When You Sign a Business Contract You Absolutely Must Negotiate Litigation Provisions Outside of New Jersey

HNWBusiness and Corporate Legal Services, Business Law

By Fredrick P. Niemann of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, New Jersey Business Corporation and Contract Law Attorney

business contractI have written extensively about the importance of selecting New Jersey as the jurisdiction to decide cases and controversies involving your contracts and relationships with customers/vendors.   Many contracts with (particularly) interstate and international companies generally designate a particular state as the place where all lawsuits and legal disputes must be filed and the law of that state applied.

Much like mandatory arbitration clauses, State and Federal Courts are increasingly enforcing these mandatory jurisdiction and venue provisions as one way to reduce their case load.  A recent case decided in California involved a New Jersey church and school where the members of the church/school signed an agreement for solar electricity generation with a contractor who defaulted almost immediately on the contract but who had been paid nearly $700,000.00 by the lender to the church.   The lender located in California brought suit against the church and the school in California arguing that its contract specified that any dispute(s) and lawsuit(s) be filed not in New Jersey where the contract was signed, the witnesses located and the property located in California where the lender is headquartered.

It is interesting that the lender headquartered in San Jose, California is in the business of funding solar equipment installations for non-profit schools, churches and other non-profit organizations throughout the United States.   I discussed with a church client of mine who is also experiencing problems with a solar contractor that this particular lender appears to prey upon non-profit churches and schools (in my opinion) because they lack business sophistication and commercial experience. The church, of course, offers religious worship and seminars as well as a boarding school for grades 6 through 12 which combines academic and religious teachings.   It is a large church and the property is nearly 43 acres in size.   Still, the principals of the church and school are pastors and educators, not attorneys, and are not sophisticated business persons. As I mentioned earlier in my first post, the contractor was recommended by the lender but never really started the project and defaulted almost from the beginning, nonetheless, the lender made disbursements to that contractor ostensibly as a result of the approval by the church.

When the lender was unable to resolve payment options with the church, it filed suit in San Jose County, California pursuant to its contract.  Thereafter, the church responded by making an application to the Federal District Court in California to change the venue of the case from California to New Jersey (venue means the location of the Court which will decide the case).   The Federal District Court in California denied the churches motion and ordered that the case remain in California.   Its reasoning and analysis is instructive and reinforces my advices to business clients to be very careful in your venue, jurisdiction, choice of laws and related contractual obligations.  The Court cited Federal Statute 28, USC Section 1391that provides:

Venue of a business dispute in a particular State is proper where any defendant resides, if all of the defendants are residents of the State in which the Court is located or where a substantial part of the events given rise to the claim occurred or a substantial part of the property that the subject of the action is situated. When venue is challenged the burden of proof is on the party who seeks to change the location of the Court (in this case the burden fell upon the church and the school).   If venue is not proper, then the Federal Court has the authority to transfer the case to another Court in another State if the interests of justice are served.

Needless to say, the court went through an extensive exchange of competing facts offered by both the lender as well as the church/school.  Each argued persuasively why aspects of the contractual relationship were predominantly undertaken in New Jersey or California but in a somewhat vague rational, the court held that notwithstanding a majority of competing interests favoring venue occurred in New Jersey, same were not conclusive enough to require the case be resolved in New Jersey.  Said the Judge, “In contract disputes, the court has looked to such factors as to where the contract was negotiated or executed, where it was to be performed and where the alleged breach occurred.”

Venue may be proper in multiples districts if a substantial part of the underlying events took place in each of those districts.  Clearly, that was the case here and the court acknowledged that.  This decision could have gone either way, the court could very easily have transferred jurisdiction to New Jersey but because of the forum selection clause located within the contract, the court held that the case would remain in California.  The fact that all of the witnesses to the litigation were predominantly located in New Jersey, that the solar installation contractor was from New Jersey, that the contract between the church and the solar company as signed in New Jersey was not enough in this Judge’s opinion.

In conclusion, the court stated that a contractual form selection form is “presumptively valid and should be enforced unless enforcement is shown by the resisting party to be unreasonable under the circumstances”.   The party challenging the clause bears a very heavy burden of proof.   Unfortunately, the church was not able to persuade the Judge that it satisfied its heavy burden of proof that the litigation should be transferred to New Jersey.

I encourage all business owners involved in contracts involving multi-state performance and/or relationships to have us closely review these form clauses and choice law provisions to avoid the unfortunate outcome which happened to this New Jersey church.

To discuss your NJ business law matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.


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