In this multi-part series, we highlight key contract issues for today’s business owners, including:
Choice of Law
You have most likely seen both “choice of law” and “choice of venue” provisions before, as they are included in nearly every professional contract.
“Choice of law” provisions are exactly what they sound like: provisions allowing the parties (businesses or individuals) to select in advance which jurisdiction’s law will apply to any contractual dispute that may arise.
For example, a contract may provide that, Pennsylvania law will apply in the case of a dispute, even if one of the parties is not from Pennsylvania. In fact, you may agree to apply the law of a state unrelated to either business or business owner. Courts will generally enforce such an agreement. As odd as it may sound, this provision may result in, for example, a Pennsylvania court applying Texas law to a contract dispute between a Pennsylvania business and a New York business.
In the absence of a choice of law provision, courts determine what law applies by undertaking what is referred to as a “conflicts of law” analysis: considering the interests of justice, where each of the businesses to the dispute are located, where critical events at issue took place, where potential witnesses may be located, and the interest of the respective jurisdictions in ensuring a fair resolution.
If you would rather not leave the selection subject to later determination by a court, selecting choice of law in advance is advisable.
Examples: Choice of Law
While many legal concepts are relatively consistent throughout the states, there are critical differences. Agreeing in advance to a choice of law provision may lead to results very different from what you intended.
Let’s consider a specific example:
You hire a new employee. You include a non-compete provision as a term of employment, protecting your business if the employee leaves and wishes to work with a competitor. You provide that this non-compete term will last for three years and include a Pennsylvania choice of law provision.
Unbeknownst to you, three years may be considered an unreasonably long time period by some courts throughout the United States.
In the event that you must enforce the non-compete provision in court, the court has the option under Pennsylvania law to “blue pencil” an unreasonable non-compete provision by modifying or re-writing it to make it “reasonable”: such as lowering the non-compete term to two years instead of three. This is a much better result for you than having the entire provision tossed out.
On the other hand, under certain other state’s laws, such as South Carolina for example, no such modification option exists. The court would instead “red pencil” or delete the three-year period if deeming it unreasonable. This could leave you without a non-compete provision, despite your advanced planning.
In another scenario:
The question arises of whether you adequately compensated your employee for a non-compete. The outcome may very well be determined by which state’s (Pennsylvania or Massachusetts) law applies to the contract.
Under Massachusetts law, in this example, continued employment is sufficient payment for a non-compete agreement, even for existing employees. Under Pennsylvania law, on the other hand, separate compensation (a bonus, promotion, or raise) is required in order for the agreement to be enforceable.
In an international context, when comparing U.S. state and federal laws to the laws of other countries or nations, the impact of a choice of law provision becomes even more pronounced. Exercise caution before agreeing to the application of another jurisdiction’s laws – doing so may change the terms of the deal.
Choice of Venue
“Choice of venue” is a similar but distinct concept, often appearing alongside choice of law. Choice of venue provisions submit you and your business to the jurisdiction of a particular venue (country, state, or county) in the event that a dispute arises from the underlying contract.
This provision can be more significant than choice of law: if a choice of venue provision is unfavorable, you could effectively lose your rights before making it to the courthouse.
Resolving a dispute with an unfavorable choice of venue provision could require travel to another state or country, along with the time and financial costs of doing so. If your attorney is not licensed to practice in the state or country agreed upon to resolve the dispute, you may lose your choice of legal counsel.
An Alternative Strategy: Keep Provisions Neutral
If you are unable to secure your preferred choice of law or venue, you may elect to choose a neutral jurisdiction. In international contexts especially, choosing a neutral jurisdiction with a well-established legal precedent for contract disputes (such as Delaware or New York) is common.
To best navigate these provisional concepts, it is advisable to seek the assistance of an attorney with experience in negotiating commercial contracts.
Pittsburgh Corporate Attorneys
Dan Lynch is the Founder and Managing Partner of The Lynch Law Group. With questions about business contracts, indemnification clauses, or other legal matters, contact him at 724-776-8000 or via email at firstname.lastname@example.org.