Forum selection clause

A forum selection clause in a contract with a conflict of laws element allows the parties to agree that any litigation resulting from that contract will be initiated in a specific forum. There are three types of clause:

• the reference might be to a particular court in a jurisdiction agreed upon by the parties (although, if the parties make a mistake as to the power of the nominated court to hear the matter, the civil procedures of the nominated jurisdiction will be applied to identify the appropriate court); or
• the clause might refer to a specific kind of dispute resolution process, such as mediation, arbitration (see arbitration clause, lex loci arbitri), or a hearing before a special referee; or
• the clause might refer to both, requiring a specific process to be carried out in a specific location.

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.”

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.” ^[1]

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.

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.

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 (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, ^[2] 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, ^[3] 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.

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.^[4]

Proposed International Convention

In 2005, the Hague Conference on Private International Law issued the Hague Choice of Court Convention.

References

1. This sample arbitration clause is from ContractStore's catalogue, where additional clauses are also available. http://www.contractstore.com/arbitration-notes
2. http://www.ca2.uscourts.gov/decisions/isysquery/13f63218-4ec9-4232-8a21-ccd32b75d408/3/doc/10-3928_so.pdf#
3. http://www.ca2.uscourts.gov/decisions/isysquery/ff01dc50-754c-4c2b-9819-2fbcc17143f8/3/doc/08-1358_opn.pdf#
4. Suskin, Howard; McWilliams, Emily. "Using Forum Selection Clauses to Avoid Default Arbitration Rules". Transaction Advisors. ISSN 2329-9134.