Anatomy of an IT Contract — Choice of Law, Forum, Venue

Business folks reach agreements, lawyers write the contracts. This being the case, often times a business person need not concern him or herself with the details of the final contract or what is commonly referred to as the “legalese” aspects of an agreement.

However, there are exceptions in that there are a small number of legal issues that a smart negotiator will take into account when negotiating a business agreement.

In technology and e-commerce related agreements, one of the more important of these exceptions is the part of the contract dealing with the resolution of disputes. At the heart of such contractual provisions are three points that a negotiator needs to address: choice of law, choice of forum and choice of venue.

Choice of Law

The choice of law section of a contract simply sets out what laws are to govern the agreement. For example, a contract between a service provider in Sydney, Australia, and a user in London, England, can contain a provision stating that the agreement is to be governed by the laws of New York.

Generally, under common law, the two ways courts will determine the proper law of the contract are by looking at the express choice or the implied choice by the parties.

Courts usually respect express choice of law clauses in contracts, even an unusual one such as the one cited above, provided that the intention expressed is bona fide, legal and not contrary to public policy. In the absence of an express choice of law by the parties, the court will look for the law implicitly chosen, which in most cases, amounts to applying the law with which the transaction has its closest and most real connection.

Closest, Most Real Connection

A number of circumstances are considered in order to establish the law which has the closest and most real connection with the contract, including and not limited to the domicile and nationality of the parties, the place of contracting, the place of performance, the places of residences or business of the parties, and the language or form of the contract.

However, there are a number of notable exceptions and complications in this area. For example, courts will often times not apply a choice of law clause that is penal in nature, or enforce a choice of law clause that is used to avoid the mandatory law of the jurisdiction that would otherwise govern.

Choice of Venue

The choice of venue in an agreement simply refers to the geographical location where dispute resolution proceedings are to be held in case of a contractual dispute. For example, in the above example, the agreement can state that all disputes are to be resolved in Toronto, Ontario, Canada.

Choice of Forum

A forum selection clause in a contract points to two things. First, it determines the specific process by which parties agree expressly to litigate all disputes concerning a contract. Second, it can specify the venue by implication.

To begin with, it should be noted that this is an area of great confusion for many, including seasoned business executives in that they assume venue and forum, and in some sense, jurisdiction, are all equivalent. This is not the case.

Jurisdiction refers to the power of a court to adjudicate a case, but sometimes people use the term “jurisdiction” to refer to a particular area or place, and not the power of the court. For example, it is common to hear someone say that parties can, by agreement, designate a given jurisdiction as the exclusive place to litigate a dispute. In this example, it is unclear whether “jurisdiction” refers to a place or the power of the court in that place to address the dispute.

Affect on Venue

Moreover, the choice of forum can implicitly also designate the choice of venue if the forum chosen is that of a court that only sits in a single location. For example, if the choice of forum in a contract designates that all disputes are to resolved by the courts in Barbados and if the only place that such courts hold hearings is Bridgetown, Barbados, then the choice of forum has indirectly also determined the choice of venue for this particular agreement.

With the above in mind, it should be noted that a choice of forum clause or forum selection clause usually simply designates whether a dispute is to be resolved by a court and/or an alternative adjudication process such as an arbitration panel.

Often times, the main three choices are one or a combination of the following: mediation, arbitration and the courts. Accordingly, our model contract can have a provision that provides for disputes to be resolved by mediation, failing which they are to go to arbitration under the laws of New York with arbitration proceedings taking place in Toronto, Ontario, Canada.

Conclusion

The above is a general overview of this complicated area of law and, as such, subject to many exceptions and complications. However, due to the fact that most technology and e-commerce contracts are between parties in different locations, it is crucial for business executives negotiating such agreements to have an overall understanding of these concepts and to address them at the negotiation stage.

Given the fact that a contract is only as good as the laws that govern it, a contract without a clear choice of law, forum and venue provision is akin to a stray bullet — somebody is likely to get hurt — the question is who?