Question: I am in the process of setting up a new business with someone who lives in Florida. He wants to include a provision in our operating agreement requiring any disputes that arise between us to be resolved in a Florida court according to Florida law. I don’t expect any disputes to arise between us, but am nervous about having to fight a court case in Florida on the off chance that one does. How do I impose my preference that any disputes that come up be resolved in Colorado?
Answer: You are right to be worried about this, Rob. Of course you’re not going into this relationship expecting problems, but the courts are filled with lawsuits between people who thought they would always get along when they first started out together.
You are also right that litigating in a state outside of the one that you live in would be, at best, inconvenient and expensive. To answer your question about “imposing” your preferences on your partner, it’s the same as any other provision in the agreement. Assuming that you are coming into this negotiation as relative equals, without any preexisting legal obligation to one another, you are going to have to decide how important this is to you and whether you are willing to walk away over it if you can’t get adequate concessions in exchange for what your partner wants. That’s more of a philosophical question than a legal one.
The question is, how important is this issue to you? You appear to think that it’s pretty important, and I think you are right about that. Depending on what kind of resources you have, putting yourself in a situation where the only recourse you have against your partner for bad behavior is to file a lawsuit against him in Florida may, for all intents and purposes, act as an immunity clause for him. And being able to threaten you with litigation in Florida may also increase his leverage against you if any dispute does arise between the two of you.
One way that you might be able to find a compromise with your partner would be by incorporating other dispute resolution alternatives into your contract. My last post was a long rant about the evils of arbitration in the consumer context. But this question provides an example of a situation where agreeing to arbitrate up front, before any dispute has arisen, can make a lot of sense. Unlike in the typical consumer transaction, the two of you are presumably equally sophisticated parties, engaging in a real, live give-and-take negotiation. There is nothing inherently unfair about including an arbitration clause in this context.
Arbitration clauses can take an almost infinite number of forms. It could just be a simple statement that you agree to arbitrate any disputes that arise, without any specifics about how, when, or where the arbitration would take place. Or you could go into great detail about who the arbitrator will be, where it will take place, who will pay the costs, and on and on.
Given the number of options available (and the corresponding number of ways to screw this up), I would strongly recommend getting an attorney’s review before finalizing anything. You don’t, for instance, say where the business is going to be located, or where it will be offering its services or products, but those factors may lead a court to makes it own determination about where a dispute should be resolved, and what law should apply, regardless of what your contract says. Drafting choice of law and venue provisions is usually work that is best left to the experts.
If you’re in the process of negotiating a business operating agreement, I would be happy to consult with you to ensure that your agreement is addressing the risks unique to your situation. Please contact me here.