Jurisdiction clause

Three related provisions usually sit together near the end of a funding agreement, and they are read past because they look procedural. They are not.

• Governing law: which state's substantive law applies. This determines usury treatment, whether particular clauses are enforceable, and how the contract is interpreted
• Forum selection / venue: where suit must be filed. Often exclusive, often a specific county in a specific state
• Consent to jurisdiction and service: the borrower agrees in advance that the chosen court has personal jurisdiction over them, and often agrees to service by mail or on a designated agent

A jury trial waiver and an arbitration clause frequently accompany them, and an arbitration clause overrides the forum clause for most purposes.

Why funders choose particular states

Predictable case law on the enforceability of receivables purchase agreements, favourable treatment of the loan-versus-purchase question, efficient commercial courts, and permissive rules on rate limits. The choice is a considered one.

Enforceability

Courts generally enforce forum and choice-of-law clauses in commercial contracts between businesses. Generally is not always. A chosen law with no reasonable relationship to the parties or the transaction, or one that would defeat a fundamental public policy of the state whose law would otherwise apply, can be set aside — and this is precisely the battleground where borrowers argue that a permissive state's law was selected to escape their own state's usury or licensing regime. Outcomes vary by state and by facts.