Choice of Law in your Terms of Service

I am going to follow Joe's lead here and share a question that I got from a client this week.  The client's question was about their Terms of Service.  More specifically, whether the governing law specified should be their local jurisdiction or the state in which their company was incorporated. In this case, my client was incorporated in Delaware, but the founders and the business itself was based in Washington State.   

Interestingly, companies don't have to incorporate in the state where they are headquartered.  Delaware, for instance, is an extremely popular option for companies all over the country.  In the case of Delaware, there are some advantages that can make it work incorporating outside of your home state.  

  • Delaware has very management/company favorable laws related to corporate governance.  
  • They also have courts that have heard lots of disputes related to corporate issues, which means they have a rich body of case law to draw on.
  • A Delaware corporation is also a known quantity to investors outside of the state of Washington.

The founder in this case was wondering whether we should specify Delaware governing law, since their company was incorporated in Delaware and their corporation is governed by Delaware law with respect to corporate issues. 

Here, the answer was no.  Washington governing law and venue was the better choice.  The benefits that make Delaware an attractive state for incorporation don't really apply in the typical contract scenario, and the inconvenience of defending or bringing a claim in Delaware makes the decision even easier.  In the case of a Terms of Service, Washington law was a great fit.  We have plenty of case law in the state related to the enforcement of contracts, and Washington has a huge software industry, which makes it a great place to deal with software/Internet related issues.  The biggest benefit, however, is the convenience of being able to defend or bring a lawsuit close to home.  Hopefully my client's Terms of Service won't ever be the subject to a dispute, but if they ever need to enforce their terms against someone, it would be an unnecessary burden for the trial to take place outside of Washington.  Particularly if company personnel need to attend depositions or appear in court.  

Obviously, circumstances differ, and in some cases it make sense to choose governing law outside of your home state (for instance, if the law in your home state is particularly unfavorable).  But generally speaking, it is better to keep disputes close to home.