Key Takeaways

  • Contract jurisdiction refers to the authority of a court to hear a dispute and should not be confused with governing law.
  • The choice of law determines which state’s legal rules will apply to a contract dispute, regardless of where the lawsuit is filed.
  • Forum selection clauses and jurisdiction clauses help minimize uncertainty in legal disputes.
  • Without clear contract jurisdiction provisions, parties may face unexpected litigation venues and unfamiliar legal systems.
  • These clauses are critical for NDAs, commercial agreements, and contracts involving out-of-state parties.

Understanding contract law jurisdiction is important for many reasons, especially if you are contracting with someone in a state far away from where you are located. Both parties to a contract have a say in where the jurisdiction is, so it is important that you pay careful attention to this section of your contract.

Background on Choice of Law Provisions in Contracts and Related Contract Provisions

It is likely you have noticed that there is language in contracts that talks about possible disputes and how they are handled. A contract typically details:

· Where the case will be filed if a dispute goes that far

· It will also mention the law that is applied

· It also discusses the fact that the court will have the jurisdiction to hear the case

The choice of forum, or where the case will be filed, is very important. Should you end up having to go to court a long distance from your current location, those costs will add up quickly. This could result in you settling sooner than you would have otherwise just to get the process over with.

The law that is applied, or the choice of law, is also important since the laws will vary in different states. The law a court chooses to apply is not always the same law as the forum state.

The choice of jurisdiction has to do with whether or not a certain court actually has the authority to hear your case. To find out if the court has jurisdiction over your case, the party has to be physically in the state. If the party is out of state, there have to be minimum contacts with that state.

The depth and range of different activities completed in a state will determine if the party has minimum contacts. For example, if your company is in Montana and has a facility in California with employees who live in California, and you also service the residents of California, you have minimum contacts.

Going into a contract with a party that is out of state does not always mean that you will be subjected to their jurisdiction. However, you are likely to deal with outside jurisdiction if you had any benefits from the contract, if your actions were directed at the other party, or if you received notice that you are being served with a court summons.

The choice of law provision within a contract will allow all parties to agree on which state laws will be used for the agreement, even if they live in a different state.

Many companies choose to use Delaware law because the state law will typically favor corporations and provide predictability with regard to disputes.

If a contract states these three provisions, the point is to provide additional certainty regarding the issues. This results in parties waiving their rights in regard to where to file a lawsuit, and instead sets it in a certain forum agreed to in the contract.

Why Forum and Jurisdiction Clauses Matter

When disputes arise and there is no express clause specifying contract jurisdiction, courts must determine jurisdiction based on where the contract was formed or performed, which can lead to inconsistent outcomes. Including a jurisdiction clause reduces litigation costs and avoids surprises by ensuring all parties know where a legal dispute must be resolved.

Forum selection clauses are especially critical in commercial agreements because they promote efficiency, predictability, and fairness. For example, a business headquartered in Texas may wish to avoid being dragged into litigation in New York due to a contract with a customer located there. Including a clear clause that specifies “exclusive jurisdiction in Texas” resolves this risk upfront​.

Governing Law Versus Jurisdiction

The jurisdiction is where a dispute will be dealt with. Governing law will indicate which state’s laws will be utilized to determine the outcome. A contract can file a lawsuit in one state but be decided under the law of a state across the country.

Choosing which state is not generally a difficult negotiation to make. However, the selection of the state can be more complex. These two provisions are often lumped together because they are similar in nature.

Types of Jurisdiction Clauses in Contracts

Contracts can include different types of jurisdiction clauses, each serving a distinct function:

  • Exclusive jurisdiction clause: Specifies that only a particular court or jurisdiction can hear any dispute. This is common in commercial contracts to eliminate ambiguity.
  • Non-exclusive jurisdiction clause: Permits disputes to be resolved in a specified jurisdiction but doesn’t prohibit them from being filed elsewhere.
  • Asymmetrical jurisdiction clause: Often found in finance agreements, this allows one party (typically the lender) to sue in any court, while the other party is restricted to one jurisdiction​.

Failing to include a jurisdiction clause may lead to costly jurisdictional arguments that delay resolution and inflate legal costs.

Choice of Law and Jurisdiction in NDAs

Choosing a jurisdiction for a non-disclosure agreement, also known as an NDA, is crucially important. There are two important components to this choice, including jurisdiction and the choice of law.

The jurisdiction will refer to which court will hear the lawsuit, whether it be in a different county or state altogether.

The choice of law chooses which state’s law will be used to determine the outcome of the non-disclosure agreement. Just like in the other examples, both of these items are important to get right when you are forming a contract so that all parties get fair treatment by the law and the location.

Interaction Between Jurisdiction and Governing Law

Although commonly grouped together, jurisdiction and governing law serve different functions and may even point to different states. A contract may require that any dispute be filed in Florida courts (jurisdiction), but that it be resolved using New York law (governing law).

This situation often arises in multistate or international contracts. While this hybrid approach allows for flexibility, it also introduces potential challenges, such as unfamiliar courts applying unfamiliar laws, increasing the risk of unpredictable outcomes​.

Frequently Asked Questions

  • What does contract jurisdiction mean?
    Contract jurisdiction refers to the court or location that has the authority to hear and decide a legal dispute arising from the contract.
  • Can the governing law be different from the jurisdiction?
    Yes. A contract may select one state’s law to govern the agreement while designating a different state’s court system for resolving disputes.
  • What happens if a contract lacks a jurisdiction clause?
    Without a jurisdiction clause, courts may rely on factors like where the contract was signed, where performance occurred, or where parties are located, leading to uncertainty.
  • Why do many companies choose Delaware law in contracts?
    Delaware law is often favored for its predictability, business-friendly statutes, and extensive case law, particularly in corporate matters.
  • What is the difference between exclusive and non-exclusive jurisdiction clauses?
    An exclusive jurisdiction clause restricts disputes to a single court, while a non-exclusive clause allows disputes to be heard in multiple courts.

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