Choice of Law

by Kurt Schulzke on January 8, 2008

Frequently overlooked elements of commercial contract negotiations are the choice of law and choice of forum clauses. These clauses can have a dramatic impact on the timing, amount, and collectibility of the revenue or expense associated with a transaction. Most contracts written nowadays contain such clauses, but many non-lawyers downplay their importance because they are “legal technicalities” that they don’t fully understand.

Choosing to minimize choice of law and forum is always a risky move, but especially in international commerce. In a 1998 case, Mobil Sales and Supply Corporation v. Republic of Lithuania, Mobil asked the U.S. District Court for the Southern District of New York to serve as the litigation forum for its effort to recover millions of dollars in revenue that Mobil claimed Lithuania had stolen. The contract between Mobil and Lithuania contained this choice of law and forum selection clause:

All the disputes, arising from this agreement, are settled by the mutual consent of both parties. Otherwise the disputes are settled by the Economic Court of the Lithuanian Republic according to the valid laws of the Lithuanian Republic.

In it’s opinion ruling that Mobil must take its complaint to the courts of Lithuania for decision under Lithuanian law, the court noted:

It is well settled that an exclusive forum selection clause is “presumptively valid in international transactions,” and generally is enforced for a variety of economic and comity rationales. The presumption of validity may be overcome only by “a clear showing that the forum selection clause is unenforceable under the circumstances”; and unenforceability requires a demonstration that: (a) the adoption of the clause in the contract “was the result of fraud or overreaching”; (b) the party opposing the clause “will be effectively deprived of a ‘day in court’ due to the grave inconvenience or unfairness of the selected forum”; (c) the “fundamental unfairness of the chosen law may deprive the plaintiff of a remedy”; or (d) the clause “contravene[s] a strong public policy of the forum state.”

The moral of the story: If you sign a contract containing a choice of forum or choice of law clause, you should expect that U.S. courts will generally require you to follow that choice even if it takes you a long way from your headquarters.

Often, negotiators will assume that their own home-country law is superior to the law of their counterparty’s country. As the cruise-ship industry knows only too well, this is often an incorrect assumption. The laws of many countries outside the U.S. are more generous toward businesses than U.S. law. Before signing the contract, it is a good idea to consider carefully the impact of choice of law and choice of forum. Consultation with an expert may be a good investment.