Forum selection clause
A forum selection clause in a contract with a conflict of laws element allows the parties to agree that any disputes relating to that contract will be resolved in a specific forum. They usually operate in conjunction with a choice of law clause which determines the proper law of the relevant contract.
There are three principal types of clause:
- that all disputes must be litigated in a particular court in a jurisdiction agreed upon by the parties;
- that disputes must be resolved pursuant to a dispute resolution process, such as mediation, arbitration, or a hearing before a special referee or expert determination; or
- the clause might refer to a combination, requiring a specific process to be carried out in a specific location, and if that process fails to resolve the issue, for litigation to be conducted in a particular court.
When the clause chooses a particular jurisdiction for the resolution of disputes, it may do so either as an exclusive jurisdiction clause or a jurisdiction clause. An exclusive jurisdiction clause mandates that all disputes must be resolved by a particular court, whereas jurisdiction confirms that a particular court may be used by the relevant parties, but does not preclude a party from commencing proceedings in another court if they wish to do so.
In many cross-border contracts, the forum for resolving disputes may not be the same as the country whose law governs the contract. The contract may provide for a staged procedure for resolving disputes. For example:
Discussion
The choice of law stage in a conflict case requires the forum court to decide which of several competing laws should be applied to resolve the dispute. In this, there is an important distinction to be made between a forum selection clause and a choice of law clause. As an application of the public policy of freedom of contract, the parties are usually free to nominate the proper law under which all relevant disputes will be resolved. If there is an express selection, this choice will be respected so long as it is made bona fide, i.e. the subjective intention prevails unless the purpose is to:- evade the operation of some mandatory provisions of a relevant law,
- there was an element of fraud or duress or undue influence involved in the signing of the contract, or
- there was some other evidence of mala fides.
- the forum has established significant expertise in the relevant areas of law, e.g. shipping, charterparties, carriage by air, etc.;
- the standard of judicial decision making may be high:
- there may be no corruption or other outside influence to affect the fairness of the judgments;
- the procedures may be efficient and minimise losses arising through any delay in arriving at a judgment;
- all the major witnesses may be resident within the jurisdiction making the forum convenient ; etc.
Forum selection clauses have been criticised by a minority of courts as improper attempts to divest them of personal jurisdiction over the parties. Because of this, some jurisdictions refuse to give effect to these clauses, declaring them to be void as against public policy. However, most jurisdictions now recognise and enforce forum selection clauses, so long as the parties were acting in good faith.
Effect of breach
Although most contractual clauses are enforced by way of either an award of damages for breach or by an injunction to restrain breach, the operation of jurisdiction clauses tends to operate at the interlocutory stage of a dispute. The existence of a jurisdiction clause in an agreement will normally operate to enable a court to take jurisdiction in a particular matter, or may provide strong grounds for another court to decline jurisdiction.Such clauses are sometimes enforced against proceedings in foreign courts by use of an anti-suit injunction.
Although it is theoretically possible to sue for damages for bringing proceedings in breach of a jurisdiction clause, examples are rare.
Related clauses
In a complex agreement the forum selection clause will often be accompanied by a number of related clauses. These may include:- appointment of an agent to receive service of process in the relevant jurisdiction - this facilitates initiating process and avoids the need to make an application to court for leave to serve a defendant out of the jurisdiction
- waiver of any objection to the chosen forum - this helps to preclude or limit the ability of a litigant to apply for proceedings to be stayed or dismissed on the grounds that they have been brought in an inappropriate forum
- contractual submission to the relevant jurisdiction - this assists in any application to enforce a subsequent judgment in another state
- waiver of a right to trial by jury in the relevant forum - especially if the chosen forum is in the United States
- waiver of other procedural provisions which might apply to foreign litigants, such as the right the request they post security for costs
- waiver of any applicable sovereign immunity which a party might have the benefit of
Clauses in void contracts
Asymmetric clauses
Typically a forum selection clause applies to all parties to the contract. However it is possible for a contract to state that if A wishes to sue B, then one procedure applies, and if B wishes to sue A, a different procedure applies. The legality of asymmetric clauses differs in various legal system. For example, they are generally enforceable under English law, but not under French law.Similarly, one party may be afforded alternative dispute resolution options. For example, a loan agreement may provide that if the borrower wishes to bring proceedings against the lender, that can only be done by way of arbitration. But if the lender wishes to make a claim against the borrower they may do so by way of arbitration or by proceedings in a certain court. These are various called "option clauses", "asymmetric clauses" or "hybrid clauses".
The situation in the U.S.
The United States Supreme Court has upheld forum selection clauses on several occasions, and has suggested that they should generally be enforced. See The Bremen v. Zapata Off-Shore Company, 407 U.S. 1 ; Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585. The Bremen and Carnival Cruise cases, however, arose under the Court's admiralty jurisdiction, not under diversity of citizenship jurisdiction.A court in the United States will not necessarily honor a simple forum selection clause whereas it is likely to respect a clause that points to a specific forum with the express exclusion of others. Two October 2011 appellate rulings illustrate the difference. In Future Industries of America v. Advanced UV Light GmbH, 10-3928, the United States Court of Appeals for the Second Circuit in New York City affirmed the dismissal of a case that sent the parties to Germany because the forum selection clause made German courts the exclusive forum. By contrast, the same court in Global Seafood Inc. v. Bantry Bay Mussels Ltd., 08-1358, affirmed the refusal of the lower court to refer the parties to Ireland because the clause was not exclusive, and the litigation continues in America.
The state of New York has a statute expressly dealing with those circumstances under which a New York court may not dismiss a case on the grounds of forum non conveniens if the parties' contract provides that the agreed upon venue is a court in New York and if the transaction involved an amount more than $1 million.
Currently, a U.S. Circuit Court split is emerging over whether forum selection clauses in a contract supersede pre-existing arbitration clauses in regulatory membership rules, such as FINRA.
Specific issues
Corporate bylaws: Prior to 2010, it was uncommon for American corporations to insert forum selection clauses in their bylaws. But that situation changed. Surveying the case law in 2015, Bonnie Roe, Daniel Tabak, and Jonathan Hofer have argued that forum selection bylaws have become an established part of corporate governance in only a few short years. Their conclusion is that a board of directors adopting a forum selection bylaw "can reasonably expect" that the bylaw will be enforced.Consumer contracts: The enforceability of forum selection clauses in the consumer field is controversial. Many opponents of enforcement argue that the contracts that include such forum selection clause are contracts of "adhesion". This position is well summarized in an article in the Chicago-Kent Law Review by Marty Gould, who argues that, unlike most federal courts – which have enforced such clauses in the consumer context – a state court in Illinois correctly refused enforcement in connection with a claim relating to an online dating service contract. Proponents of enforceability take issue with the assertion of "adhesion".
Scope of a forum selection clause: Courts are often required to determine whether a forum clause covers all parties to a transaction. Many courts resolve the scope issue by applying the "closely related" test. See e.g. Manetti-Farrow, Inc. v. Gucci America, Inc. and Roby v. Lloyd’s. Writing in International Aspects of U.S. Litigation, Eric Sherby argues that most courts that have addressed the issue have glossed over the circular nature of the finding of "closely related" and that even those few judicial decisions that evince an awareness of the circularity problem have themselves fallen into the circular reasoning trap.
Franchise and dealership disputes: A number of American states have enacted statutes that require franchisors to agree to litigate disputes with franchisees in-state. Those states include California, Wisconsin, and New Jersey. Although not all of these statutes contain language of exclusivity, the case law has generally interpreted these statutes as invalidating contractual clauses that require disputes to be resolved out of the franchisee’s home state.