In Part 2 of this blog series (visit this link for Part 1), we dive into which state—New York or Delaware—is best for businesses to consider as governing law for their contracts. Both Delaware and New York have a reputation for being the governing law or jurisdiction of choice in commercial agreements and corporate transactions. A company’s decision will greatly impact which rules and laws govern agreements when legal issues arise.
Where Should I Go for Governing Law?
Both Delaware and New York have developed a good reputation in the business world when it comes to offering a business-versed (and friendly) court system and ample body of jurisprudence to help rule business disputes. While this is true, when it comes to choosing a governing law and jurisdiction, business parties should know that for the choice of law and jurisdiction clause of a contract to be enforceable, there must be enough points of contact between the law and jurisdiction and one or both of the parties or the transaction involved.
Both Delaware and New York courts will generally enforce a contractual choice of law when there are sufficient nexus between the transaction and the jurisdiction of choice. New York, however, offers businesses the possibility of applying New York law to their agreements and submitting their disputes to the jurisdiction of New York courts if two requirements are present in the transaction. With the exception of certain types of agreements (i.e. employment agreements), when the consideration involved in the agreement is $250,000 or more the parties “. . . may agree that the law of [New York] shall govern their rights and duties in whole or in part, whether or not such contract, agreement or undertaking bears a reasonable relation to this state . . .” (New York General Obligations Law § 5-1401). Furthermore, parties to an agreement can include in their contract a clause by which they submit to the jurisdiction of New York courts when the agreement in question “. . . (a) is a contract, agreement or undertaking, contingent or otherwise, in consideration of, or relating to any obligation arising out of a transaction covering in the aggregate, not less than one million dollars . . .” and the parties expressly made that choice in the agreement (See New York General Obligations Law §5-1402).
Therefore, while Delaware can be a jurisdiction of choice for incorporation purposes, especially for businesses with multi-state operations, New York offers a well-developed body of contract law that is available to contract parties in transactions over the thresholds mentioned above.