If you’ve ever reviewed a purchase order, a partnership agreement, a lease agreement, or an indemnity agreement, you’ve probably seen a choice-of-law clause or a forum selection clause. A choice-of-law clause is a contract term that selects a specific state’s law to govern the interpretation of the contract and any disputes arising under the contract. A forum selection clause is a contract term that designates a particular state as the one in which the parties will litigate any disputes arising out of their contract.
Many contracts often include a choice-of-law clause and a forum selection clause. For example, a partnership agreement might specify that the agreement shall be governed by and construed in accordance with the law of the state of North Carolina (the choice-of-law clause), and that any disputes shall be litigated (or arbitrated) in North Carolina (the forum selection clause).
Choice-of-law and forum selection clauses have spawned endless litigation on a variety of issues, including whether forum selection clauses are contrary to public policy and whether choice-of-law clauses take precedence over the jurisdiction’s traditional conflict of laws rules. Fortunately, those cases are not the subject of this blog post, and they may not be the subject of future blog posts thanks to Senate Bill 621.
On July 18, 2017, Governor Cooper signed Senate Bill 621 into law. Senate Bill 621 will be codified as Chapter 1G of the North Carolina General Statutes. The official title of this new law is “North Carolina Choice of Law and Forum in Business Contracts Act,” but, for ease of reference, this post refers to the act as the “Business Contracts Act” or the “Act.”
The Act attempts to guarantee certainty and predictability for North Carolina businesses. Given that, it’s important for North Carolina businesses (and their lawyers) to understand how and when it applies.
The Business Contracts Act applies only to “business contracts.” The Act defines “business contract” as a contract “entered into primarily for business or commercial purposes.” The definition also states that: “The term [business contract] does not include a consumer contract or an employment contract.”
The Business Contracts Act is retroactive. This means that the Act applies to business contracts entered into before July 18, 2017 as well as business contracts entered into on or after July 18, 2017.
The Business Contracts Act requires North Carolina courts to honor North Carolina choice-of-law clauses. Subsection 1G-3 addresses North Carolina choice-of-law clauses in business contracts. The Act supersedes prior North Carolina case law and permits the parties to a business contract to select North Carolina law to govern their rights and duties under the contract even if:
* The parties, the business contract, or the transaction that is the subject of the business contract do not bear a reasonable relation to North Carolina; and
* A provision of the business contract is contrary to the fundamental policies of the state whose law would apply if the parties had not selected North Carolina law in their contract.
In other words, if the parties select North Carolina law in their business contract, they are stuck with North Carolina law when a dispute arises under the contract. This is a good thing for at least three reasons:
1. it provides the certainty and predictability the parties presumably wanted when they selected North Carolina law in their contract;
2. it reduces litigation costs for the parties; and
3. it preserves judicial time and resources.
The Business Contracts Act does not require North Carolina courts to honor contractual choice-of-law clauses that select the law of a state other than North Carolina. Subsection 1G-3 applies only to contractual choice-of-law provisions that select North Carolina law. If your business contract selects the law of any other state, then a North Carolina court might conclude that the choice-of-law clause is not enforceable if the chosen state’s law is not substantially related to the parties or the transaction or if the chosen state’s law violates a fundamental policy of the state whose law would otherwise apply to the dispute.
The Business Contracts Act requires North Carolina courts to honor North Carolina forum selection clauses. Subsection 1G-4 addresses North Carolina forum selection clauses. The Act confirms that a party to a business contract may pursue its claims against the other party in a North Carolina court as long as the business contract contains:
* A provision selecting North Carolina law; and
* A provision agreeing to litigate disputes arising from the contract in North Carolina.
A party who enters into a business contract that satisfies both of these requirements will be deemed to have consented to the personal jurisdiction of North Carolina courts.
Subsection 1G-4(b) expressly prohibits North Carolina courts from entering an order to dismiss or stay the lawsuit on the basis that it would “work substantial injustice,” or otherwise be inconvenient, for the case to be tried in North Carolina.
The Business Contracts Act permits parties to designate one or more North Carolina counties in which to file suit. Subsection 1G-4(c) also permits the parties to designate one or more counties in North Carolina as the proper venue for a dispute arising from the business contract. If the parties do not designate a county in the contract, a party may commence an action in any county in North Carolina.
As of September 1, 2017, there were no published cases applying the Business Contracts Act so it remains to be seen whether litigants and their lawyers will come up with clever arguments to avoid the Act.
In the interim, if North Carolina businesses want to litigate in North Carolina courts and want their agreements to be subject to North Carolina law, they should reassess their boilerplate choice-of-law and forum selection clauses to ensure that those provisions include the language required by the Business Contracts Act. They also should update their standard forum selection provisions to designate a preferred county (or counties) in North Carolina as the place where a lawsuit relating to the contract must be filed.
About the Authors:
Alan M. Ruley is a seasoned civil trial and appellate lawyer at Bell, Davis & Pitt, where he has practiced for 25 years. He represents clients in a wide variety of disputes in federal and state court, focusing primarily on business litigation, intellectual property, insurance, banking and employment. Alan is active in the community, recently serving as co-president of the R.J. Reynolds High School PTSA.
Allison Buckner Parker is an attorney at Bell, Davis & Pitt. She concentrates her practice in the area of commercial litigation with a focus on insurance coverage litigation for corporate policyholders.