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U.S. Courts Likely to Enforce “Forum Selection” Clauses in Contracts

Companies spend a great deal of time and effort in negotiating the parameters of a business transaction, and then they spend a lot of money on their lawyers to draft and finalize the deal, usually encapsulated in a written contract. The days that “your word is your bond” seem to have disappeared, and a signed, written agreement is key.

Assume you made all this effort and spent all that money but the deal went haywire and you want to file suit. It might therefore come as a shock to find out your company must travel half way around the world to litigate the dispute in the back yard of the company that was seated on the other side of the negotiating table, due to a clause buried in the boilerplate.

“Boilerplate” Clauses 

The part of the contract that people often do not check carefully is the “boilerplate” tacked on at the end, which could include a clause that provides for a “forum” or place where disputes must be resolved. It may be a specific court (e.g. federal or state court in the US) or arbitral body (American Arbitration Association in California; the ICC in Paris; or the Hong Kong International Arbitration Centre), as well as at a specific geographic location (e.g. Los Angeles or Singapore).

Be aware that courts and arbitral bodies usually have their own procedural rules that the parties must follow in a dispute before that forum.

Further, with more and more contracts “going global,” the boilerplate may even include a clause that a specific country’s law will govern any dispute (e.g. English or Dutch law), referred to as a “choice-of-law” clause. U.S. federal courts consider themselves well-equipped to resolve disputes governed by foreign law, and judges can be guided by affidavits or live testimony (in person or telephone) by foreign lawyers, barristers or advocates.

Enforcement by U.S. Courts

The U.S. Supreme Court first addressed the enforceability of a forum-selection clause back in 1972 (Bremen v. Zapata Off-Shore Co.) when it held that such a clause “should control,” absent a strong showing that it must be set aside, and that it was “prima facie valid” and had to be enforced unless the opposing party could show it was unreasonable under the circumstances.

Since then, U.S. courts have consistently upheld forum selection clauses:

For example, the US Supreme Court upheld a Florida forum under a cruise line ticket, even though it was nonrefundable and not even the product of bargaining i.e. a take-it or leave-it ticket (Carnival Cruise Lines, Inc. v. Shute); and it upheld a Korea arbitration clause under a bill of lading (Vimar Seguros y Reaseguro, S.A. v. M/V SKY REEFER). The 9th Circuit (federal court that controls California) enforced a Saudi Arabian forum selection clause between a Delaware corporation and California resident (Spradlin v. Lear Siegler Management), and an Alabama federal court upheld a Saudi Arabian forum clause in a contract signed by a U.S. citizen, despite his potential for arrest in that forum on an unrelated matter (Tisdale v. Shell Oil Co.).

Further, the 9th Circuit granted an anti-suit injunction based on a forum selection clause requiring disputes to be settled in a California court (E.&J. Gallo Winery v. Andina Licores), due to the overwhelming U.S. policy of enforcing forum selection clauses.

Recommendations    

An agreed forum (and choice of law) clause – whether in your back yard, the other party’s yard or even a neutral yard – is a function of the parties’ bargaining strength and your lawyer’s negotiating ability. So make sure you have a selected forum nailed down during negotiations.

If you are in a strong bargaining position, push for a local forum. It’s a lot easier to drive to a local courthouse of your choice, flanked by your regular lawyers, than having to incur the cost of foreign travel and appointing new lawyers (unless you fancy a trip to Paris for ICC arbitration).

But if you are in roughly the same position, be creative – you could suggest a neutral forum. For example, if you are in California and the other party is in Europe, you could agree on the High Court in London with application of English law. Or if the other side is in China, you could agree on the Singapore High Court under Singapore law (which follows English common law, as does Australia and India, among others).

If you are in a weak position, why not propose that you will agree to the other side’s forum, provided it agrees to non-binding mediation in your neck of the woods as an initial step? If there are problems down the road, you could try to reach a settlement or at least flush out the arguments against your position.

Conclusion

In the U.S., forum selection clauses will be “controlling.” Absent a strong showing, they will not be set aside, as courts consider them presumptively valid and enforceable unless the resisting party can prove they are “unreasonable under the circumstances.”

A party trying to avoid your forum selection clause must prove to the court it has a most exceptional case: it must make a “strong showing” that the clause is “unreasonable” – this is a heavy burden, usually only carried by a clear showing of fraud or overreaching, violation of a strong public policy, or that enforcement would deprive the party of his day in court.

The bottom line is forum selection clauses are good for your contracts. Put them in, even if you have to go to Paris in the springtime.

Article written by:
Neil Klein 

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