A common provision in contracts that auto dealers sign with vendors covers choice of law, venue and jurisdiction.
Generally, those 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 any dispute will be in its home state; and that the dealer agrees to jurisdiction in the supplier’s home state.
Dealers generally don’t take issue with these provisions. However, they can practically guarantee the supplier’s victory in any potential legal dispute.
Let’s look at a hypothetical situation: A dealer in Florida signs a contract with vendor based in Portland, OR. The vendor’s representative goes to the dealer’s business in Florida, demonstrates the products and presents the dealer with a contract. A provision of that contract states:
Choice of Law; Venue; Jurisdiction. The terms of the 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, OR, and you and we agree to submit to the exclusive jurisdiction of the state and federal courts located in Multnomah County, Oregon.
Later, the vendor claims it shipped products to the dealer. The dealership disputes that, saying it does not owe the $25,000 invoice. The vendor sues the dealer in Portland. How does the contractual provision quoted above affect the outcome of the dispute?
The dealership cannot use its own Florida lawyer to defend the Oregon lawsuit. It must hire a lawyer in Oregon who will spend time learning about the dealership, its business, the contract and the dispute.
Because of the contractual provision, the Oregon court likely will find that the venue (the location where a trial is held) is proper, it has jurisdiction (the ability to require a defendant to appear for a trial or suffer a default judgment), and Oregon law will govern the outcome of the case.
So the dealer must pay the Oregon lawyer to prepare the case and try it, and possibly fly witnesses across the country to Oregon for depositions and perhaps again at trial, all while having employees tied up in preparing discovery responses and trial-preparation materials.
Given the total cost, the dealership may decide it is not worth contesting the case since it will cost nearly as much or more than the disputed $25,000 bill.
But if the dealer doesn’t contest the case in Oregon and a default judgment is entered for $25,000, the vendor can hire a lawyer in Florida and file an action to enforce the judgment.
The only defense the dealer will have is that there was no jurisdiction over the case in Oregon, and that the Oregon judgment is defective. But that is unlikely to be a winning argument if the contract provides for choice of law, venue and jurisdiction in Oregon.
The result? Because of the provision to which the dealership agreed, it faces a losing choice either to spend nearly as much as the amount claimed to defend the lawsuit in the faraway state, or to suffer a default judgment of $25,000 that is collectible in its home state.
So what is the lesson? Do not overlook the choice of law, venue and jurisdiction provision in any supplier contract you sign.
Since the supplier is more than happy to do business at your location when things are good, why agree that the law of a distant state will prevail and the courts of a distant state will hear a dispute?
Negotiate this term as much as any other substantive term in the contract.
Michael Charapp is a lawyer who represents auto dealers. He is based in McLean, VA.