisdiction comes into to play.
(Inside baseball alert!) In order for a court to hear a case, the court must be able to exercise personal jurisdiction over the parties. Personal jurisdiction means the court can issue orders because a person is either a citizen of the jurisdiction or a person/business has agreed to allow a court to issues orders that apply to that person/business. For out-of-state businesses, there must be sufficient contacts with the state, such as regularly conducting business within a given state, to allow the court to say they are subject to the court’s personal jurisdiction.
Out-of-state businesses can argue, and often successfully do argue, that they do not have sufficient contact with a given state that would justify a court being able to force them to appear in your chosen venue. But parties can agree to having a court having the power to haul them into court. Having you clients agree to the personal jurisdiction of your home court makes sure that if there is a dispute, they cannot argue that the court cannot exercise jurisdiction over them. Bear in mind, if they don’t catch the provision that says they agree to the personal jurisdiction of a Maryland court, that is there error.
While home court advantage in a contract dispute does not guarantee any sort of victory. But your local lawyers are also more likely to be familiar with the law and rules of court. So for small businesses, being able to choose the law that applies, the location of the dispute resolution, and the ability to haul out-of-state clients onto your home court will do at least one thing–keep your lawyer’s travel costs down.