Contracts: Governing Law and Jurisdiction

Deep in the boilerplate language of most contracts are two clauses that you might not have given much thought to: The Choice of Law and Jurisdiction provisions. Or maybe you've heard the term "jurisdiction" thrown around in a TV crime drama "this isn't your jurisdiction, detective!" kinda way and wondered what that word is doing in your contract. Let's discuss what these provisions are about and why you should care.

Let's illustrate the importance of these clauses with an example. Let's say you run an online business based in Houston, Texas that sells stationery. Because you run your business online, you're shipping orders all over the country. Now let's suppose you have a client who owes you a significant amount of money for an unpaid bill that is based in Portland, Maine and you want to sue them for breach of contract.

The Choice of Law provision is what we look at to determine which state's laws should control. Here, you're based in Texas while your client is based in Maine so which state's laws should apply?

Here's why this matters: Texas and Maine might have very different laws regarding breach of contract disputes. This could affect what defenses are available to your client and what penalties could apply.

So let's say you drafted your own contract and you omitted the Choice of Law provision because "what is this, who cares". Now there's a factual issue that has to be decided based on factors like where the business was initiated, where it was performed and where the contract was signed. Maybe those answers are simple but maybe not. Why risk it?

Some states have more developed case law in regard to certain areas. For example, New York and New Jersey happen to have very well developed laws regarding the leasing of equipment. This is helpful if you're in a dispute involving equipment leasing. Similarly, some states will have a track record of being more favorable to certain types of clients or transactions. All of this information will help you determine whether or not you'll be successful in bringing suit.

Include a Choice of Law provision to specify exactly what state's rules will apply in the event of a dispute. Here's a simple option:

Choice of Law. This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of Texas, without regard to the conflict of laws principles thereof.

Now don't just go picking a random state and putting it in your contract. To be enforceable, there must be some relationship between the state you choose and the transaction. In this example you would be safe to go with either Texas or Maine.

Now let's talk Jurisdiction.

Jurisdiction is very similar to the Choice of Law provision but instead of controlling which state's laws apply, it controls which state's courts apply. So if a suit is brought in regard to this contract, the Jurisdiction provision will tell us where the suit can be brought.

In the example above, you would probably opt for Texas in your contract language.

Here's why this matters: If you bring suit in another state you have to travel to that state and hire an attorney there to bring suit. It would be more convenient (and far less expensive) to bring the suit in Texas where your business (and you!) is located.

Here's a simple Jurisdiction provision:

Jurisdiction. Parties agree that personal jurisdiction shall exist in the State of Texas and that the State of Texas shall have subject-matter jurisdiction over any issues arising from interpretation or enforcement of this Agreement. Any lawsuits arising out of this Agreement shall be brought in Harris County, Texas.

As with any clause included in a contract, the goal is to remove as much guess work as possible. These provisions make it clear where exactly any disputes will be brought and what laws will apply. Be sure to throw this language in your contract just to make sure you're covering all your bases.