Today, I want to talk about geeky contract terms that people often ignore: Governing Law, Jurisdiction, and Venue. These terms usually appear in the boilerplate of a contract, and I group these three subjects together because they revolve around one similar concept: What are going to be the rules if there is a dispute between the parties of a contract?
In some contracts, these three concepts get split apart (one provision says governing law and another says venue and jurisdiction). In some contracts, the concepts are combined in one provision. Usually, the party that is drafting the contract has control over what law is going to be used.
Let’s talk first about governing law. Because contracts are private law, parties are allowed to make a lot of choices inside their contracts. One of the things they can choose is:
What is going to be the law that will be applied if there is a dispute?
The chosen law is usually the law of the home state of the party that is drafting the contract, or should both parties be in the same state, then their home state is, more or less, automatically selected. If the parties to the contract are in different states, however, they can choose one of the two states that they are in, or they could also choose a state that is not where either of the parties is located. While it is possible, selecting a state that is not the home state of either company becomes a little more complicated and often courts don’t particularly like it.
Here is an example for illustration. Let’s say a company based in Baltimore, Maryland, is contracting with a company based in Houston, Texas. The parties can choose either Maryland law or Texas law to apply to a dispute, and almost every court in America will uphold that. A little outside the norm, the parties could also choose something like Delaware law or New York law if there is some kind of logical connection as to why that state matters. If both parties are incorporated in Delaware, common for corporations, a court might accept Delaware law as the governing law, but probably only if both companies are incorporated there. Let’s say that the parties are agreeing to build a bridge in New York. The parties could legitimately choose New York State law to govern the contract because that is the location of performance (something courts accept). But the parties are going to have a difficult time arguing that the court should apply Montana law, for example. While a contract is private law and parties can dictate how their relationship will work, there needs to be a rational connection between the governing state law and the transaction or the parties to the contract.
The governing law is important because that state’s law will dictate the rules by which a contract will be interpreted and enforced. For most issues of law, there are no significant differences between the substance of contract law among the states. But the state’s governing law may have some statutory requirements depending on the subject matter of the contract. In our example above, many rules about bridge construction exist, such as permitting rules, labor rules, or environmental regulations. Those laws would be incorporated or referenced in the contract.
The other part of this geeky term is the jurisdiction and venue:
Jurisdiction and venue means where the parties can conduct any kind of lawsuit, mediation, or arbitration that might take place, and whether or not the parties are going to be subject to that state. Or, if you are working with an international contract, perhaps other nation.
So what does jurisdiction mean? Warning: Super-legal stuff coming:
Jurisdiction comes in two parts. The first is subject matter jurisdiction. The question to answer here is whether this specific court can make a decision in this subject area of the law. For example, when it comes to patents, only a federal district court can hear that case, or bankruptcies can only be handled in a bankruptcy court. A state court of any kind does not have the authority to decide those kinds of cases. All states have what are referred to as courts of general jurisdiction, meaning the court can hear most disputes, including the vast majority of contract cases. The second part is personal jurisdiction, which is the ability of the court to exercise authority over a particular person or legal entity. For example, without some substantial connection to the state of Maryland, a Maryland court cannot compel a person from Florida to appear in a Maryland court and have a dispute resolved by the Maryland Court.
Most states have what is called a “long-arm” statute which describes the circumstances and connections to a state that would allow a state to exercise personal jurisdiction over a person or legal entity from another state. The problem is that sometimes a party may fight over the question of whether a court can exercise personal jurisdiction over that party. Those fights can be time consuming and add significantly to the cost of a dispute. To prevent that fight over personal jurisdiction, which can sometimes last months, the contract will contain a provision that says all parties agree to be subject to a state’s courts to avoid the fight over personal jurisdiction.
Venue means the physical location of the court. So at least that is an easy concept.
Thus endeth the super-legal part.
The point of jurisdiction is to have a court that can issue an order and expect to have that order followed and enforced. The venue, because it is a function of geography, is often a matter of convenience for the contract parties.
Most people don’t often think about the rules of procedure being different from the actual substantive law, but it does matter.
But, when a contract combines, governing law, jurisdiction, and venue in a way that may favor one party (usually the party drafting the contract), you are creating a home court advantage. By home court advantage, I am not saying that the judges are biased. I am saying that when the lawyers are familiar with the law and procedure, they have a certain comfort that lawyers from another state won’t have. You can say we are going to be governed by Delaware law and the parties are going to be subject to the jurisdiction of the Maryland state and federal courts. And then you choose your venue – you choose where you are going to have these things. You can say any dispute is going to be in the circuit court for Baltimore City, or the United States District Court for the District of Maryland, depending upon the nature of the dispute.
There is also a financial cost involved with just travel. Take our Maryland and Texas companies building a bridge in New York. If the Maryland company is a relatively small business with limited financial resources, litigating a case in Texas can get expensive quick. If both parties are going to New York, maybe the burden becomes more equal for both parties.
Governing law, jurisdiction, and venue can often lead to a significant advantage to the party who is drafting the contract if you’re not careful. But hardly anyone ever really negotiates governing law, jurisdiction, and venue.
Admittedly these are not super geeky terms such as other provisions could be, but they are important concepts that need to be thought about when you are negotiating a deal. Where are disputes going to happen and where will those disputes be resolved? I hope disputes do not happen, but they could, and if they do, where those disputes are going to be resolved is an important part of contract negotiation and contract drafting.