A “choice of law clause” is precisely what the name suggests. When your company signs a contract that has one of these, you’re agreeing that a particular state’s law will govern the contract and any future dispute.
Lawyers carefully consider potential outcomes of hypothetical disputes when drafting contracts. This is especially true when it comes to choice of law provisions. Predicting outcomes is easier when you know which law will be applied.
A common choice of law clause, prepared by corporate lawyers for their big business clients, calls for Delaware law. Delaware has a well-developed and predictable body of corporate law naturally favored by large corporations and their lawyers.
But what if you are a small software developer in California? You’d might expect California to have a more robust system of laws in the area of IT. In that case you’re wise to insist on a clause stating the agreement shall be governed by the laws of California.
Keep in mind that like forum selection clauses, (refer to Contract Negotiation Tip 002), choice of law issues can be complex. Expensive legal battles can be waged over the enforceability of a choice of law clause before the underlying matter is ever heard by a court on its merits. It’s important that your choice of law be upheld. As a very general guideline, to be enforceable, there must be an adequate connection between the parties or transaction and the state law chosen.
Also, keep in mind that it’s generally better to have the choice of law, and forum, of the same state. The outcome will be easier to predict when the matter is being decided by a court applying the law of its own state.
Additionally, be aware that contracts containing arbitration clauses (refer to Contract Negotiation Tip 001) also generally have choice of law clauses. Parties are free to not only use these privatized tribunals but can agree to use the body of law of their own choosing. This can get rather interesting when negotiating a contract that calls for international commercial arbitration.
Conflict of law clauses, like forum selection and mandatory arbitration clauses, often go overlooked in boiler plate contracts. Regardless of whether these clauses are tucked away in the fine print, they are generally enforceable and can greatly impact the outcome of any dispute.
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