Consideration of Accounting Errors and Fraud In Financial Reporting

The financial health and stability of a company. One of the main purposes of financial reporting is to provide shareholders and investors with accurate information, so they can make adequate decisions. Therefore, it is vital to accurately report financial information. Even the slightest error that may seem immaterial can have a large impact on important financial ratios. Firms should report the corrections to errors as prior period adjustments including that changes to previous period financial statements were needed. It is vital that the total values of assets and liabilities from the prior periods be adjusted for a cumulative effect. 

This cumulative effect will equal the needed adjustment to the balance of retained earnings. Some common accounting errors include mathematical mistakes, unrealistic estimations, failure to accrue expenses or revenues at the end of a period, misuse of facts, and incorrect classification. However, there is a fine-line between an error and fraud. Fraud is crime in which people or businesses purposely provide incorrect information for personal gain. Firms can commit fraud a variety of ways for a variety of reasons; it is a serious matter that ultimately misrepresents the firms financial position.

The moment a company finds an error in reporting, the error must be corrected. The company corrects errors from prior periods by making an adjustment to their retained earnings for the current accounting period. Subsequently, these transactional corrections are called prior period adjustments. When estimations are needed, it is important to use realistic and accurate numbers, so the amounts involved are accurate. The estimations that are involved with depreciation expense can be vital in the creation of their bottom line. If depreciation expense is overstated, the firms net income will be understated. At the same time, if a company understates depreciation expense, they will have a higher net income.

Consequently, estimations and non-cash expenses have a significant impact on a company's bottom line; therefore, must be reported as accurately as possible.

If a firm recognizes a change in an estimate must be made, the company must use the new, configured basis for reporting on current and future financial statements. However, no changes are to be made to prior period financial statements. Also, current period opening balances should not be adjusted due to the effects in prior periods.

If a company needs to be a change the way they are reporting entity, they must do this retrospectively. Therefore, the firm must restate their financial statements of previous periods. They must also provide the reason and nature of the change and the changes effect on the bottom line and earnings per share for all prior presented periods. 

When a firm needs to change their accounting principle, they must do this retrospectively. A change in accounting principle is when a firm changes from one generally accepted accounting principle to another: for example, if the United States were to adopt International Financial Reporting Standards, companies would have to retrospectively change their financial statements that they recorded under Generally Accepted Accounting Principles. Therefore, if a change in principle occurs, a company must change their financial statements for all previously presented periods. 

The year that the accounting principle occurs, the company must disclose the effects of net income and earnings per share that occurred during the prior periods. An adjustment to the retained earnings balance in the earliest presented year also needs to be completed. If decides to change from FIFO to LIFO it is impractical to determine the occurring effects during the previously recorded periods. Therefore, the company is not to change income from previous years. For all subsequent LIFO computations, the firm must use opening inventory for the year the method is adopted as the base year inventory. Finally, the firm must disclose the occurring effects and specify the reasoning behind omitting the computation of the cumulative effect and proforma  amounts.

There is a fine line between an accounting error and change and committing the crime of fraud. Firms and individuals usually commit fraud for the financial gain. Therefore, fear of losing your job, difficult financial goals, personal bonuses, and to maintain financial performance are all factors that come into play. For example, it is two days away from the end of the period and you are only a few sales away from earning that big bonus, but it does not look like you are going to get there. So, you decide to make a deal with a close contact to buy some inventory which you will buy back after the period. 

This is an instance of misrepresenting sales in order to get paid which is fraud. As you can see there is a distinct difference between an accounting error and change in relation to fraud. Errors, changes, and fraud are major components of the accounting profession. Fraud should try to be prevented proactively through internal control, while errors and changes should be dealt with either prospectively or retrospectively.

Should You Work Coworking Environment

They people doing freelance work, working for themselves or working in small business start ups, there are more people than ever without an office space in the traditional sense. However, what if you are someone who finds a more social atmosphere is the most productive? Many people find a traditional office environment to be the most beneficial way to work easily, without the distractions of home or a public area.

The term was "co working" first launched in 1999, by Brian DeKoven. In the same year, one of the first studios opened in New York City, called 42 West 24. Then, in the UK, the first co-working space wasn't opened until January 2005 in London. However, the term only became popular in March 2007, when it was trending on Google Search. Soon afterwards, in October 2007, it was listed as a term on Wikipedia.

Since then, it has only expanded in popularity and many offices have been founded. It is easy to understand why the demand for the spaces has developed so rapidly, as there are many positives. The pros easily outweigh any potential cons.

Pros

In starting up your own business beneficially, it is paramount to create connections and utilise networking to succeed. This is one of the main pros of a co-working environment - everyone you meet and work with is a potential network connection, or even a client. You meet dozens of people simply through working alongside them during your normal day.

Asides from networking, the people you work with in a co-working space can benefit you and your business in another way. Ideas people thrive in a situation where you can bounce ideas off others, as it creates a more stimulating environment. Other people and businesses are willing to help you out, and often an exchange of services can be given. For example, a website designing business may work in the same space as a marketing business, and they could compliment each other by exchanging certain online services.

In a co-working office space, there is an existing sense of community. This creates a certain feeling of belonging, which you wouldn't necessarily get from working alone or at home. Your colleagues become your friends, as well as associates, which is one of the most enjoyable factors about traditional office work. It also creates the opportunity to still participate in work events.

Cons

As with most things, there are downsides - yet, there aren't a lot of cons. However, the one recurrent negative seems to be the noise levels, particularly when someone appears to be persistently loud. If a space is too noisy or crowded, it can become difficult to concentrate and work to the best of your ability. Although, if everyone in the office understood the necessity to keep the noise level at an acceptable level, then there wouldn't be a problem.

The only other negative I uncovered is the feature of messiness in a co-working environment. This is something that can't easily be avoided in any work office space situation, and you may often find yourself guilty of slacking off your cleaning duties when there's work waiting! A factor that's similar and does relate to co-working, however, is the concern with who provides the general amenities, such as toilet paper, washing up liquid, milk and teabags. Each space is different, but in general it is the facilitator of the particular space who takes care of those things.

Conclusion

Yet, despite those, one of the main positives of a co-working environment is that it creates freedom for you and your business. The hours are more flexible than your typical nine-to-five, and, if you work for yourself, you can pick certain days to work in the space and other days you can work from home. The point is to be flexible and help each business succeed in their individual way.

Ultimately, co-working is all about the people, who become your friends and motivators in your business. The spaces are generally open and designed to enhance productivity in this professional environment. You have the freedom to interact and generate social and professional encounters, or simply choose not to.

Co-working is a far more stimulating environment for freelancers and small businesses, rather than working from home. The interaction and sense of community generates productivity, collaboration and resulting success for everyone involved.

Here at Bright Yellow Creative Group, we work in a co-working office space as part of a growing business of coworkers called Indy-cube. There are several work-spaces available through Indy-cube, all throughout South Wales currently. 

Manage Leadership Capability Practice And Theory

Summary of article key points:

Leadership is more about practice than theory, even if theory can inform some relevant insights as part of a leadership development programmed.

Leadership is a blend of art and science. Some leaders are born / per-equipped better than others (nature), but intelligent training and development (nurture) can enhance virtually any one's leadership capability.

Theories and models have a use, but only to underpin "practice" in leadership and real world outcomes.

Functional skills and previous performance are no guarantees of future leadership capability.

You will only get the leadership qualities that you select and train for.

The cost of promoting without leadership skills and then desperately seeking to equip people with adequate leadership skills can be high in human and economic terms.

Well-designed internal leadership academies can help when they match enhanced leadership awareness and capability to actual business needs.
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Main article:

For centuries much has been written about the "science" and the "art" of leadership.

Most of us have read and absorbed elements of this wisdom (and too often perhaps some of the come and go fads rather than wisdom). Many of us have subsequently pondered that age-old question about leadership; "are great leaders born, or are they made"?

Based on our experiences we have found that effective leadership capability tends to arise from a little of both in terms of settling that 'nature versus nurture' debate? Sabre's recent work on a number of high-level leadership academies (including one that was integral to the Coles turnaround) has confirmed that whilst there are many valid theories and models for the "science" of leadership, it's often the "art" of leadership that still evades adequate capture and definition.

Many businesses simply don't get it right, but it's reassuring to see those that do reap the positive rewards that flow so evidently from putting in the effort.

It is certain that nature does equip some people better than others in terms of their leadership traits (from a genetic, neurological and thence a behavioural perspective). There are those who just seem pre-loaded with healthy measures of IQ, charisma and also enough EQ to meld it all together in a way that gets their people to where they need to be.

Arguably though the honing of these skills that may at first glance seem to be gifted from "nature" can be attributed in at least part also to a degree of "nurture." For example, the development of complex neurological systems and patterns that drive much of our behavior (social systems of the brain, core belief patterns and embedded personality) can be traced to responses to external stimulus over the course of a lifetime.

It is however equally certain that proper approaches to 'nurture' can be used to raise the bar for virtually anyone who wishes to play the leadership game by enhancing awareness of their own strengths, areas of struggle and weakness as they manifest day to day.

Discipline is then required to act upon those insights of self-awareness to help cultivate better leadership capability for their own personal and professional circumstances.

One thing we often see is that being gifted in a particular functional skill or specialization, even to the point of genius, is no assurance that you can then lead a group of former peers in that field (or indeed any other).

Regular experiential "practice" of leadership comes into play as a valuable tool for enhancing the quotients of leadership talent that are gifted or acquired from our own recipe of nature and nurture. In the cut and thrust of day to day work life we don't always have adequate time to discern the true source of, and impact of our leadership and team role styles.

Current research and models from such emerging fields as neuroscience confirm some leadership theories and debunk others, and are often very useful in framing approaches and delivering ongoing insight. They are at the end of the day however just more tools for the toolbox, with leadership capability itself something that needs to be lived and developed day to day and powerfully linked to real world outcomes.

One of the clearest examples that I have observed was in the military when being selected for and subsequently entering into Army Officer training. Now whilst not all attributes of military leadership are relevant to commercial or non-military endeavors, it's safe to say that many are with respect to the human dynamics of leadership (particularly leading amidst complexity).

For Officer selection the emphasis was first and foremost upon personal leadership capability (and the potential to hone it further for a military environment). It was only much later after rigorous training in general military skills and leadership that relevant specialist streaming was done into various specializations and functional skills.

In commerce the reverse is often the case, where people are selected and promoted firstly with their "functional" skills and credibility strongly in mind (e.g. a great engineer, lawyer, stockbroker, salesman) with their leadership skills seldom given the same rigorous analysis as their functional results.

The Officer selection process was designed to reveal "leadership" potential first via a careful blend of psychometric followed up with a host of mental and physical challenges that were rigorously observed by an experienced leadership selection panel. Their emphasis for selection was first upon core leadership traits exhibited under pressure, and the potential to polish those.

It was only much later that the aptitude for possible functional roles was to be explored. Functional experience and past performance, whilst taken into account if it was present, was never taken as an assurance of future leadership capability.

In commerce the best and brightest performer in a functional sense may not be the best person to lead a team of their former peers (unless they have been equipped by nature and nurture to lead also). The skills for leadership often exist outside of our functional skills, and are deserving of attention.

The military naturally values both individual leadership capability, and functional proficiency in an Officer's chosen trade post graduation (e.g. Infantry, Armour, Artillery, Intelligence etc), but the term "General Service Officer" is used to describe Army Officers upon graduation, and is used to imply that it's the "Officer" bit (your designated status as a leader) that comes first, and any functional / technical proficiency that may come later is second.

So much so that in theory any General Service Officer can be moved to or seconded into to virtually any military role or command should it be required of them. Of course you won't get far, or get much respect form peers or subordinates if you don't have some credible functional capability also, but the foundation is first your personal "leadership brand" which can be transferred into almost any other challenge.

Again, the military doesn't always get it right, but there is much to be said for the "leadership first" approach given to seeking and honing "Leadership DNA" as part of the overall process of developing organizational leadership talent. This in tandem with functional capability is ideal. Both matter, but the "personal leadership capability" bit is often overlooked in commerce (or considered as a clear second to ticking all the boxes on functional results and skills).

We have all seen people who are highly adept specialists in their given field (e.g. engineer, lawyer, doctor, stockbroker, IT professional) given leadership roles after getting runs on the board functionally speaking, without necessarily coming equipped with the requisite inter-personal and leadership awareness to handle the "non-functional" challenges of leadership.

Even being a respected genius at your chosen trade, does not ensure that you may end up out of your depth when asked to lead a cohort of your former peers (unless you have the "leadership bit" sorted first)?

The low morale, high turnover, friction and inefficiencies that can arise from poorly lead dysfunctional teams costs a great deal in both personal and economic terms This is where teams that on paper may have fall the boxes ticked for functional brilliance with their professional skills, experience and qualifications can simply fail through poor leadership and poor teamwork.

In a military environment the price paid for this is often instant, but in business it' can be slower and more insidious, but the outcome is the same, your team takes casualties and loses.

The ideal package for a leader is perhaps having enough functional proficiency to establish credibility, whilst also ensuring that they have been given ample opportunity to properly explore and develop their own leadership capability before being advanced to lead others. There is thus far less chance of being caught out of their depth in the all-important "leadership bit".

So how can business get the balance right?

It is our assertion that businesses can 'cherry pick' from the very best of the military approach by carefully designing and delivering their own internal leadership academies to target existing and emerging leaders. This enables people to build and develop upon existing leadership skills within the critical context of what they actually need to do and deliver within the business.

Time taken "outside" of the business, but very much "about" the business can really pay off when leadership development is tailored to meet business needs.

We have been involved with several wonderful examples at Coles where senior leadership skillfully identified a need to design a series of highly tailored leadership academies for enhancing personal leadership capability. This is one of the few examples where we have seen a company achieve such a wonderful balance of leadership capability development wedded to real world needs and outcomes.

Coles recognized leadership capability development as a key factor in itself and that it was by "practicing" it in tandem with cutting edge theory that worked best. It was our privilege to be invited to work with Steve Robinson and Dr Malcolm

McGregor who were brought in by the Boards of Coles and Wesfarmers to craft the overarching strategy for these approaches.

An enormous amount of design work was done to ensure that every aspect of the Academy would hone and develop each individuals leadership capability, but very much with the business in mind and putting valid personal insights immediately into practice.

The blending of theory and practice in facilitation was done very carefully to ensure constant linkages back to a leader's daily planning, interactions with their own teams and daily execution. The careful and intelligent exploration of personal leadership styles was matched to personal leadership plans and real world business scenarios. This was all within an environment that focused meaningfully upon people taking responsibility for and ownership of their own development and the impacts of their behavior (in both tailored simulations and shared real world case studies).

Participants were existing leaders within the business, and emerging leaders with high potential who were engaged in meaningful pre programme diagnostics followed by an intensive 7 day residential programme with targeted follow though, mentoring and coaching back into the business.

Theory was carefully linked to real world and business case studies were used throughout and the targeted experiential content was linked powerfully and intelligently to individual profiling and learning. Leadership was lived and "practiced" throughout.

All approaches used were of sufficient complexity and sophistication to meaningfully engage intelligent leaders (there certainly weren't any tacky reality TV show rip off team games or treasure hunts). This is very much along the lines of what most successful military academies embrace, and that is to take the time to properly select leaders then develop and hone personal leadership capability itself as a powerful enabler for better functional capability and success to follow.

Some well selected theory is fine, but at the end of the day it's all about putting it into practice.

This was reflected in the outcomes that ensued for the many alumni of this Coles academy, and the turnaround demonstrated by Coles as a company and as a brand.

Yes there is a price to pay in terms of taking key people outside of the 'day to day' business for a time, but it's important not to forget that ongoing development of leadership capability is still very much "about the business" when it's done well.

Investing in leadership capability in this way removes the "lucky dip" approach of selection primarily for a person's functional skills, then finding out all too late that real world productivity and lost opportunities has been caused by poor leadership that transfers into low performing teams.

Five Important Contract Provisions To Save Your Business

The following five Contract Provisions will undoubtedly help save your business future headaches! While no contract provision can be guaranteed to be enforceable, following some basic principles of use will dramatically increase the odds. Of course, your business won't get any protection without using them in the first place.

1. Warranties

You may or may not want to include specific, express warranties for anything you sell on your website. There is no law requiring you to give any written express warranties to your customers. Although, you can unwittingly make an express warranty through any ads or written materials contained on your website.

But, there are also implied warranties. Certain warranties arise automatically under the law or are "implied" unless they are specifically disclaimed in a written agreement. To avoid the possibility of providing an implied warranty, your contracts must include a disclaimer waving these warranties in a conspicuous manner. A conspicuous manner means that the disclaimer is set off from the rest of the contract by all capital letters, bold type, or a different color. The type cannot be smaller than the surrounding type in the contract.

A written statement regarding the "As-Is" or "With All Faults" nature of the product (or actually disclaiming the implied warranties by name) is sufficient. Internet businesses may use a clearly-labeled hyperlink such as "IMPORTANT WARRANTY INFORMATION" to lead to the full text of any warranty. Also, the warranty should be presented in a way that is capable of being preserved, either by downloading or printing.

Implied warranties could include a warranty of title (seller owns the goods, has the right to sell them, no creditor will interfere with buyer's purchase of the goods, and the goods are free from copyright, trademark, or patent claims of third parties), a warranty of merchantability (goods are reasonably fit for the ordinary purposes for which such goods are used), a warranty of fitness for a particular purpose (seller has reason to know of the purpose for which the goods are bought and knows that the buyer is relying on the skill and judgment of the seller to select the goods) and a warranty arising from course of dealing or trade usage (a court presumes both parties have knowledge of trade custom and presumes that custom is intended to apply to the contract). These warranties apply equally to services and goods.

Not all states will allow you to disclaim all implied warranties if you sell goods online. But, you should still disclaim all implied warranties in writing in your terms of sale. (You should also understand disclaiming implied warranties will not shield your business from liability for any injuries caused by a product sold from your website). Without this provision, the goods or services provided under the contract will be warranted with the express warranties arising from what your company states on its website and with the implied warranties provided under state law. Reducing the uncertainty this creates requires a warranty disclaimer.

2. Limitation of liability & Damages

You may limit or alter the types of damages normally recoverable by your customers. Customers may suffer damages if your business breaches any of the terms of sale with a customer or any warranty or if your business is liable for any product defects that cause any injuries. In those cases, the customer would be allowed to recover damages reasonably foreseeable or "within the contemplation of the parties" at the time of contract formation. This means your customers can suffer "direct damages" or the damages that you would expect to occur from the breach, such as cost to repair or replace a product. However the customer may also suffer "consequential damages" (also sometimes referred to as indirect or "special" damages) which encompass all damages that aren't either direct or incidental damages.

Expenses incurred by your customers in connection with enforcing available remedies are "incidental damages." Any lost profits or revenues suffered because of failure of the product are consequential damages. This is a factual determination that could lead to your customers being able to collect a large amount of damages above and beyond the simple cost or value of the product. If you don't limit your damages contractually, your customers may be entitled to collect any and all foreseeable damages.

TIP! Always limit damages to the cost of the item itself or replacement of the item and also have your customers waive their rights to collect lost profits or any type of incidental or consequential damages!

Not all courts will honor these limitations if they feel they are unfair to the consumer (I.e. "unconscionable"). For instance, limitation of consequential damages for injury to the person in the case of consumer goods is unconscionable on its face, but limitation of damages where the loss is commercial is not. Most courts generally uphold limitations of liability and you should always include them anyways. Damage costs that could be recovered include direct damages, which are damages that are a direct result of what happened, like medical costs or property damage, and indirect damages. Indirect damages are those that are not directly caused by the other party but that are incurred because the party was injured. 

Some states have laws that require a disclaimer of liability in a contract to be conspicuous within the contract to be enforceable. For that reason these provisions should be in all capital formats, bolted, set in a larger font than the surrounding text, or otherwise distinguished from the rest of the contract. You also may want to limit the time frame in which the consumer may bring a claim. This greatly decreases the likelihood of a claim being filed.

3. Include An Attorney's Fees Provision

Always include an Attorney's Fees provision in your terms of sale. This clause creates a right to recover costs and expenses paid by the party that prevails in a contract dispute. The way this clause is worded, the costs and expenses are not limited to those paid in a lawsuit-the costs and expenses incurred in any contract dispute could be recovered. This provision is thought to discourage frivolous lawsuits because the party filing a lawsuit risks payment of the other party's legal costs if the suit is lost.

4. Using Forum Selection Clauses (Venue)

I have had numerous clients ask me about forcing their customers to settle any future disputes in a specific location. This is a type of contractual term known as a "forum selection clause" (or "venue clause"), which more or less binds the parties to litigate in a specific jurisdiction. You can and should use a forum selection clause on your website user and product purchase agreements. They are not illegal and can even be justified from a business standpoint. They are used to avoid costly and frivolous litigation. Since these clauses can be extremely valuable, you should understand how to effectively use them. Assuming the terms were validly accepted and proper notice of the terms was given, these types of provisions generally are just as enforceable as the underlying agreement.

TIP! You must also make sure that "notice" that this specific type of provision exists in the contract is provided to the user. This requirement has been relaxed by the courts quite a bit recently, but I still recommend using bold font, 'all caps' or a larger font for your forum selection clause so it stands out from the rest of the agreement.

Sometimes contractual provisions can overreach and be so unreasonable that they are declared null and void by a court. These are sometimes known as "contracts of adhesion." This type of contract is basically an agreement where one side holds all the bargaining power and uses it to write the contract primarily to his or her advantage. This is really how many Internet businesses improperly use forum selections clauses. Understanding how forum selection clauses might overreach and be unreasonable is obviously very important to your Internet business. Basically, the courts won't automatically honor provisions that require the consumer to waive some right.

An unreasonable forum selection clause may also violate publi

c policy. This typically occurs when a particular state has a strong interest in regulating a particular industry or in protecting a certain class of persons. State courts have various approaches in determining the enforceability of forum selection provisions. If a party opposing the forum selection can demonstrate extreme inconvenience that was not foreseeable at the time the provision was negotiated, some states will reject it. But, usually the opposing party has to show that a heavy burden would be imposed if they were to litigate in that forum.

Additionally, for a forum selection clause to be upheld, the parties must use language clearly indicating that the forum selection clause excludes all other courts in hearing any potential dispute. A few states refuse to enforce forum selection provisions altogether (such as Idaho and Montana) while others limit enforcement with respect to certain types of contracts.

The following case summaries illustrate some of these principles:

Fee v. Expedia Inc.- Zachary Fee sued Expedia, which operates the travel website Hotels.com, for deceptive trade practices. Fee alleged that Hotels.com switched the plaintiff's paid reservation from a four-star hotel to a three-and-one-half star hotel. Fee brought the lawsuit in the state of Kansas. But, he agreed to a forum selection clause contained in the click-wrap agreement that required all suits to be filed in Texas. The Kansas court dismissed Fee's lawsuit since the click-wrap agreement on hotels.com required Fee's lawsuit to be brought in Texas, not in the state of Kansas. The forum selection clause used by Expedia was simple and straightforward and only required that all claims basically be heard in the State of Texas. 

Olmsted v. Dell-The plaintiff brought a class action lawsuit in California against Dell, Inc. The plaintiff asserted that Dell designed, manufactured and sold defective notebook computers in violation of California consumer protection laws. Dell's website required purchasers to accept a click-wrap agreement that contained a forum selection clause. This clause required all lawsuits against Dell to be filed in the State of Texas, but it also required consumers to waive their right to bring a class action suit against Dell for any reason. The California court refused to enforce Dell's forum selection clause. The difference in this case is that Dell not only required consumers to litigate in Texas, but the company's click-wrap agreement also required consumers to give up a fundamental right to sue as class action litigants. The court found this to be overreaching. 

5. Choice of Law provisions

Choice of law provisions usually also accompany forum selection clauses. They really go hand in hand, although choice of law provisions can stand alone. This type of provision specifies that the laws of a certain jurisdiction must be applied by the court hearing any dispute. The particular court hearing the dispute will apply the law of the state the court is located in (the forum) unless there is some conflict, such as when an out-of-state consumer sues an Internet business. The court may also apply a different state's law if the contract calls for specific laws to be followed. 

Modern courts follow the rule articulated in the Restatement (Second) of the Conflicts of Laws. It provides that choice of law provisions are presumptively enforceable as long as there is some relationship between the transaction and the state's law that would govern, or by another reasonable basis for choosing a particular states' laws. 

The Restatement basically recognizes there should be no limitation on the power of the parties to incorporate foreign law into their contracts. Under Section 187(2), the express choice-of-law made by the parties is still recognized "even if the particular issue is one, which the parties could not have resolved, by an explicit provision in their agreement directed to that issue." But, there are three exceptions to Section 187(2). First, the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice. Second, misrepresentation, duress, undue influence, or mistake secured the consent of one of the parties to the inclusion of the provision. Third, application of the state's law chosen would be contrary to a fundamental policy of the state that would be able to apply its own law but for the choice-of-law provision. 

Besides the Restatement, the Uniform Commercial Code (UCC) also allows the parties to a commercial contract to choose the applicable state law, so long as the transaction "bears a reasonable relation" to the state chosen. See UCC Section 1-105. (The UCC is followed in some form in all 50 states). Thus, the general law in the U.S. is that parties to a contract may choose the law of a particular state to govern the contract, and that the courts will uphold the choice. 

TIP! Most businesses online should simply require disputes to be heard under the laws of the state they are physically located. This is valid since there is already a relationship with the state. Also, selecting the laws of your home state is advantageous since your business is operating under these laws already. If no state law is designated, a court will typically interpret the agreement under the laws of the state where either party is located, or where the contract was performed or signed. 

 

Forum Selection/Choice of Law Lessons:

1. Always use forum selection clauses to avoid frivolous and costly litigation in some distant state;

2. Keep your forum selection clause simple. Don't restrict "fundamental" consumer rights, such as a consumer's right to initiate a claim against your business or initiate or join a class action suit;

3. A straightforward clause selecting the forum for any potential litigation and the choice of law should be simply used and no more. The language should be simple, yet crystal clear and should state the chosen forum is the exclusive forum that any and all disputes would be heard;

4. Finally, there is no guarantee any forum selection clause you use will be upheld. As stated, even if it isn't
unreasonable, the clause may violate the public policy of some state.

This article was written by Philip A. Nicolosi, J.D. Mr. Nicolosi provides legal services through his law firm, Phil Nicolosi Law, P.C., focusing on startup and small business law, Internet & technology law and commercial transactions. 

Mr. Nicolosi serves as a trusted advisor to numerous start-up and small to medium sized businesses. This includes representation for a wide range of business law matters including business organization, corporate/LLC governance, regulatory law, contracts and transactions and most other matters outside of litigation. Mr. Nicolosi provides guidance with e-commerce, Internet marketing and technology-related legal matters.