Wednesday, August 30, 2017

Governing Law and Jurisdiction Simplified

"Governing law and jurisdiction" clause often causes confusion even though it's an easy issue to decide on. In the vast majority of startup cases this clause should simply refer to the city and state you are based in. This way you won't have to travel far (or hire a lawyer there) to resolve disputes.

Let's say you run an online business out of California, your company is incorporated in Delaware and you are about to hire a freelance developer in India. What should be the governing law of the developer contract?

Jurisdiction refers to where a dispute will be resolved. Governing law dictates which state's law will be used to decide the dispute.  So, for jurisdiction, you can choose whatever city or county you live in.  Governing law should be the state that you live in. So, in the example above you can have the governing law of California and jurisdiction in Los Angeles, CA.

That easy way is the correct way in the vast majority of startup contracts. Avoid tweaking that simple formula unless you are a professional who really knows how and why.

What to do if the remote party insists on governing law/jurisdiction very far from you and you really don't want to lose this contract? You have to factor the added risk into the cost of the deal and consider offering arbitration as an alternative. The American Arbitration Association even offers non-appearance based arbitration. So, instead of going to courts, the dispute will be resolved by submitting documents to the arbitrator, without any actual hearing. This can save all parties time and money.