This Agreement shall be governed by and construed in accordance with the law of..
October 26, 2009 6:56 PM   Subscribe

How is a contract's governing state determined? Is it where it's drafted? Or is it something else? "This Agreement shall be governed by and construed in accordance with the law of.." I am drafting a contract in PA but the recipient is in another state. Should the governing state by mine or the recipient.
posted by xdeliriumx to Law & Government (10 answers total) 1 user marked this as a favorite
In my experience, the party writing the contract usually puts in their own state unless the other party objects.
posted by Jacqueline at 7:03 PM on October 26, 2009

When I worked as a paralegal, the lawyer for whom I worked told me to draft agreements stating that the agreement operated under the laws of the state in which our company was incorporated. My understanding was that if the other party had a problem with that, that would be a point of negotiation between my boss (the lawyer) and the other party's counsel.
posted by dfriedman at 7:03 PM on October 26, 2009

If you're drafting it, you can put in wherever you'd like; I'd assume that would be wherever you are or are incorporated as you'd be most familiar with the laws there and you wouldn't have to travel to litigate.
posted by cestmoi15 at 7:06 PM on October 26, 2009

If there isn't language like that, how is the governing state determined?
posted by hattifattener at 7:15 PM on October 26, 2009

If you think you might ever have a legal dispute regarding this contract then you need to have it written by a commercial lawyer. That being said, the contract reflects the agreement between you and the other party. You can put in any clause you want about the law of the contract and the state where disputes would be litigated - they are not necessarily the same! It is notorious that some legal jurisdictions are more or less friendly to plaintiffs than others, and lawyers might spend a great deal of time ensuring that the case is heard in a "friendly" jurisdiction. But that's not your problem.

What you need to know is: (a) you ought to have the contract drafted by a lawyer; (b) my non-legal opinion is that the lawyer will likely choose your state's law as the law of the contract; (c) the lawyer will likely choose your home state's courts as the predetermined venue for any disputes; and (d) the other party's lawyers may disagree, because they would want their home-ground advantage in any dispute.
posted by Joe in Australia at 7:19 PM on October 26, 2009

hattifattener: Good question! The courts will try to figure out the governing law of the contract from the intent of the parties - is there any implication from the text of the contract? where was the contract drafted? where was it signed? where do the parties live? If the contract doesn't state the choice of forum then the party bringing the case chooses the forum (typically the one local to the plaintiff) and the defendant may try to argue that it is an "inconvenient" forum and that the case ought to be heard somewhere else.
posted by Joe in Australia at 7:23 PM on October 26, 2009

A lot of the agreements I dealt with on a large aerospace company did use the state the corp was incorporated in, which was Delaware. Delaware laws are pretty nice for big corps, so few of the companies had a problem with it.

I do recall the legal department conversations where they had to wrangle out these terms with international companies. They had to add federal terms, and terminology for the other countries, and also Export terminology ad infinitum.

Usually it's the state you were incorporated in legally, unless the other party says no, then you amend the language as needed to make it agreeable.

You might find out if the laws in the other state are better for this sort of thing, also if there are laws SPECIFIC to the agreement which could affect your business dealings. Their state may be more lenient regarding some things that your state is stinky about, and that language could also help YOU!

Usually it doesn't come up, if we thought there would be too much liability or problems, we either would NOT do the agreement at all, or change it from our boilerplate form to a huge unwieldy monster that EVERYONE hated EQUALLY!
posted by Jinx of the 2nd Law at 8:46 PM on October 26, 2009

an academic quibble with one of the comments above: you might not be able to literally chose "any state you like." when you see choice of law disputes in the courts, there's generally a willingness to abide by the choice in the contract, but you see some restrictive language in the opinions -- "as long as there's some meaningful connection to the state" -- that sort of thing.

I can't recall any situation where a court actually ignored a choice of law clause for having insufficient connection with the parties or the deal, but it's not something I'd want to take a chance with.
posted by lex mercatoria at 11:31 PM on October 26, 2009

Generally, you're bound by the terms of the contract, but the court that the contract picks to decide disputes still needs to have jurisdiction over the matter, which requires some sort of minimum contacts with the state. Generally speaking, the language of the contract should be specific about what laws govern and what court should be the forum for disputes, and in making that choice you can pick between the state of either company's incorporation, or anywhere that the business of the contract will be conducted.
posted by craven_morhead at 9:08 AM on October 27, 2009

I am not your lawyer.
I am not your lawyer.
I am not your lawyer.

Generally speaking, every state will have its own set of laws governing "choice of law" that applies to interpretations of the contract. Absent a provision in the contract itself, choice of law may be determine by such things as where the contract was signed, where it was meant to be performed, where the parties are located, or a host of other criteria that vary from state to state.

That's why most contracts you see in the commercial context have "choice of law" provisions in them. Most states will honor such provisions in most circumstances, but some will require that there be a rational basis for the selection. (Such as some of the criteria listed above.) Most such provisions pick the state in which one of the parties does business, and barring some kind of flaw that makes the contract itself void, that's usually going to be sufficient. PA law may differ; check local authorities.

As previous posters have noted, you'll also want to consider the forum in which any disputes get resolved. Typically, most states will honor such "choice of venue" clauses as well, especially if they have some rational basis. One lawyer I know very well likes to pick the "state and federal courts located in the County of ____, State of ______" for resolution of any disputes relating to the contract. The county and state are almost always going to be the home base of one of the parties.

For both provisions, there is a substantial advantage to picking your own home base. First, you will generally have a better understanding of the law of your own state. Second, if you need to litigate, you get to make the other party come to you, rather than vice-versa. This makes it less (but still very) expensive for you and more expensive for the other side.

That said, if you're preparing a contract worth litigating over, it's worth having a lawyer review.
posted by mikewas at 9:43 AM on October 27, 2009

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