Startup contracts are riddled with complexity. When entrepreneurs, technology startups, and new businesses start on research and development (R&D) and begin to develop products, marketing campaigns, and even bring in fundraising, classic legal issues involving of startup contracts inevitably arise, and among the many the many legal considerations involved in a startup contract will be the issue of choice of law, or jurisdiction of the contract.
Startup Contract Legal Issues
Startup contracts can be for many goods and services, depending on the nature of the deal. For example, a company designing shoes and apparel company may contract with a designing consultant for production of sketches and other design ideas for the company apparel merchandise line. This startup, or established business as in the case of Nike, may contract for design services, or consulting services for a reputable designer or apparel consulting firm. In another example, this same startup or established business may contract with a supplier or vendor to purchase raw materials to create the shoes and apparel merchandise. This startup contract may be reduced to a sale of goods agreement. And yet in another example, entrepreneurs, tech startups and small business may hire a company to manufacture the shoes and apparel merchandise, using the startup’s sketches, designs, and raw materials that it has purchased, and this startup contract is typically called a manufacturing contract or agreement.
Choice of Law Provision in Startup Contracts
In all of the examples above, and many others, whether a startup contract is for design and consulting services, for sale of goods such as raw materials, or for assembly and manufacturing, choice of law provisions are generally included in the agreement.
A choice of law provision in a contract allows the parties to agree that a particular state’s or other jurisdiction’s laws will be used to interpret the agreement, even if the parties are based outside of the selected jurisdiction.
Examples of Choice of Law Provisions in Startup Contracts
For example, say a technology startup based in Santa Monica, Malibu, West Hollywood, Beverly Hills, or elsewhere in California or the greater Los Angeles area, enters into a startup contract for website development services with a company in Brooklyn, New York. In this example, the parties can legally agree to have the laws of Illinois, or any other state, govern their contract. This is different from venue clauses that govern the physical location where a dispute may be litigated.
Where choice of law provisions may become particularly important is startup contracts involving intellectual property rights. In these cases, choice of law clauses should favor places with a rich body of jurisprudence in intellectual property litigation, such as copyright, trademark, patent, and trade secret matters, for example. When growth stage companies and pre-product, pre-revenue startups enter into contracts, consultation with an experienced business and startup contract attorney can be valuable in the deal structuring and contract drafting stage, as well as contract compliance after a deal is made.