Tuesday, July 19, 2011

Conflict of Laws

In contracts the parties will usually agree upon the applicable law, jurisdiction and forum in the event of a dispute between the parties. There are a number of reasons why they do that and one of them is the issue of conflict of laws between parties from different locations. A simplified explanation of conflict of laws is when you are dealing with principals from different jurisdictions, the courts will follow a procedure to determine what laws should be used in the event of a dispute between the parties. If you fail to specify what laws apply in the event of disputes and what jurisdiction or forum would apply, a case could be brought in any location where the parties have presence.  For example if you were headquartered in New York and a Supplier was headquartered in California, if you had a legal presence in California such as local sales office, the Supplier could serve you at that sales office in California for the suit to be heard in California.  If you failed to specify the applicable law, the law that would be applied would usually be the one that had the greatest connection with the transaction.

Unlike other potential legal actions, contracting parties are free to establish the applicable law, jurisdiction and forum in the event of a dispute. For example in the United States you could have the State of Delaware as the applicable law, the jurisdiction could be the State of New York, and the forum could be the U.S. District Court in the Southern District of New York that is located in Manhattan.

Under conflict of laws principles, even though the lawsuit is to be held in a different location than the country or location where the applicable law was agreed, the courts are required to interpret the laws of that location specified in making their decisions.  Frequently the applicable law specified might be the one that has the most case law on the subject matter or the one most favorable to business.

The selection of jurisdiction may be trying to get home field advantage or neutrality.
The selection of forum may be driven by the court’s expertise, their standard of decision making, their historical fairness, or an attempt to have cases heard more promptly because of the Court’s efficiency or the Court’s backlog of cases.  

Courts try to honor the intent of the parties as is stated in the agreement.  So in the example where the State of Delaware is the applicable law, the Jurisdiction is the State of New York, and the forum is the U.S District Court in the Southern District of New York in Manhattan, any suit between the parties would need to be brought only in that U.S. District Court in Manhattan. The U.S District Court in Manhattan would then use the laws of the State of Delaware to interpret the agreement and the facts.  The law of the forum (in our example the U.S. District Court in the Southern District of New York) applies to all procedural matters. The parties need to follow the procedural rules of that court.

If the Jurisdiction and forum were not agreed in the contract and the dispute involves parties from different jurisdictions, a court will go through several steps. First they decide whether they have jurisdiction and that the court is the proper venue for the case to be heard.  In the example above, if the court found that the parties agreed to Jurisdiction being in New York and the forum being the federal district court in Manhattan, as long as that court hears contract law cases they would decide they had jurisdiction. A court would look at the legal categories involved. Each legal category may have their own rules to determine which of any competing laws apply.  If you specified the law of the State of Delaware there should be no conflicting laws, so the laws of the State of Delaware will be applied. That law must be proved before the forum court. In our example, the parties to the suit would need to prove the applicable Delaware law before the federal district court in Manhattan.  The court would then reach judgment based upon that law.

When the parties are from a different location than the jurisdiction, for enforcement you need to have jurisdiction in the forum of the losing party to the suit.  For example if the buyer had a judgment for money damages against the supplier, and the supplier had sufficient assets in New York, the buyer could secure judgment against those supplier assets in New York because it’s a Judgment made in New York against assets held in New York.  If the Supplier didn’t have the assets in New York or the assets were insufficient, the Buyer would need to get recognition of the award in the Supplier location to enforce the judgment against them in that jurisdiction.  For example if the buyer was based in New York and the supplier was based in California and the buyer won its claim for damages, the Buyer would need to take the Federal Court’s order to the courts in California to get their recognition of that award so it could be enforced in California.

When you write contracts be clear about the applicable law, jurisdiction and, when needed, the forum to avoid problems that could occur because of conflicts between the laws of certain jurisdictions.  In a negotiation if a Supplier wants to change the applicable law or jurisdiction, you should review that with your legal experts to determine whether it would be acceptable and the potential impact.

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