Contract Jurisdiction: Where Will a Dispute Be Heard?

Years ago, many companies dealt with vendors, suppliers, customers and others that were located in the same geographic area. Today, it's not unusual to engage in transactions with entities in multiple states and even numerous countries. The Internet has made the business world a small place.

While doing business outside your area may open up new lucrative markets, it can also make your company vulnerable to a potential trap. When signing contracts, pay attention to clauses that lay out the "choice of law" and "venue." These clauses state what law applies and the location where disputes related to the contract will be resolved.

You may think that if you're sued or if you file suit over a contract dispute, it will take place in a courthouse up the street. But a decision is not legally valid unless the court has both personal jurisdiction over the parties and subject matter jurisdiction, which means the court has the power to hear the type of case.

If a contract does not include a choice of law provision or a venue provision, courts will decide where the case will be heard based on personal jurisdiction and subject matter jurisdiction. Needless to say, being forced to go to another state or country for litigation or arbitration can be inconvenient and costly.

For example, consider the case of a high-net worth individual from Colorado who invested in a South African mining company owned by a British company. A dispute ensued over how the mining company used the funds and the Colorado investor sued. He was forced to litigate in New York courts where he held business meetings with representatives from the British company. The case lasted a year and a half before a settlement was reached. In addition to his legal costs, the investor had to make time-consuming trips and pay travel expenses.

As you can see, determining jurisdiction can be complicated when there are multiple locations involved in one contract. Business transacted on Internet Websites is even more complex and the law is continually evolving in this area. Courts must examine websites, e-mail messages and other technology issues.

Here are some of the factors that courts examine in determining personal jurisdiction:

Does the defendant do business in the state or location?
Are there offices, employees, retailers or distributors in the state?
Does the defendant reside or own property in the state? Maintain a bank account?
Has the defendant engaged in a significant amount of activity or have "minimum contacts" in the state?
Has the defendant engaged in advertising to target residents of the state?

Businesses should be aware it might be possible to successfully challenge the jurisdiction even if there is a contract. For example, a manufacturer located in Arizona took a $100,000 loan from a bank headquartered in New Jersey in order to buy equipment. The manufacturer defaulted on the loan. The New Jersey bank sued but the contract stated that disputes would be heard in New York, even though neither of the parties were located there. The reason the jurisdiction was listed as New York is because the bank's attorney was located there. The manufacturer's attorney made a motion to dismiss based on jurisdiction grounds and the bank settled so a court decision could be avoided.

Bottom line: Be aware of the "choice of law" clauses and "venue" provisions in all contracts you sign. Do they involve locations where you don't want to be pulled into court? Generally, you want the law in your jurisdiction to apply. Consult with your attorney to ensure that contracts you sign provide adequate protection in your situation.