Forum selection clause

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Forum selection clauses often gravitate towards the courts of large commercial centres, like London, New York (pictured) and Hong Kong.

A forum selection clause (sometimes called a dispute resolution clause, choice of court clause, jurisdiction clause or an arbitration clause, depending upon its form) 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.

A simple forum selection clause covering both the proper law of the contract and the forum for resolving disputes might read:

“This contract is governed by the laws of England and any dispute shall be finally resolved by the English courts.”

Where the clause chooses a particular jurisdiction for the resolution of disputes, it may do so either as an exclusive jurisdiction clause or a non-exclusive jurisdiction clause. An exclusive jurisdiction clause mandates that all disputes must be resolved by a particular court, whereas a non-exclusive clause 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. And the contract may provide for a staged procedure for resolving disputes. For example:

“1.This agreement shall be governed by and interpreted in accordance with the laws of England.
2.The parties shall endeavour to settle any dispute that arises by direct negotiation between their managing directors or similar senior executives but if direct negotiation does not result in a resolution of the dispute, either Party may require that it be referred to mediation in accordance with the CEDR (Centre for Effective Dispute Resolution) Mediation Rules at present in force.
3. Any dispute that is not settled by direct negotiation or by mediation shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.”[citation needed]

Discussion[edit]

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.

But, if the parties do no more than nominate a forum, this is no more than an indication that they intend that forum's law to apply. There are many reasons why parties may select a forum (see a discussion of forum shopping):

  • 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 (see forum non conveniens); etc.

If the parties have selected a jurisdiction as the place for the resolution of a dispute, the implication is that the courts may nevertheless apply their lex fori which includes their general choice of law principles. Thus, in the ordinary course of legal events, the forum court may identify and apply a foreign law as the proper law. The majority of professionally drafted contracts will address both issues, and contain clauses specifying both the forum and the law to be applied therein. The fact that the particular contract only specifies the forum therefore becomes highly revealing as implying that the parties intended to leave the choice of law issue to the forum nominated.

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[edit]

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 (not the chosen court) to decline jurisdiction.[1]

Such clauses are sometimes enforced against proceedings in foreign courts by use of an anti-suit injunction.[2]

Although it is theoretically possible to sue for damages for bringing proceedings in breach of a jurisdiction clause, examples are rare.[3]

Related clauses[edit]

In a complex agreement the forum selection clause will often be accompanied by a number of related clauses (either in the same contract or in a collateral document). 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[edit]

Despite the general rule that if a contract is void each of the individual clauses in the contract are void, numerous legal systems, including English law, provide that jurisdiction and arbitration clauses are a special case, and that such clauses may still be relied upon even when it is part of the case of the person relying upon them that the contract is void.[4][5]

Asymmetric clauses[edit]

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.[6][7]

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".[8]

The situation in the U.S.[edit]

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 (1972); Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991). 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, [9] the United States Court of Appeals for the Second Circuit in New York City affirmed the dismissal of a case which 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, [10] 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 not less 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.[11]

Specific Issues[edit]

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 (in Lexology)[12] 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.[13] 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 (including non-signatories) 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.[14]; Roby v. Lloyd’s[15] Writing in International Aspects of U.S. Litigation [16], 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. [17]

Proposed international convention[edit]

In 2005, the Hague Conference on Private International Law issued the Hague Choice of Court Convention. The Hague Convention does not apply to disputes involving consumers.

References[edit]

  1. ^ Cooper Grace Ward (27 July 2016). "Foreign judgments, foreign contracts and dangers of jurisdiction clauses". Lexology. 
  2. ^ See for example the decision of the United Kingdom Supreme Court in Ust-Kamenogorsk Hydropower Plant JSC v AES Ust-Kamenogorsk Hydropower Plant LLP [2013] UKSC 35 and the Privy Council in Société Nationale Industrielle Aérospatiale v Lee Kui Jak [1987] UKPC 12.
  3. ^ Gisele Ruehl (31 July 2014). "English Court of Appeal confirms Damages Award for Breach of a Jurisdiction Agreement". 
  4. ^ "Court has jurisdiction even when the underlying contract is void". Allen & Overy. 6 November 2008. Retrieved 28 September 2017. 
  5. ^ "Relying on an exclusive jurisdiction clause in a disputed contract". Kennedys. 18 December 2015. Retrieved 28 September 2017.  (Singapore)
  6. ^ "Asymmetric jurisdiction clauses protected by Brussels Recast anti-torpedo rules". Allen & Overy. 27 March 2017. Retrieved 28 September 2017. 
  7. ^ "The validity of unilateral "hybrid jurisdiction" clauses has become less certain under French law". Norton Rose. Retrieved 28 September 2017. 
  8. ^ Claudio Perrella (8 April 2013). "Italian Supreme Court Considers Unilateral Jurisdiction Clauses". Mondaq. Retrieved 28 September 2017. 
  9. ^ http://www.ca2.uscourts.gov/decisions/isysquery/13f63218-4ec9-4232-8a21-ccd32b75d408/3/doc/10-3928_so.pdf#
  10. ^ http://www.ca2.uscourts.gov/decisions/isysquery/ff01dc50-754c-4c2b-9819-2fbcc17143f8/3/doc/08-1358_opn.pdf#
  11. ^ Suskin, Howard; McWilliams, Emily. "Using Forum Selection Clauses to Avoid Default Arbitration Rules". Transaction Advisors. ISSN 2329-9134. 
  12. ^ https://www.lexology.com/library/detail.aspx?g=1d349d33-0c85-492a-9f25-0b47632f886c
  13. ^ See Marty Gould, The Conflict Between Forum-Selection Clauses and State Consumer Protection Laws: Why Illinois Got It Right in Jane Doe v. Match.com, 90 Chi.-Kent. L. Rev. 671 (2015).
  14. ^ Manetti-Farrow, Inc. v. Gucci America, Inc., 858 F.2d 509 (9th Cir. 1988).
  15. ^ Roby v. Lloyd’s, 996 F.2d 1353 (2d Cir. 1993).
  16. ^ See Sherby, Eric “Forum Selection Clauses In International Commerce” in Berger, James, International Aspects of U.S. Litigation. American Bar Association. Pp 292-93. ISBN 978-1-63425-558-5 (hereinafter: “Sherby”).
  17. ^ See Sherby, pp. 276-78.