New contract law adds predictability and clarity to business litigation

Senate Bill 621, signed into law this summer, could provide an advantage to North Carolina businesses when contracting with out-of-state parties.

Madeline Gray—North State Journal

North Carolina businesses commonly enter into contracts to buy or sell goods and services west of Murphy, north of Mount Airy, south of Charlotte, and even east of Ocracoke. When contracts such as these extend beyond state lines, businesses should intentionally assess and negotiate terms commonly called “choice of law” and “choice of forum” (or “forum selection”) provisions. These terms are up-front agreements to determine which state’s laws will govern any potential dispute relating to the contract, and in which state any potential lawsuit will be filed.

When potential disputes turn into actual litigation, choice of law and choice of forum provisions can be critical. For example, one state’s law may be more favorable to one of the parties, one of the parties could gain an advantage by litigating on its “home turf,” or one of the parties could save travel and business interruption cost by having the lawsuit filed nearby, rather than out of state. It isn’t uncommon for North Carolina businesses doing business with an entity from another state to see the advantage of applying North Carolina law and requiring litigation to occur in North Carolina.

On July 18, 2017, Gov. Cooper signed into law Senate Bill 621 after it unanimously passed in both the House and the Senate. This new law strengthens North Carolina choice of law and choice of forum provisions in business contracts, and along with other efforts, adds greater certainty that North Carolina businesses can litigate in their home state.

Business contracts existing before July 18, 2017

There are two preliminary points about the scope of Senate Bill 621:

· The law applies only to “business contracts”—contracts entered into “primarily for business or commercial purposes.”  Contracts entered into by an individual “primarily for the individual’s personal, family, or household purposes” are not subject to the law, nor are contracts “between an individual and another party to provide labor or personal services,” whether as an employee or independent contractor.  Note, though, that a “business contracts” is not limited to one entered into among corporate entities.  A contract between an individual and a business, or between two individuals, could be a “business contract” if it was primarily for a business purposes, and not an employment contract.

·The law is applicable to all business contracts which currently exist, not just those which are entered into after the date Senate Bill 621 became law.

The impact on North Carolina “Choice of Law” provisions

Prior to the passage of Senate Bill 621, litigants who believed that another state’s law would be more beneficial to their position could challenge a North Carolina choice of law provision on the grounds that the dispute bore no substantial relationship to North Carolina (in other words, if there was not a sufficient reason to apply North Carolina law); or if application of North Carolina law would violate a fundamental public policy of the state whose law would otherwise apply (for example, some states allow parties to waive the right to a jury trial, while other states find such a waiver to violate public police).

This posturing resulted in additional expense, delay, and uncertainty—precisely the outcome that the parties seemingly sought to avoid by including the North Carolina choice of law provision in their contract.

Senate Bill 621 seeks to eliminate this issue. It permits North Carolina choice of law provisions in business contracts, even if another state has a more substantial relationship to the dispute, or if a provision of the contract is contrary to a fundamental policy of the other state.  This provides greater certainty that North Carolina choice of law provisions will be upheld.

The impact on North Carolina forum selection provisions

Prior to the passage of Senate Bill 621, litigants could attack a contract provision requiring that suit be filed in North Carolina by arguing that the provision was the result of extremely unequal bargaining power or that it would work a substantial injustice to require the party or essential witnesses to appear in North Carolina.

Senate Bill 621 aims to eliminate this issue as well. The new law validates North Carolina forum selection provisions in business contracts so long as the parties have also contractually agreed that North Carolina law should apply. It also directs North Carolina courts to disregard issues of substantial hardship to the opposing party or to witnesses in deciding whether to transfer the lawsuit out of North Carolina.

A new choice of counties

The new law also gives parties to business contracts additional choice by allowing them to select a specific North Carolina county as the place where any lawsuit relating to the contract must be filed. Before the passage of Senate Bill 621, North Carolina law designated only certain counties as “proper” for the filing of a lawsuit, which typically would include where one of the parties had its registered office or maintained a place of business, or, if an individual, where he or she lived.

Now, Senate Bill 621 permits parties to designate any county as the location where a lawsuit relating to a business contract must be filed, so long as those parties have also agreed that North Carolina law will govern. The parties’ choice of county will only be overturned if a judge determines that the convenience to witnesses or the “ends of justice” require a transfer, or that a party could not have a fair trial in the selected county. In that event, the case would be transferred within North Carolina, still giving effect to the North Carolina forum selection provision.

Senate Bill 621 was designed to, and should, create more certainty as to the enforceability of North Carolina choice of law and choice for forum provisions in business contracts. The law should help businesses eliminate the cost and delay often associated with an opposing party’s attempt to avoid its agreement to be subject to North Carolina law or to litigate in North Carolina.

Michael J. Parrish is a civil litigator with Ward and Smith, P.A.  He focuses on cases involving commercial and business disputes in both State and Federal Courts.