“Consent to Jurisdiction” or “Choice of Law” clauses in Equipment Leases Can be Key to Legal Success in Court Battles Between Lessors and Lessees

Equipment lessors should recognize the importance of including “consent to jurisdiction”, “forum selection”, and “choice of law” provisions in leases. Contractual terms of this kind are generally enforceable, in most states. These provisions provide assurance to the lessor (which generally drafts the lease agreement) that, in the event of litigation with the lessee over money due or any other issue, the parties will be bound by a certain state’s laws, and that state’s courts will be the forum for the dispute.

“Consent to Jurisdiction” or “Choice of Law” clauses in Equipment Leases Can be Key to Legal Success in Court Battles Between Lessors and Lessees

Why is it important to know in advance what laws would apply to a possible future legal dispute? There are many legal jurisdictions in the United States: Each of the 50 states has its own court system and its own peculiar laws, as does the federal government and its courts, the District of Columbia, Puerto Rico, and other federal districts – not to mention other nations! Which of these jurisdictions’ laws applies to a particular legal dispute can have a significant impact on the outcome, because one state’s courts may make different rulings, including interpreting a contract differently, than will another state’s courts, based upon the statutes existing in each state or prior court decisions.

While there is no simple rule of thumb as to which state’s laws will be most favorable to a lessor in a dispute with a lessee, a lessor would not want to find out, in the middle of a litigated matter, that it is going to be bound by a set of laws in a foreign state, that limit the strength of the contractual promises made by the lessee.

Also, each state has its own local judges, and, if you’ve ever seen the movie “My Cousin Vinny”, you will understand that it can be a distinct disadvantage to appear in court before a judge that views your company or your attorney as an out-of-towner. By the same token, it can be a big advantage to be litigating a case before a judge that is familiar with your company, and may have even handled prior, similar cases involving your company.

In addition, different localities have different rules of evidence and procedure, and your company will inevitably have to hire local counsel if it is forced to litigate in a state where your company typically do not sue or get sued. This added expense is avoidable if your company can simply limit its lease-related litigation to a single jurisdiction, by agreement.

Further, the local residents who will make up a jury in one state may view your company’s case very differently from the way in which jurors in another state might, due to their different perspectives on business, money owed, etc.

But perhaps the even bigger and more tangible “bottom line” reason to agree by contract as to the forum for any potential lawsuit is that the costs related to prosecuting or defending a case in a far-away state add up quickly, and may make the effort too costly to pursue. For example, if witnesses, business people, or attorneys must frequently travel to the local forum for depositions, mediations, arbitrations, court hearings, trial, or other purposes, the bill for such added logistics may be huge. Strategically speaking, it is advantageous to force the opposing party pay such added costs, by coming to your company’s home turf, as these mounting costs may add pressure upon them to settle the lawsuit on terms more favorable to your company.

On top of these reasons to agree upon the “forum” state for a potential case, it is also critical to get a lessee to consent to jurisdiction – which is a slightly different issue. The United States Constitution and the local laws of each state protect any person or company from being forced to defend against a lawsuit in a jurisdiction where he, she, or it, has not had “minimum contacts”.

For example, if an equipment leasing company in New Jersey enters into a lease agreement with a lessee that does business only in Ohio, in the event of a dispute, the lessor surely can sue the lessee in Ohio, but may face an argument from the lessee that it cannot be sued in New Jersey, if the lessee had no other significant business connections to New Jersey. A New Jersey court might be inclined to dismiss such a case because of the lack of jurisdiction over the defendant lessee; but by including both a “choice of forum” clause and a “consent to jurisdiction” clause in the lease agreement, the parties can usually side-step that issue.

A court will typically respect the parties’ intention to choose a lawsuit forum and to waive any argument that jurisdiction is lacking, in the absence of some indication that the lessee was tricked into signing the lease and could not have known that those provisions were in it. In effect, by signing the lease containing such provisions, the lessee is creating “minimum contacts” between itself and the chosen forum state.

Finally, it is important for a lease to specify the “choice of law” that the lessor and lessee are making, i.e. that New Jersey law will apply to any dispute between the parties arising out of their deal. Local counsel will be able to advise your company as to the key differences between different states’ laws that may pertain to your company’s leasing transaction. In any case, you do not want to find your company, some years from now, subject to the arbitrary or unfathomable laws of a foreign state where the other party to the transaction happens to reside – any more than you would want to have to travel there to attend a mandatory deposition. Typically, courts will enforce these “choice of law” clauses, even though, in the absence of such a clause, the chosen state’s law would never have applied, as the chosen state might actually have nothing to do whatsoever with the leasing transaction at issue.

The bottom line is that these important legal tools are available for leasing companies to include in their lease agreements, and can be used, with a business and strategic mindset, to reduce both costs and the threat of legal complications in the event of a dispute. In general, most courts will enforce such provisions according to the contract’s terms. Obviously, your local counsel should tailor the particular language to appear in your contracts to suit the legal requirements of the state in which the contract is intended to be enforced.

By Gerald R. Salerno

i DeLage Landen Fin. Servs. v. Leighton K. Lee Law Office, Docket No. A-3148-10T2, 2011 N.J. Super. Unpub. LEXIS 3059 (App. Div. Dec. 19, 2011). The New Jersey Superior Court, Appellate Division, recently explained in this DeLage Landen decision that a forum selection clause in an equipment lease “is enforceable unless it results from ‘fraud, undue influence, or overweening bargaining power,’ is ‘unreasonable’ or ‘violates’ a ‘strong public policy,’ and that forum selection clauses “are prima facie valid and enforceable”, such that the party seeking to defeat a forum selection clause “bears the burden of establishing its invalidity”. DeLage Landen Fin. Servs., at *7.

ii As the United States Supreme Court explained long ago, the test for “due process requires only that in order to subject a defendant to a judgment in personam, if he be not present within the territory of the forum, he have certain minimum contacts with it such that the maintenance of the suit does not offend ‘traditional notions of fair play and substantial justice.’” International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S. Ct. 154, 158, 90 L. Ed. 95, 102 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463, 61 S. Ct. 339, 343, 85 L. Ed. 278, 283 (1940)) (followed in Blakey v. Continental Airlines, Inc., 164 N.J. 38, 66, 751 A.2d 538 (2000)).
DeLage Landen Fin. Servs., at *7 (citing M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 10-15, 92 S. Ct. 1907, 1913-16, 32 L. Ed. 2d 513, 520-23 (1972)).