What a Choice of Law Provision Does
A choice of law clause in a contract specifies which state’s laws will govern the agreement. In a deal between a company in California and one in New York, the parties can agree upfront whether California law or New York law applies. Without this clause, a court has to figure it out—and the answer may not favor you.
Why It Changes Outcomes
Different states have different rules on the same legal issues. The law governing your contract can directly affect how disputes are resolved, what damages are available, and which party’s obligations are enforceable. Courts will generally honor the choice of law designation the parties agreed to, with limited exceptions.
Jurisdiction and Venue: Where You’ll Fight
Related to choice of law is the jurisdiction and venue provision—which court will hear any dispute. Without one, the parties can potentially sue wherever either party is located or wherever contract-related activity occurred. That could mean litigating in a distant, inconvenient state.
A jurisdiction and venue clause designates an exclusive court for disputes. If there’s any chance your contract could lead to litigation, choose a location convenient for your business.
Two Provisions, One Strategy
Choice of law controls which rules apply. Jurisdiction and venue controls where disputes are heard. Together, they let you shape the legal landscape before a problem ever arises—rather than scrambling to react after one does.
Video Transcript
Types of Goods in Business Transactions
As we talk about contracts and the common contracts you have, the next big area is products you buy, sometimes called goods. You might buy products like computer equipment, but it also might be inventory that you buy and then sell. Or maybe it is parts that you assemble together, and then you sell those. Maybe it is various materials and parts, and you manufacture something and sell it. Whatever products or goods you buy, there are important provisions in there. Not a lot of the provisions we have already talked about, but now we are going to cover some other important ones.
What the Provision Means
Let’s talk about choice of law. Choice of law is the type of provision or contract term which basically says which state’s law is going to apply, New York or California.
When Courts Might Not Honor It
There are a few times when a state will not honor the choice of law designation in a contract if a judge is reviewing a contract, but for the most part, if parties agree to follow certain states’s laws in a choice of law provision, usually courts will honor that.
Where Cases May Be Heard
Now you might say, What court would this case be litigated in? Well, we talked about arbitration. It wouldn’t go to any court if it went to arbitration, and then after the whole arbitration process is over, it could be the arbitrator’s decision could be filed in a court. But if we don’t have an arbitration clause, or if we are talking about where the arbitration decision can get filed, we should talk about what court would that be.
Factors That Determine Location
Now, in general, parties can sue where they are located, where the other party is located, and where any of the contract, harms, or activities occurred. So it is pretty broad. In a contract involving a company in California, a company in New York, and business that occurred all along in multiple other states, you could sue in California, New York, and probably those other states.
Making It Convenient for Your Business
But if the contract has a jurisdiction and venue provision, usually it says, “That is the exclusive court where the parties can sue.” So you might consider having that be somewhere convenient for you, especially if there is a chance that this case or this contract might end up being part of a lawsuit.
So that is the choice of law provision, which state’s law do you want to apply, and the jurisdiction and venue provision, which is in which court do you want any disputes involving this contract to be handled.
Free Tools and Education
Now, if you would like to know more about how to avoid trouble like this, I have a free resource at AaronHall.com/free. I provide information for business owners of small to mid sized companies on how to avoid common legal problems. That includes a PDF. It includes videos talking about important issues.
I am Aaron Hall. I am an attorney for business owners and entrepreneurial companies. If you would like, subscribe to this channel so you can get more educational content like this.
