What Does ‘Choice of Law’ Mean, and How Can It Affect Your Business Rights?

After three long years of law school, I decided to venture into a freelance writing career instead. Different story for a different time, but after a half decade in the writing game, I realized I made the right decision. I can support my family without having to stand in front of a judge or jury (with the exception of my 8- and 2-year-olds). Less stress and more time with the family is more than I could have asked for.

Now and again I like to revisit the field of law, such as a recent article I wrote about litigation. It is fun to be able to share the knowledge that most people will not be able to get without paying an attorney a few hundred dollars an hour to explain.

One topic that I loved in law school was “choice of law.” Along with forum shopping, it was one of my favorites as it can be the difference between winning and losing a disagreement with someone you contracted with. Law can be like a chess game and understanding choice of law can help you win the game before it even starts.

So What Exactly Is “Choice of Law”?

Choice of law is a doctrine within “conflict of laws” which basically states that a specific law will be used to govern an agreement. According to Cornell University, choice of law is the “difference between the laws of two or more jurisdictions with some connection to a case, such that the outcome depends on which jurisdiction’s law will be used to resolve each issue in dispute.”

Regardless of where you live, where the agreement was signed, or what type of business you run, the “choice of law” you agree to will be used to govern any dispute.

Kenneth Sharperson of Weber Gallagher offers the simplest definition I have seen yet. “Choice of Law is simply the state whose laws will govern an agreement in the event of a dispute.”

When it comes to agreements, it is not your personal feelings that decide a breach. In fact, do not look to any litigation history such as that of a friend or another similar business. All agreements are different and likely have a different choice of law provision. This is the reason you may see similar cases decided in different manners when the facts of the case are nearly identical.

How Can It Affect Your Business Agreements?

Just because you sign an agreement, do not assume that the law where you live will govern the contract. In fact, there are many different laws within your own jurisdiction that could be applied. Are you dealing with federal, state, or local laws? Did you agree to hear the matter within the county you do business, or the county (and maybe even the state) of the other party?

According to Steven G. Bazil of The Bazil Group, choice of law can govern many different provisions of a contract. “A choice of law provision in a contract can have serious implications for your business.” He adds that the “statute of limitations can vary widely. Remedies available for a breach of contract may vary. Interest rates allowed to be charged can differ significantly. With a choice of law provision in a contract, you should carefully research that state’s laws and how that might impact the transaction you are contemplating and your rights and remedies under that state’s laws.”

You should always make sure you understand the choice of law so that you are prepared in the event of a breach. After all, similar laws in different jurisdictions can mean a world of difference.

“When looking over agreements, make sure you know what law will be applied in the event of a breach,” says Marc Lamber from Lamber Goodnow. “You need to understand that if there is a disagreement, the law that applies may be what decides the dispute. If you do not know this in advance, you could be at a disadvantage when entering into the agreement.”

How much of a disadvantage? Well, let’s look at an example.

Let’s assume you are under agreement with a supplier who will pay you damages in the event they do not provide you with enough supplies to make your product. An example would be a farmer who enters into an agreement with Heinz to provide them with a certain amount of tomatoes each year to make ketchup.

Now, let’s say that supplier fails to provide you with the agreed upon product and you lose $100,000 in sales. You may think that you will be entitled to the full amount of damages, but if the law you choose has a cap on damages (say, $25,000), then you will be out quite a bit of money.

The above is only a small example of what could happen to you in the event of a contract breach.

What You Can Do

To protect yourself, I recommend becoming familiar with the choice of law within any agreement you enter into. I also would advise you to have an attorney review all agreements you enter into as this can save you a ton of money in the event of a breach.

Protect yourself in the beginning and hopefully you will not have any difficult battles further down the road.

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The post What Does ‘Choice of Law’ Mean, and How Can It Affect Your Business Rights? appeared first on AllBusiness.com.