Finding your way in the USA

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As the Aussie dollar continues to slide against the greenback, the US market is starting to look more attractive to local manufacturers. Marcel Vaarzon-Morel and Silva Gevorkyan outline some of the legal pitfalls of doing business in the USA.

Most of us have signed some sort of contract at least once, whether to sign up for a phone service, or something more serious such as to purchase property. Doing business in any context inevitably calls for entering into contracts with other businesses or parties. While most contracts have standard clauses, these very clauses might become the centre of litigation if overlooked.

One of the key elements in contract law is determining which jurisdiction’s laws govern the contract. Although it might seem simple, figuring out where a party can bring lawsuit is actually a complex process. In order to litigate a matter in a certain court, that court must have jurisdiction over the party being sued, as well as over the subject matter of the litigation. Things to consider are where the contract was signed, where each party to the contract resides, where performance of the contract is to take place and the place of personal or real property that is the subject of the contract, etc.

You, a resident of Sydney, might enter into a contract with someone from Brisbane to purchase a boat. If the Brisbane resident breaches the contract, you may want to sue in a Sydney court so as to avoid having to travel to another state. This might be particularly important when considering that litigation can often carry on for months or even years. Having to travel to another city for litigation over a long period of time is not only exhausting, but can also amount to a massive expenditure.

However, you can’t just pick the court that is most convenient to you to begin proceedings. If you travelled to Brisbane to sign the contract, and the boat in question is also in Brisbane, then you would be out of luck because Sydney courts are very unlikely to have jurisdiction. The mere fact that you are a resident of Sydney would not grant Sydney courts jurisdiction over the matter.

United States of complexity

The process of determining jurisdiction becomes even more complex when parties originate in different countries. United States courts have different methods of determining what court has the right to exercise jurisdiction over a particular matter. These methods vary not only from state to state, but also between the State and Federal government. This means that the outcome of any given matter can be different based on which court the matter is litigated in. While some states determine jurisdiction based on where the contract was signed, others weigh more heavily the state where performance took place or was to take place.

For example, if a resident of New York enters into a contract with a resident of California to purchase a boat from California, and the contract was signed in New York, some courts may find that New York law should govern due to the fact that signing took place there, while other courts might find that California law is more appropriate since the subject matter of the contract is in California.

Similarly, if you, a resident of Sydney, enter into a contract with a resident or business in the United States and the matter turns into a dispute, the outcome of the dispute might be very different based on which state the resident or business are in.

A final important point regarding jurisdiction in the United States is that the geographical location of the litigating court does not necessarily determine the applicable law. In other words, just because a court in a particular state has jurisdiction over a matter does not always mean that the laws of that state will govern the case. This means that a case litigated in a New York court might find that the law of California should apply instead.

For example, you, a resident of Sydney, might enter into a contract to purchase a boat from a company whose principal place of business is in New York. You met with the company’s representative several times in Texas to lay out the terms of the contract, and you signed the contract in Texas, but the boat that you are contracting to purchase is to be built in California. In this scenario, it is not clear which state has jurisdiction over the matter. As a party to a contract, in the case of a dispute, you might be subject to litigation in New York, Texas, or California. This leaves you in a vulnerable position, especially if you are not familiar with the laws of each state.

How to protect yourself

There are few ways to protect yourself when contracting with a foreign party and they are not always bullet-proof.

One way to protect yourself is to include a clause in the contract that spells out what law will apply should the matter go to court. This way, all parties come to an agreement before signing a contract, and in the case of a dispute, the parties can be prepared. US courts will generally uphold ‘choice of law’ clauses so long as the chosen state bears some kind of a connection to the case (i.e. one of the parties is a resident of the state, or the contract has some kind of connection to the state). Unfortunately, ‘choice of law’ clauses are merely discretionary, so the court may choose to overrule them.

A more secure way to protect yourself is by being very careful with regards to all circumstances relating to the contract. If you are entering into a contract with a company based in the US, do as much research about the company as you can. Find out where the company’s principal place of business is and where the company is incorporated so that you know where you can bring suit. If you are dealing with a partnership, find out what state each of the partners is a resident of, as you may bring suit in any of those states.

Research the laws of the states where you may be able to bring suit to determine whether they are favourable to you. Most importantly, if you are going to travel to the United States, or send an agent on your behalf, be aware that the state in which you are entering into a contract is very likely to have jurisdiction should the matter become a dispute. If you are not prepared to face litigation in the particular state, think twice before entering into a contract.

This article was first published in the December/January issue of Marine Business magazine.

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