In commercial litigation, a contract between the parties is almost always an issue and most creditor-friendly states will uphold written contract terms, whether detailed in a formal written agreement, on a credit application, or simple terms written on a cocktail napkin. Whatever the form of such a contract, and regardless of how simplistic or concise that it may be, there is never a good reason to exclude a jurisdiction clause from those terms.
During the first year of law school we were taught that, in the most basic sense, the term jurisdiction meant “power.” It indicates the power of government to enact laws, as well as the power of the courts to enforce laws and resolve disputes. It is this latter meaning and its application to the credit and collections process upon which I shall focus.
The jurisdiction clause in an agreement does two things for the credit and collections professional – it helps to reduce uncertainty and complication. These benefits are often overlooked, though, by credit managers who follow a calculus which dictates that when a debtor is located in another state, the delinquent account needs to be forwarded to that same state. Such a calculus, however, ignores any applicable jurisdiction clause in its entirety, effectively hiding the clause in plain sight and disregarding the reasons for which it was included in the associated contract.
One often-asked question relates to the conditions under which jurisdiction arises. This is part of a much larger discussion about the different types of jurisdiction, but for purposes of this article we are only concerned with what is referred to as “long arm” jurisdiction. Where a contractual relationship arises between two parties, the courts where any party is located, or where the contract is to be performed, may have jurisdiction. The purpose of the jurisdiction clause is, then, to contractually limit the courts with jurisdiction over a dispute related to a given contract. In the case of collections, when an account is to be assigned for collections, there are two basic choices in initiating any action: (1) file suit where the debtor is located or (2) file suit where the contract says you should file suit. A well-drafted contract, complete with a jurisdiction clause, probably requires that disputes be litigated where the credit grantor’s offices are located, regardless of the debtor’s location. Why, though, might a credit or collections professional be inclined to include a jurisdiction clause allowing for suit to be filed in their home location?
First and foremost, filing suit in your home jurisdiction has a number of cost incentives, including the fact that fewer expenses are incurred when your witnesses and documents only have to travel ten or twenty miles. This is vastly different than when litigating out of state, where airfare, ground transportation, food, and lodging add up, and even more so if you must send witnesses out several times a year. In addition to the cost savings, more often than not, a debtor will not appear in a judicial forum that is located hundreds or thousands of miles from his or her home, which typically leads to the creditor obtaining a default judgment. Finally, there is a perceived home court advantage that exists in some, but by no means, all jurisdictions. Whether or not you receive a home court advantage from litigating in your home jurisdiction is really secondary to making certain that the debtor does not receive that same advantage should you attempt to file suit in the debtor’s hometown. Litigation is more than simply presenting facts; it is a series of involved tactical decisions which culminate in a hostile fact-gathering process. How you get there is as important as what facts are ultimately revealed.
As it is true that, subsequent to the issuance of a default judgment, a debtor may be allowed, in his or her home state, to challenge the jurisdiction of the court that entered the default, some may wonder whether, if the matter may ultimately end up in the debtor’s home location, there is any purpose to filing in their (the creditor’s) home jurisdiction. And, there most certainly is – not the least of which is that once a creditor obtains a judgment against a debtor, even should the matter end up in the debtor’s location, the debtor’s options with regards to contesting the amount due are severely limited. As such, the fact that the matter could end up in the debtor’s location, should never sway one from filing in their own home jurisdiction, and affording themselves of the advantages of doing the same.
Despite the clear benefits of choosing to file suit in one’s home jurisdiction, there are, however, a few reasons not to choose the home state of the credit grantor as the exclusive place to vest jurisdiction. Foremost among these is the fact that the creditor’s home state may not be creditor friendly, or may have laws that would make enforcement of the credit terms difficult or impossible. A thorough cost/benefit analysis to weigh the advantages and disadvantages of a jurisdiction clause can be completed by an attorney well versed in collections law. However, inclusion of a modified clause, one which is not an exclusive grant of jurisdiction, may best serve the credit grantor by providing the flexibility to weigh the laws of competing jurisdictions in order to determine which jurisdiction will provide the most favorable outcome.
In short, there is no reason to omit a jurisdiction clause in your written contracts or credit application, in one form or another. Additionally, where a clause is present, there are few reasons to neglect it and, the result of doing so may very well be increased costs, an adverse outcome, and lost efficiency in the recovery of accounts receivable.