Parties to a contract have the opportunity to select which substantive law they wish to apply to their contract. Contracting parties can also elect the forum in which they bring disputes arising under the contract. Implementing these terms into contracts at the time of drafting reduces uncertainty regarding how a dispute may be resolved and which procedural tools may impact the outcome, such as a statute of limitations.
Choice of law rules are a subset of state law that deal with questions of which substantive law to apply. What is substantive law? Substantive law is state law that governs substantive rights and obligations. For example, New York's Uniform Commercial Code is state law that governs contracts involving the sale of goods. Interestingly, parties typically include language in choice of law clauses that exclude the applicability of conflict of laws rules to the extent the rules require application of the laws of another jurisdiction, other than the one selected. New York has a special statute that encourages parties to select the law of the state by providing clear requirements even if the parties or transaction have no connection to the state.
When parties negotiate choice of law clauses, they should consider the impact of selecting the law of a particular state, which is why enlisting the skilled help of a contract attorney is beneficial. Factors such as the legal environment of the state, the predictability of the state's substantive law, and even instances in which parties cannot freely choose the governing law, such as in specific corporate law situations, should weigh heavily on these decisions.
A choice of forum clause, on the other hand, allows contract parties to choose the state and/or federal courts that will have personal jurisdiction over the parties to adjudicate disputes. There are two broad categories of forum selection clauses: mandatory forum selection clause and permissive forum selection clause. Mandatory forum selection clauses require the parties to bring disputes exclusively to the selected forums. Mandatory forum selection clauses can be fixed, which means the forum is specifically stated and not subject to change, or floating, which means the forum is selected based on future events. As with choice of law decisions, when deciding on the forum, parties should consider factors such as subject matter jurisdiction, legal environment of the forum, desire to litigate in a party's home state, and where parties are qualified to do business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
