Litigation is an unfortunate but increasingly common cost of doing business. Where you litigate is often as important as – and sometimes more important than – the strength of your position or claim. Forum selection clauses are being used frequently to determine where the parties to a contract will litigate any dispute before one has even arisen.
What is a Forum Selection Clause?
A forum selection clause is a provision in a contract that requires that any litigation arising between the parties be conducted in a specified jurisdiction or geographic location. For example, a contract between a seller from North Carolina and a buyer in New York could include a forum selection clause which requires that any dispute arising between the parties be resolved in New York. If the New York buyer fails to pay the North Carolina seller, then the forum selection clause will require the North Carolina seller to pursue litigation against the buyer in New York, not in North Carolina. The costs and expenses to the North Carolina seller (not to mention inconvenience) would obviously increase dramatically if that were the case.
When entering into a contract, many parties simply do not worry about what might happen if the parties end up in a dispute over the contract or its subject matter and often do not read the "fine print" or "legal mumbo-jumbo" of a multi-page contract handed to them. The parties are even less likely to worry over where they might have to litigate if a dispute arises. After all, if there was a real concern about the other party not performing its part of the bargain, the contract would probably never have been negotiated in the first place. However, this approach is fraught with risk. Agreeing to litigate in a certain forum if a dispute does arise is analogous to the coach of the Wolfpack basketball team agreeing to play "any game" against the Tar Heels at the Dean Smith Center.
What Can Happen
The risk in agreeing to a forum selection clause is simple: If a dispute does arise between you and the other party to the contract, you may be required to pursue your legal remedies against that party in a location that is distant, is inconvenient for you, and has no real connection to you or the dispute over which you are litigating. In other words, you're agreeing to give up the home court advantage to the other party.
Why It's Important
Where you may have to litigate is important not only if you do end up litigating, but also before you've fully entered into a contractual relationship.
There are statutes and procedural rules that prescribe where litigation can or should be conducted. To the extent that a forum selection clause alters or changes these requirements (and courts will typically find that they do just that because the parties are "entitled" to the benefit (or burden) of their bargain), the clause may well be waiving or barring a right that you otherwise have. In the case of the North Carolina seller and the New York buyer described above, a North Carolina statute might give the North Carolina seller the right to bring suit in North Carolina and force the New York buyer to litigate here, before a North Carolina judge, with a North Carolina jury, and using North Carolina law. The North Carolina seller is giving all that up if it agrees to a forum selection clause designating New York as the forum for dispute resolution.
The forum selection clause typically selects a location that is distant and inconvenient for the party that did not draft it. If required to litigate in a distant location, you will incur increased costs and increased expenditures of your own time. You will likely have to retain local counsel with whom you may be unfamiliar and who does not know your business or internal policies and procedures, all while frequently incurring greater legal fees. There may be local procedural rules in the chosen location that are both unfamiliar and unfavorable to you. Put simply, in agreeing to a forum selection clause, you typically give the other party the home court advantage.
Frequently, a forum selection clause selects a location different from that where the action "arose." Generally, the most logical location for litigating a dispute is the location where the transaction at issue occurred. Consider having to litigate in California where the subject matter of the dispute is a house built in North Carolina. If you have the burden of proof, winning your case will be much more difficult if the subject of the dispute is separated from the courtroom by several thousand miles.
The law concerning the enforceability of forum selection clauses is full of ambiguity. Thus, the existence of a forum selection clause often creates an additional procedural dispute between litigating parties that increases their costs and delays the ultimate determination of the substantive issues in dispute.
Perhaps most importantly, the potential remedies that arise from a contract are the benchmark or polestar around which the parties measure and provide their performance. Unfortunately, many people perform their end of a contractual bargain, not because it is the right thing to do, but because they know that the other party can obtain that performance (and possibly, additional penalties) by seeking to enforce the contract through litigation. Thus, even if you never have to invoke the litigation process, your right to do so frequently is what actually causes the other party to ultimately do what it already agreed to do. The bottom line is that if you agree to litigate in a forum that is clearly inconvenient for you, you take the risk that the other party will fail to fully or properly perform its obligations under the contract because that party knows that the inconvenience of the selected forum makes it more difficult for you to pursue and obtain your contractual remedies.
How to Protect Yourself
You always should fully read contracts you are signing. Remember, the devil's in the details (otherwise known as the "fine print"). When faced with a proposed forum selection clause, approach it with the following general rules in mind:
- If you are uncertain of the meaning or effect of a term or clause, seek legal advice.
- Never blindly agree to a forum selection clause or assume that it is less important than any other contractual provision.
- If it's not feasible to remove a disadvantageous forum selection clause entirely, attempt to negotiate a version that is less unfavorable.
- In considering a forum selection clause, assume that any litigation that ensues will be in the location chosen by the forum selection clause.
- If you react in a viscerally negative way to the potential of your favorite basketball team agreeing to play all of its games against its archrival in the archrival's home court, consider having the same viscerally negative reaction to someone asking you to agree to resolve all of your future disputes in a distant, inconvenient, and unfriendly place.
In some cases, you may not have the bargaining power to refuse to agree to a forum selection clause. In those situations, at least be aware of the existence of the forum selection clause and its potential effects, and take them into account in determining the economic viability of the transaction.
Of course, it goes without saying that a forum selection clause is a coin with two faces. If you have the opportunity and bargaining power to impose your own "fine print," all of the disadvantages mentioned above can become advantages for you. But, if you are inserting a forum selection clause into a contract, make sure it is drafted perfectly to enhance the chance it will be enforceable and will result in disputes being litigated in a forum clearly advantageous for you.
Forum selection clauses are appearing more and more in written contracts. Often, the chosen location is inconvenient for at least one of the parties. Agreeing to such a forum selection clause is fraught with risk. Therefore, read your contracts in full beforehand, make sure you understand the terms to which you are agreeing, and don't blindly concede to a disadvantageous forum selection clause unless absolutely necessary.
© 2011 Ward and Smith, P.A.
For further information regarding the issues described above, please contact Jason T. Strickland.
This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.