Why You Need to Understand Choice of Law for Your Business Contracts

Contracts govern a lot of different relationships between business entities. In fact, the whole purpose of creating a contract is to set out the rules of the agreement. However, many enter contracts without truly understanding all the legal consequences. One area that often remains misunderstood concerns the governing law. Yet, choice of law provisions can have a profound effect on the way your contract plays out. See what you need to know about these provisions before signing on the dotted line.

Determining What Law Governs

A business owner might make the mistake of believing that the law of his or her own state controls a contract. This is a reasonable assumption, but a dangerous one as well. Most contracts usually contain a choice of law provision in the fine print. This section is an agreement that determines the applicable state law during a contract dispute. Thus, any time you are dealing with an entity that has a principal place of business out of state, you need to review the choice of law provision.

As any business law attorney will tell you, the law can change drastically from jurisdiction to jurisdiction. In fact, the law can be a determining factor in whether you are successful in contract litigation. Thus, choice of law is a very important consideration in contract preparation.

The Types of Law That May Apply

In any given jurisdiction, one of two types of law may apply. The first is the Uniform Commercial Code. Many jurisdictions have adopted this code in part or whole. It applies to contracts that involve the sale of goods.

States also have their own version of common law. This consists of the legal principles that have come into being after years of litigation. Contracts for services will be controlled by a state's common law.

In a business law case, you must be sure to distinguish between choice of law and venue. These are two concepts that are easily confused by the average person. Venue refers to the actual geographical location where the case will take place. In contrast, choice of law concerns the law that will apply regardless of the court's location. Therefore, you can't assume that a contract litigation matter in a Utah court will interpret the agreement pursuant to Utah law. Again, this will depend on the choice of law provision.

Other Considerations

By now it should be clear what choice of law provisions do. Nonetheless, what happens if the contract is silent on the issue? In such a case, the Utah courts can apply Section 188 of the Reinstatement of Conflict. This test tries to determine which state has the "most significant relationship" with the legal issue at hand. As the court in Salt Lake Tribune v. Management Planning, 390 F.3d 684 (10th Cir. 2004) explains, there are five considerations relevant to this determination:

1. The location the contract took place.
2. Where the contract was negotiated.
3. The site for performance of the contract.
4. The physical location of the subject matter.
5. The place of incorporation and business of each party.

In the end, these factors help the court determine the fairest way to interpret the law.

Final Thoughts

As a business owner, you should never jump into a situation you don't fully understand. Overlooking a choice of law provision could significantly affect your business obligations. This is why it is important to consult a business law attorney during contract preparation.

For more assistance with business law issues in Utah, contact TR Spencer Law Office.