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The Most Under-Appreciated Provision in a Contract

Jun 30

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6/30/2014 11:56 AM  RssIcon

BOILERPLATE MATTERS, PART 1

 

CHOICE OF FORUM PROVISIONS:

THE MOST UNDER-APPRECIATED PIECE OF BOILERPLATE

 

You know those miscellaneous provisions at the end of most contracts that many people don’t even read?  They can really matter – a lot!

In my opinion, perhaps the most under-appreciated provision in a contract is a choice of forum provision.  This is not to be confused with a choice of law provision.  The two usually appear in the miscellaneous provisions near the end of a contract, perhaps reading something like this:

This Agreement shall be interpreted under the laws of the State of Arizona, without regard to conflict of law principles.  The parties hereby acknowledge and agree that venue and jurisdiction shall exclusively lie in the state and federal courts located in Jones County, Arizona, for any litigation arising out of or relating to this Agreement, and the parties submit to the exclusive jurisdiction of such courts.

I will confess that in most cases I wouldn’t get too wound up over the first sentence, but the second sentence is an entirely different matter in my book. 

Let’s say you have a consulting business located in Atlanta.  You have a contract with a client of yours, Deadbeatco, who is also located in Atlanta, for a project performed entirely here in Atlanta.   Deadbeatco’s headquarters is located in Middleofnowhere, Arizona and they insist on having the above language in your contract with them.  The agreed-upon fee for the project is $30,000, and you perform flawlessly.  However, they decide they would prefer not to pay you, so they fabricate a meritless claim about how the project was not properly performed and refuse to pay you.  They threaten to sue you for negligence and breach of contract.

All the first sentence provides is that in the case of any issues over proper interpretation of provisions of the contract or enforceability of the contract’s provisions, etc., everyone will have to look at what Arizona statues and caselaw might have to say on the subject. Even if the lawsuit is being conducted in a Georgia court, the idea is that everyone will have to refer to Arizona statutes and caselaw in deciding the issues.  Usually the laws of different states don’t vary that much on most basic questions, and I doubt that many lawyers have the encyclopedic knowledge of the minute differences in the laws of various states to have a good reason to object to having the law of another state govern the contract.  (There are certainly situations that are exceptions, but not generally.)  Heck, in a lot of cases courts won’t even enforce these provisions and will choose to apply their own state’s law anyway.

The second sentence is a different story.  It says that if either side sues the other in a dispute under the contract, it has to be done in a court in Jones County, Arizona.  If you want your payment, you are going to have to sue them in Middleofnowhere, Arizona, even though everything happened in Atlanta and all the people involved are in Atlanta. Even worse, you might decide that it is not worth a lawsuit in Middleofnowhere, Arizona but Deadbeatco might decide that “the best defense is a good offense” and launch a preemptive strike by suing you in a court in Middleofnowhere, Arizona for breach of contract and negligence.  Every time there is a court date in your case, you, your witnesses and maybe even your attorney(s) might have to take two planes and a three-hour rental car ride to Middleofnowhere and stay in hotels.  Even if you don’t have to have your Atlanta attorney travel to Middleofnowhere, you are going to have to try to identify a capable attorney located in Middleofnowhere and risk the unkown there.  If you don’t have an attorney fees provision in your contract, then you in all likelihood will not be able to be awarded your attorney fees and other litigation expenses even if you win.  You see how this little provision totally changes the dynamic of a dispute under the contract?

Try not to let this happen to you.  If you cannot get your own location specified as the “choice of forum”, here are a few compromises that you can propose:

1.         Specify some mutually convenient/inconvenient location as the choice of forum – in our example perhaps Chicago.

2.         Specify that “the plaintiff must travel” (must bring suit in the defendant’s jurisdiction), at least eliminating the “preemptive strike” scenario from my example.

3.         Ask to have the provision stricken entirely, and let usual legal principles decide under the circumstances what courts should have jurisdiction over a dispute and where a lawsuit can be properly brought.

I know that if you are like most people your eyes have glazed over long before you get to this little passage at the back of the contract.  But resist the urge to gloss over it, and don’t get taken for a ride by this provision!

Many thanks to my friend and litigator colleague Justin O’Dell of O’Dell & O’Neal  for looking over this to confirm that I wasn’t egregiously wrong on anything from a litigator’s perspective.

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