Q&A #20 – Which state’s laws should govern our contracts?
Question: My organization is incorporated in Virginia and has its headquarters in Maryland. We are hiring a consultant on an independent contractor basis who will do some work for our organization in New York. We are in the process of drafting an agreement for this work. Our usual contract template has a section for “governing law,” but we are confused about what state to put in. Should it be the state where we are incorporated, where our headquarters is located, where the work will be done, or something else?
Answer: The short answer is that it is generally up to the parties to select the state whose laws will govern interpretation of the contract, and there is no one “correct” state that you have to select. Only in rare instances will a court override the state of governing law specified in a contract. Which state is the best choice is a more complicated question that depends on the circumstances.
It is important to keep in mind that there are two distinct issues potentially embedded in your question that people often conflate: (1) the state whose laws will govern the interpretation of the contract (this is the “governing law”); and (2) the courts in which disputes over the contract will be litigated (this is called the “venue”). These issues are not one and the same, and ideally your contracts will address both.
With regard to governing law, there are a few different reasons an organization would want to specify a particular state:
For clarity, to cut down on the expense of resolving the ambiguity later (in the absence of a provision specifying the governing law, a court would do a complicated legal analysis under “conflicts of law” principles to determine which state's laws should apply);
For convenience, because the organization is generally more familiar with the law of a particular state (e.g., its home state); and/or
For strategy, because a particular state's law is more favorable on the subject of the contract than another state.
There are sometimes significant variations in state law with regard to the particular subject areas addressed in a contract (one notable example is how different states treat “non-compete” provisions). However, the differences in state law are often minimal, and it is sometimes not cost-efficient to have an attorney do the research on which state will provide the optimal treatment of the contract. Thus, many organizations simply opt for their state of incorporation or the state where their headquarters is located. But please consult an attorney before making this decision.
With regard to venue, there is a smaller set of considerations. This is mainly about where it will be most convenient to litigate any disputes regarding the contract, should one arise. Your organization probably wants to avoid getting dragged halfway across the country for a contract dispute, if possible.
Planning Tip – The laws of most states provide that an organization may not initiate a lawsuit in the courts of that state unless the organization is registered to do business there (i.e., registered as a “domestic corporation” or “foreign corporation”). Before agreeing to a specific venue, make sure that your organization is registered in the state or is ready and willing to do so. Otherwise, you may be prevented from enforcing your contract rights.
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