Picking Your Battles —— Choice of Law and Forum in Aircraft Purchase Contracts

Like the aircraft themselves, the purchase and sale of a private aircraft will often cross borders, meaning that sellers and buyers may be thousands of miles apart. Reaching agreement and proceeding to successful closing is an act of diplomacy as well as mutual interest. One critical element in a purchase agreement is the parties’ choice of governing law and court(s) to resolve any disputes that might arise between the parties. A typical choice of law provision might look like this:

This agreement will be governed by and interpreted in accordance with the substantive laws of ____. The parties consent to the [exclusive] jurisdiction of the courts, for themselves and their assets, in _______ for resolution of any disputes arising hereunder.

Now let’s break that contract clause down into a few components:

  • Governing law. Words and phrases have slightly different legal meanings in different places. The term “commercially reasonable” will mean one thing in New York, and another thing in London. The term “as-is” may mean one thing in California, and something slightly different in Quebec. So, when the parties say that the laws of New York apply, they mean that contract terms will be interpreted and applied as previously determined by courts applying New York law. Sometimes the clause will specify that the parties choose the substantive laws or the internal laws of a location. This means that the procedural laws that govern how the case is started and managed may be different and will be determined by the choice of jurisdiction or forum.
  • A court (forum) can only issue rulings that are binding on someone who is subject to that court’s jurisdiction. Jurisdiction of a court is a matter of local law, and usually relates to the person’s physical proximity or conduct of business in the vicinity of that court. However, jurisdiction can also be established by agreement between the parties. Having jurisdiction over a person (or entity) allows the court to rule for or against that person or entity. But in order to allow a judicial order to be enforced, it may be necessary to have a party consent to having its assets subject to court jurisdiction.
  • Exclusive Jurisdiction. A contractual consent to jurisdiction can be exclusive, meaning that the court(s) noted are the only courts with authority to rule on the case; or it can be non-exclusive meaning that in addition to the noted court with jurisdiction, the case may be heard by any court that otherwise has jurisdiction based on the facts of the case. If the parties want to specify one place for disputes, then can use exclusive jurisdiction. If they simply want to know that they can bring suit in a specific location, among others, they can rely on non-exclusive jurisdiction.

With that background, let’s see how these clauses work in a typical aircraft purchase transaction.

  • Why do we include choice of law clauses?

A contract does not need to designate governing law. If governing law and/or forum is not specified, parties can bring law suits where they wish, and the courts themselves will decide if they have jurisdiction over the parties, and which law will govern the case, based on where it was signed and where it would be performed. But when two parties are thousands of miles apart, it is better to know the forum and governing law than to hope that courts will figure it out.

For international transactions, choice of forum (jurisdiction) is perhaps the most important legal provision in the contract. When two parties from different nations enter into a transaction, it is vital to specify where a dispute will be brought since the circumstances of the transaction may not offer clarity. For this reason, it is best if the choice if jurisdiction is exclusive. It is also important that the choice be fair and reasonable. If the parties cannot agree to have the disputes handled in a court that is local to one or the other, then it may need to be directed to a third location. For example, a New York seller and the Hong Kong buyer may agree to have disputes settled in the courts of London, England.

  • Which governing law is best?

The parties may pick a governing law based on how predictable and proficient that law is with commercial disputes. However, when one party is in Los Angeles and the other party is in Beijing, the choice of law often has to be a compromise because to pick one jurisdiction is a significant disadvantage both in distance and familiarity. Even in the U.S., parties from different states will often pick a third state so that neither one feels unfairly treated. In general, the laws of New York, Delaware or London are most frequently chosen because they are the most familiar and clear.

  • Do they have to match?

While it is possible to have a New York court handling a case governed by Hong Kong law, it is certainly not recommended. It is best to have the choice of law be the same as the jurisdiction so that the court will be working with familiar law, and will be relying on their own prior decisions to guide their actions on your case. It is not a good compromise to choose the law of one party and the courts of another. That is more likely to create a problem than to solve one.

  • What good is a judgment without a remedy?

If the parties agree to governing law and to a forum, then it will be relatively easy for a court to come to a decision on a dispute. For example, if a Hong Kong buyer and California seller have a dispute over an aircraft transaction governed by New York choice of law and forum, then a New York court may find in favor of the Hong Kong buyer, but the decision of a New York court does not resolve dispute until it is enforced. The court’s decision needs to be executed, meaning that unless the losing party cooperates, the prevailing party may need to find assets of the losing party (such as bank accounts or real estate), and seek a remedy against those assets such as seizure and sale. When a party consents to jurisdiction over its assets, it will be easier to secure satisfaction of the judgment against those assets. However, it is often necessary for the prevailing party to take a court decision and bring that decision to the courts of another state or nation to have it enforced.

In closing, the above is a basic overview of choice of law and forum. (Arbitration is another choice of forum that will be covered in a separate article.) As with any contract, the outcome may be determined by bargaining power of the parties. For example, an aircraft manufacturer that is going to build and sell you an aircraft, may insist that the choice of law be their own country and state. You may not have much choice in the matter.

Lastly, while the parties have wide latitude to select governing law and forum, there are limits to how far and wide you may go. Unless you meet the standards of the applicable chosen forum, your choice of law or forum may not be enforceable. It is preferable to pick a location that has some connection to the contract (where it’s signed, where it’s performed or where one party does business). But it is also possible to pick a neutral court, if you check the local rules.

Greg Cirillo
Greg Cirillo

Greg Cirillo is a Member in the U.S. law firm HCH Legal, LLC and has a multinational client base of corporate and high-net-worth individuals who own and operate private aircraft. HCH Legal is based in Bethesda, Maryland and includes attorneys licensed to practice law in New York, Washington DC, Massachusetts, Virginia and Maryland. For more information: www.hchlegal.com