The “Choice of Law” Clause
One of the most common mistakes businesspeople make when writing and negotiating a contract is to overlook or be forced to sign the “Choice of Law” clause. While this may sound like a technicality, it is, in fact, one of the most critical elements in the contract’s enforcement and the most damaging to one party to the contract.
A “Choice of Law” clause in a contract mandates that the agreement be interpreted and enforced under the laws of a particular state (e.g., NJ, Fla, or Alaska). This clause, or these clauses, is especially important when the state in which the contract is entered into is geographically remote from New Jersey. For example, what if someone who resides in New Jersey signs an employment contract with a company based in New York? What if that person will work from home in N.J. and at times out of a satellite office in California? Which state’s law will apply: New York, New Jersey, or California? In the absence of a written contract that defines the laws of a state, it is not clear which state’s law applies. That is a major problem if, for example, a restrictive covenant against competition is in the contract and is being enforced to bar an employee from working in an industry for a certain period. The law of California is radically different than the law of New York or New Jersey in this regard. The same analogy applies to virtually any contract, be it for the sale of goods and products, professional, technical services, technology, you name it.
As a general but highly accurate rule, a “Choice of Law” Clause recited in a written contract will generally be binding. One major exception is in franchise agreements and other contracts where the bargaining positions of the parties are very unequal. But returning to our employment example, the employment contract might state that California law applies, so the lawsuit will be filed in California, even though the now-former employee resides in New Jersey. In such a case, the California court will apply California law, not New Jersey law, and the employee’s salary and assets will be subject to collection if a judgment is entered in California.
Fredrick P. Niemann Esq.
Concerned about what you just read? Are you at risk? If so, contact me personally today to discuss your NJ contract matter, especially during its negotiations. If you’re having a problem with your contract, call me too. I’m easy to talk to, very approachable, and can offer you practical, legal ways to handle your contract concerns. You can reach me at (732) 863-9900 or e-mail me at fniemann@hnlawfirm.com.