North Carolina Law Adds Predictability to Litigation Involving Business Contracts

North Carolina businesses commonly enter into contracts to buy or sell goods and services west of Murphy, north of Mt. 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"). 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.

Under previous law, businesses from other states that litigated in North Carolina who found an advantage in avoiding a contractual choice of law or choice of forum provision would often argue that these provisions should not be enforced. Until recently, North Carolina courts sometimes would throw-out such provisions, even though the parties intentionally negotiated these terms and made them a part of the parties' bargain. This left North Carolina businesses subject to increased litigation cost and with less predictability.

On July 18, 2017, Governor 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.

Senate Bill 621 Applies Only to "Business Contracts," and Applies to All Existing Contracts, Not Just Contracts Entered Into After it Was Passed.

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

• The law applies only to "business contracts" — those contracts entered into "primarily for business or commercial purposes." This means that 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 the definition of "business contracts" is not limited to those 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 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 July 18, 2017, the date Senate Bill 621 became law. Thus, any existing contract containing a provision choosing the application of North Carolina law, or litigation before a North Carolina court, automatically receives the additional protections offered by the new law.

The Impact on North Carolina "Choice of Law" Provisions

Prior to the passage of Senate Bill 621, North Carolina law provided that a choice of law provision in a contract would not be enforced if either:

• the dispute bore no substantial relationship to North Carolina (in other words, if there was not a sufficient reason for choosing to apply North Carolina law); or,
• if application of North Carolina law would violate the public policy of the state whose law would apply if the contract did not contain a choice of law provision (for example, some states allow parties to waive the right to a jury trial in a contract, while other states find that jury trial waivers are unenforceable as a violation of public policy).

Before the passage of Senate Bill 621, if the opposing party in a business contract dispute felt that another state's law (its home state, for example) was more helpful to its position than North Carolina law, that party could challenge the North Carolina choice of law provision by arguing that the other state had a more substantial relationship to the dispute, or that the other state would not approve of the result under North Carolina law. 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 the other state will not approve of the result under North Carolina law. In this way, the new law is intended to provide greater certainty that the parties' agreement to apply North Carolina law will be upheld thereby eliminating the cost and delay of fighting over these issues.

The Impact on North Carolina Forum Selection Provisions

Prior to the passage of Senate Bill 621, other arguments for attacking a contract provision requiring that suit be filed in North Carolina were 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. Lawsuits filed in an "improper" county were subject to transfer.

A North Carolina business might prefer to name what was previously an "improper" county as the required litigation forum for any number of reasons. For example, a North Carolina business might insist on litigating inside the border of North Carolina, and an out-of-state business might compromise by agreeing to one of several counties with convenient airport access. Or, a North Carolina business headquartered in New Bern might agree to split the distance with a Charleston, South Carolina supplier by naming New Hanover County as the required forum for litigation.

Now, Senate Bill 621 would permit such a county to be the proper forum because the law allows parties to a business contract (who also agree to apply North Carolina law) to select any of North Carolina's counties as the location where suit must be filed. The parties' choice of a 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.

Conclusion

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. For North Carolina businesses, the law also eliminates 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.

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© 2024 Ward and Smith, P.A. For further information regarding the issues described above, please contact Michael J. Parrish.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

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