The Risk of Glossing Over Contract 'Boilerplate'

As the old adage goes, the devil is in the details.

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Distributors do business across the country, which means entering into contracts with customers, suppliers and other parties in many different states. This also means that those contracts, and any disputes that arise relating to them, may be governed by the laws of a state other than the distributor’s home state.

Most commercial contracts contain detailed provisions that address such issues as which state’s laws govern the document’s interpretation and apply in the event of a dispute, which court system (federal, state or an alternative dispute resolution forum like arbitration) will hear any such disputes, and how the costs involved in resolving a conflict are allocated. These provisions, along with many other consequential clauses, are often found in the “boilerplate” of an agreement, which, as the old adage goes, is where the devil lies — in the details.

Distributors cannot ignore and should not gloss over the so-called boilerplate in their commercial contracts; the consequences can be game-changing, especially when disputes involving commercial dealings and/or agreements devolve into litigation.

Choice of Law Provisions

A “choice of law” clause or provision in a contract essentially provides that the contract or business documents and any disputes arising thereunder will be governed, interpreted and enforced pursuant to the laws of a specified state. Usually, but not always, the chosen state will be where one of the parties has its principal place of business.

Depending on the nature of the issue and the governing law chosen, one party may find themselves at a significant disadvantage in the event of litigation while the other reaps the benefits of laws more favorable to their claims or defenses.

As an example, let’s say that a distributor based in Ohio that does business in several states hires a sales representative in California. The employment agreement contains a non-competition provision that designates Ohio law as governing the terms of the contract. While Ohio courts, at least for now, will enforce reasonable non-competes, California law has largely prohibited the use of such provisions. This means that a non-compete that would likely be held valid under Ohio law would be equally likely to be declared void and unenforceable in the Golden State. Accordingly, by designating Ohio law as controlling the agreement, the distributor/employer has significantly tilted the scales in its favor should it need to enforce the clause.

On the other hand, a statute may alter or override a choice of law provision. For example, several states have sales representative statutes that can change the outcome of a sales representative dispute. If applicable to a distributor’s sales representative (e.g., an inside sales representative that acts as a contractor), the law selected in a choice of law provision may be a nullity by virtue of a state’s sales representative act.

Choice of Jurisdiction and Venue

While a choice of law clause determines how a lawsuit will be resolved, choice of jurisdiction and venue clauses control where it will be resolved. The concepts of jurisdiction and venue, while closely related, are distinct. Jurisdiction refers to the power and authority of a court to hear and adjudicate a lawsuit. By agreeing that a designated state’s courts have jurisdiction, the parties are submitting to the exclusive power of those courts to resolve their lawsuit, even if it is not procedurally proper under jurisdictional laws in the selected forcum and/or could have properly been adjudicated elsewhere.

Venue is more a matter of geography than authority. A choice of venue clause identifies the specific location where any litigation must occur. For example, a choice of jurisdiction provision can provide that any litigation must proceed in the courts of the state of Ohio, while the same agreement may include a choice of venue clause that designates Cuyahoga County, Ohio, as the specific location where the case will be heard. Often, boilerplate will identify arbitration, mediation or other forms of alternative dispute resolution as the preferred “venue,” which can be highly undesirable depending on the circumstances.

In situations where one party’s home base is far away from the agreed-upon venue, that means the other party will likely get a home-field advantage. This includes using their own lawyers in their own backyard in front of judges they may be familiar with and unwritten court rules and practices that they understand. Those lawyers will not have to get up to speed on their client or matter, and won’t have to bill for their time traveling to a far-flung courthouse. Additionally, juries may be more inclined to support a local business in the dispute, whether consciously or otherwise.

Conversely, a party that agrees to a distant and unfamiliar venue will need to retain local counsel and may need to have employees or officers travel to that venue for trial or other reasons. Given those increased costs in attorney’s fees, expenses and lost productivity, the out-of-town party may be more inclined or compelled to settle the dispute on less favorable terms than they otherwise would.

Prevailing Party Attorney’s Fees and Cost-Shifting Provisions

Similar to choice of venue, jurisdiction and law provisions, “boilerplate” provisions governing which party will pay for attorney’s fees and other costs incurred in a dispute can often change the litigation and settlement landscape. Typically, absent a contract containing a provision that addresses the allocation of fees and expenses, the “American” rule is that each party pays its own attorney’s fees and costs regardless of which party prevails. Some provisions, however, provide that the prevailing party in a dispute pays the legal fees of the other party. Other times, the fee-shifting provision is in favor of one party or the other.

A recent case I handled for a distributor illustrates how choice of law and jurisdiction/venue provisions and fee-shifting clauses can have a determinative impact on the outcome of a dispute. The distributor had loaned money to a venture, expecting a quick, profitable return. Unfortunately, the note designated a foreign state’s law as governing the agreement. That state’s laws had no exception for usury, eviscerating any claim for the recovery of the loaned amounts. To make matters worse, the choice of venue provision in the note would have required the distributor to file a collection lawsuit in a far-away state court, favorable to its hometown party, while the distributor would also be responsible for paying the other party’s attorney’s fees if it lost its case.

Given the potential significance that boilerplate contract provisions can have on a dispute, distributors should not treat these clauses as surplusage and ensure that experienced counsel reviews and evaluates their implications.

If you would like to discuss such issues, please contact Fred at 312-840-7004 or [email protected]

The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any subject matter. The author expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this article.

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