Spring 2014 Article
Preparing for Litigation While Things are Good: Choice of Forum Clauses
No one enters into an agreement with the expectation of a lawsuit, but inevitably some agreements will result in lawsuits. Therefore, even if it never becomes necessary, a party to any contract, and particularly an international commercial contract, should consider the potential for litigation while negotiating its contract with any counterparty. If these potential areas of dispute are addressed in advance, a party may - if litigation becomes necessary - find itself in a much more favorable position than it would be in if it merely relied on the laws as it found them.
Therefore, when drafting a contract involving international or even interstate commerce the parties should consider this: if a dispute occurs, where will the matter be litigated? In order to address this concern, parties have long included "choice of forum" clauses in their contract. This article will attempt to explain what these clauses are, how they are viewed by the courts, and when - and when not - a party may wish to include them in its contracts.
2. Law of forum
Before considering whether to include a choice of forum clause, it is necessary to understand the "default" rules for forum selection in courts in the United States. Each state in the United States has its own court system. Further, the U.S. Federal Court system is organized into districts in which each state has, at minimum, at least one district. Each of these states or districts may potentially be the forum for litigation, subject to other considerations such as whether the court has jurisdiction over the defendant. The law of forum (or "venue") determines where such an action can and will take place.
At the start of all litigation, two questions must be answered. Which courts have "personal jurisdiction" over the defendant and what is the proper forum or venue for the action (venue and forum are, for these purposes, interchangeable)?
Initially, a court may not render a judgment or even issue orders binding a party unless the Court has "personal jurisdiction" over that defendant. The law of personal jurisdiction is beyond the scope of this article, but essentially it is determined by constitutional limits on due process as well as various Federal and state statutes.
Under the U.S. Constitution, a party must have "minimum contacts" - meaning it does business or resides in a particular state - in order for a court to have constitutional authority to render a judgment against that party. For example, if a corporation is located outside the U.S., but regularly does business in a particular geographic location, a Court in that district or state likely has personal jurisdiction over that party.
Equally important, lack of personal jurisdiction is an affirmative defense that may be waived if a party consents to appearing in that particular court. As such, if a court does not have jurisdiction over a party, but the party does not object to the court assuming jurisdiction over them as a party to the action, intentionally or inadvertently, the Court will have personal jurisdiction. This is important because a party may enter into an agreement in which it consents to the jurisdiction of a court, such as through a forum selection clause, where it would not otherwise be required to do so.
In contrast to jurisdiction questions, the forum for the litigation is governed entirely by statute. In federal court, "venue" refers to the "geographic specification of the proper court or courts for the litigation of a civil action that is within the subject-matter jurisdiction of the district courts in general." 28 U.S.C. § 1390(a). Generally speaking, a determination of the proper venue for a particular defendant considers where the events or omissions occurred; if a corporate defendant is a "resident" of the district; and how to resolve the competing "convenience" factors involved in a change of venue request". District No. 1, Pacific Coast Dist., M.E.B.A. v. State of Alaska (9th Cir. 1982) 682 F. 3d. 797, 798.
For a domestic corporate defendant, residency is usually defined as the state of its incorporation and the state in which its principal place of business is located. For a foreign corporation, the forum can be in whatever state or district has personal jurisdiction over the corporation (which, given the liberality of the "minimum contacts" test, could mean many potential forums for a foreign corporation).
3. Contractual forum selection clauses
However, these considerations are only relevant if the parties have not already consented to a place in which the litigation will occur through a "forum-selection clause". In such a case, a court will almost always enforce the parties' agreement to litigate in a particular forum. Importantly, the U.S. Supreme Court has held that forum selection clauses are presumptively valid. Bremen v. Zapata Off-Shore Co. (1972) 407 U.S. 1, 12-15; 92 Sup. Ct. 1907, 1914-17. Therefore, a choice of forum clause should be enforced "absent some compelling and countervailing reason." Murphy v. Schneider National (9th Cir. 2004) 362 F. 3d. 1133, 1140. The party challenging the clause bears a "heavy burden of proof" and must "clearly show" that enforcement of the clause would be unreasonable. Murphy at 1141.
This strong presumption in favor of enforcing the parties' choice of forum was confirmed in another recent Supreme Court case. In that case, Atlantic Marine Const. Co., Inc. v. U.S. District Court for the Western District of Texas, 2013 WL 6231157 at *4 (U.S. Dec. 3, 2013), the Court confirmed that when a plaintiff brings an action under a contract in a forum other than the forum agreed upon in the forum selection clause, the Court should transfer the case to agreed-upon forum in "all but the most unusual cases". In addition, and in contrast to earlier practice, convenience of the parties or other "private interests" will not be considered as the court assumes the parties already considered these "private interests" when entering into the agreement. Essentially, the Supreme Court has held that when the parties freely consent to a particular forum, courts must accept that and enforce it.
The rare exceptions to the enforcement of these clauses will involve "public interests", such as labor laws and other matters, where both state and federal courts will recognize the public policy interests that make certain laws and access to the courts "non-waiveable".
4. Practical Considerations
As we have discussed, parties' decision to enter into a "forum selection clause" will generally be enforced. Therefore, parties to a contract, as potential litigants, must consider seriously at the time of formation of the contract what may potentially go wrong and where a party would like to bring an action - or have to defend an action.
If the parties have included a "choice of law" clause in their contract as well, which is common, the parties may wish to have the venue in the same district or state as the applicable law. It will be easier for the parties to find local counsel, and the Court will be comfortable applying the law.
Further, a non-U.S. company may wish to limit the forum for any action to its home country. However, doing so may lead to some complications. First, any judgment rendered against a U.S. entity would have to be "domesticated" - meaning given legal effect in the U.S. - by a court in the U.S. before being enforced. Second, if for some reason at the time of the litigation the home country is not advantageous (such as longer time to "get to trial"), the party runs the risk of having the forum selection used as a way of delaying or complicating matters. For example, if the transactions were carried out in the U.S., witnesses would have to travel and documents would need to be translated. Although a foreign plaintiff could choose to "waive" the clause and file an action in the U.S., as discussed, the defendant could choose not to accept the waiver and move to dismiss the action.
One potential way to handle these issues is to have a reciprocal forum selection clause, where each party agrees, if it is plaintiff in any action, to bring the action in the other party's preferred forum. Such a clause can have the effect of reducing the likelihood of litigation, and encouraging settlement, but again may make litigation very costly and inefficient if forced to litigate in some remote forum.
Finally, a non-U.S. entity may wish to leave the issue unresolved. Depending on its contacts with the U.S., a party may preserve flexibility by refusing to consent to any forum, which will permit it to maintain its right to raise "jurisdiction" defenses, as well as permitting it flexibility if it must file its own action. Of course, such a choice reduces the predictability of the litigation.
Regardless of the choice, a party should consider these issues before entering into any agreement, particularly in an international transaction, with the expectation that whatever choice is made will be enforced should litigation occur.
Requests for information or insights on this issue may be addressed to email@example.com.
This article is for information purposes only and does not constitute legal advice. The information contained herein may be outdated or incomplete, and shall in no way be taken as an indication of future results. The transmission of this article is not intended to create, nor does its receipt constitute, an attorney-client relationship between sender and receiver. You should not act on the information contained in this article without first seeking the advice of an attorney.