Supplier Contracts: Why Choice of Law, Venue, and Jurisdiction Matter

A common provision in contracts that dealers sign with suppliers covers choice of law, venue, and jurisdiction. Generally, supplier contracts provide that the law that will be applied to any dispute is that of the home state of the supplier, that the venue for a case in the event of a dispute will be in the home state of the supplier, and that the dealer agrees to jurisdiction in the supplier’s home state.

Many dealers generally don’t take issue with these provisions. However, such a provision in a supplier’s contract can practically guarantee the supplier’s victory in many disputes between the supplier and the dealer.

Why? Let’s look at a hypothetical situation. Dealer in Virginia signs a contract with Vendor, a company from Portland, Oregon. Vendor’s representative went to Dealer’s place of business, demonstrated the products, and presented Dealer with a contract. A provision of that contract states:

Choice of Law; Venue; Jurisdiction. The terms of this Agreement and any dispute relating thereto will be governed by the laws of the State of Oregon, without regard to conflict/choice of law principles. You and we agree that any dispute will be heard in a state or federal court in Portland, Oregon, and you and we agree to submit to the exclusive jurisdiction of the state and federal courts located in Multnomah County, Oregon.

Vendor claims that it shipped products to Dealer. Dealer disputes that and says it does not owe the $25,000 invoice Vendor sent. Vendor sues Dealer in Portland.

Before analyzing how this matter will play out, it is important to understand each of the concepts used in the contractual provision.

Choice of Law.  A court deciding a case between parties in different states must decide what law applies. A dealer should want to have the law of its state apply since its lawyer is most familiar with those laws. Generally, courts apply the law of the state where a contract is made. But, when there is a contractual provision in which the parties agree on the applicable law, the court will generally find that the contractual provision on choice of law will control.

Venue. At its most basic, venue is the site where the trial of a case can take place. Typically, under most state laws, venue is generally appropriate where a defendant is or where the claim arises. However, if the parties agree on a different location, a court will go along with that.

Jurisdiction. To require a party to appear in court, the court must have jurisdiction. That means the court must be able to compel the party being sued to appear there or suffer an enforceable judgment otherwise. In the hypothetical, Dealer is in Virginia. It does no business in Oregon, has no property in Oregon, and has no contacts whatsoever with Oregon. Normally an Oregon court would probably not find that it has jurisdiction over Dealer. However, where a contract provides that Dealer agrees to jurisdiction in Oregon, a court will generally enforce that.

Applying these concepts, how does the contractual provision quoted above affect the outcome of the dispute?

Dealer cannot use its regular attorney to defend the Oregon lawsuit. It must hire a lawyer in Oregon who must expend substantial time learning about Dealer, its business, the contract in issue, and much more. Since the Oregon court is likely to find that the case will be heard in Oregon with Oregon law applied, the dealer must pay the Oregon lawyer to prepare to defend and to try the case. In addition those fees and the normal expenses of engaging in discovery and preparing for a trial, the dealer may have to fly its witnesses more than 3,000 miles to Oregon for depositions and a trial. The dealer may very well decide that it is not worth contesting the case since the Dealer may incur costs of $25,000 or more to challenge the invoice for $25,000.

The problem is that if the Dealer doesn’t appear and a default judgment is entered for $25,000, Vendor can hire a lawyer in Virginia and file an action to enforce the judgment. The only defense the dealer will have is that there was no jurisdiction over it in Oregon and that the Oregon judgment is defective. But where the agreement provides for choice of law, venue and jurisdiction in Oregon,  that is unlikely to be a winning argument.

The result? Because of the provision to which the dealer agreed, it is faced with a losing choice either to spend as much or more than the amount claimed to defend the case or to fail to appear in the suit in the far-away state and suffer a judgment of $25,000 that is collectible in its home state.

So what is the lesson from this? Do not overlook the choice of law, venue, and jurisdiction provision in any vendor contract that you sign. Even in situations where you contact the vendor, it still engages you at your dealership, negotiates the terms with you at your dealership, contracts to provide the products or services at your dealership, and requires your dealership to fulfill its part of the bargain – paying for the products or services – from your dealership. It does business in your state and has the resources to appear at trial in your state.  Why agree that the law of a distant state and the courts of a distant state will hear any dispute when that puts your dealership at such a disadvantage? Be prepared to negotiate this term as much as any substantive term in the contract