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What is a forum selection clause in a contract?
How does it work?
In this article, I will break down the meaning of a Forum Selection Clause so you know all there is to know about it!
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What Is A Forum Selection Clause
A forum selection clause is a type of contractual provision where the contracting parties designate the court and location where the parties wish to resolve potential legal disputes.
Typically, in a forum selection clause, the parties will agree to give the court personal jurisdiction to hear the matter and establish the venue setting and the physical location where the court will exercise its powers.
In essence, the parties contractually select the court and the location where they would like legal disputes to be submitted.
In law, you can define a forum selection clause to be a contractual provision where the parties agree on where their contractual dispute will be litigated.
A forum selection clause will generally identify the specific court that the parties agree to have personal jurisdiction to hear their contractual disputes and define the location where the competent court is located.
For example, the parties to a commercial contract can choose to give the State Courts personal jurisdiction to hear the matters between them located in New York City.
Although most forum selection clauses apply to all contracting parties equally, in some contracts, the parties can choose to have the forum selection clause apply to a specific party only.
For instance, in a service contract, the forum selection clause can only authorize the client to choose where to sue the service provider.
Keep in mind that not all jurisdictions will enforce an asymmetric forum selection clause the same way.
Some jurisdictions will enforce such provisions (like under English Law) while others will not (like under French law).
Why Include A Forum Selection Clause In A Contract
There are many reasons why contracting parties may want to include a forum selection clause in their contract.
In most cases, the forum selection clause is presented as a “boilerplate” clause that the parties leave as is.
However, in international transactions, the contracting parties will want to properly negotiate the forum selection clause to provide themselves with an edge in the event of a dispute.
Here are some reasons why the parties include a forum selection clause:
- A party wants to litigate disputes in a jurisdiction that it is familiar with
- A party wants to litigate disputes in its “home” jurisdiction
- The location where the court is located is where you have most of the parties and witnesses
- The selected court has special expertise in dealing with the specific type of contracts
- The contract will be primarily executed in the selected jurisdiction
Types of Forum Selection Clauses
There are two types of form selection clauses: permissive forum selection clause and mandatory forum selection clause.
A permissive forum selection clause is a type of clause that allows a party to submit contractual disputes to a certain court located at a certain place, but will not prohibit the parties from filing a lawsuit somewhere else.
On the other hand, a mandatory forum selection clause is a type of clause where the parties have an obligation to submit their dispute to the selected court and venue.
To avoid getting into a legal dispute as to whether or not the forum selection clause was permissive or mandatory, make sure you draft your contractual provision carefully to clarify if you wish “all” of your disputes to be the subject of the forum selection clause or not.
Benefits of Forum Selection Clauses
When you negotiate a forum selection clause in your favor, you can potentially draw many benefits.
The most important benefit is that you can choose the forum to give you a home-court advantage.
In the event of a dispute, you’ll be litigating at home where you are familiar with the courts, have relationships with lawyers and law firms, and you are at physical proximity to the court.
Additionally, you will prevent a potentially costly dispute over collateral issues such as which court is competent to hear the matter.
By including a forum selection clause, you can select a court that has experience and knowledge in the type of contract that you are entering into.
Drawbacks of Forum Selection Clauses
Not having a forum selection clause or negotiating one that is against you could lead to certain disadvantages.
If you give the other party the home-court advantage, you will be less likely to exercise your legal rights against that party in a foreign location.
For example, a US company accepting to litigate the contract in Germany will have the challenge of being far away from the court’s location and the inability to speak the local language.
In addition, since you will be in a foreign jurisdiction, it’s likely that you will not know much about that jurisdiction.
As a result, you’ll need to hire local counsel who is not familiar with your business thereby leading to additional costs for you.
Also, since the other party is at home, it is more likely that they will exercise legal recourse against you if things don’t go as planned.
Forum Selection Clause vs Choice of Law Clause
What is the difference between a forum selection clause and a choice of law clause?
In essence, a forum selection clause is a contractual clause where you choose the court and location where you will want breach of contract and contractual disputes to be litigated.
For example, you can choose the Federal courts located in Houston, Texas to have jurisdiction to hear contractual disputes.
On the other hand, a choice of law clause is a contractual clause where the parties mutually agree to subject the contract to the laws of a specific jurisdiction.
For example, in international transactions, it’s very common that the parties agree to subject their contract to the laws of the State of New York.
The choice of law clause is relevant when the contracting parties are located in different jurisdictions as it will provide them greater clarity as to which law will govern the contract.
Enforceability of Forum Selection Provisions
In general, a forum selection clause is enforceable by the courts in the United States.
In fact, in most commercial contracts, you may see a forum selection clause as part of the general clauses inserted in the contract.
In most commercial disputes, the courts will accept to enforce the parties’ wishes as to which court will have the competence to hear their disputes and where.
This is even more true the more there is a nexus between the parties, their business transaction, and the performance of their contractual duties with the forum selected by the parties.
However, the court does have the power to decide otherwise if there’s an exceptional circumstance where it must decline jurisdiction.
It’s also worth mentioning that in certain cases, even if the contract is found to be void, the court will continue to enforce the forum selection provision.
Typically, the operation of the forum selection clause will take place on an interlocutory stage where the parties seek to have the court confirm or deny its personal jurisdiction before the matter is heard on its merits.
Forum Selection Clause Example
Let’s look at a few examples of forum selection clauses to better illustrate the notion.
The Parties shall submit all disputes to the state courts of the Commonwealth of Massachusetts or the United States District Court for the District of Massachusetts and the Parties hereby expressly agree to the sole and exclusive jurisdiction of the said court
All actions or legal proceedings in any way whatsoever arising out of or related to this Agreement shall be litigated before the federal court in the City of Chicago, Illinois, and the parties waive any objection they may have in contesting the personal jurisdiction of this court
So there you have it folks!
What is a forum selection clause?
In a nutshell, the forum selection clause is an agreement between contracting parties as to which court, located in which area, will have the competence to hear their contractual dispute.
This type of contractual provision is found in most commercial contracts.
However, the impact of properly negotiating this provision can be significant in cross-border transactions.
Now that you know what a forum selection clause is, why it’s important, and how it works, good luck with your research!
I hope you enjoyed this article on the Forum Selection Clause! Be sure to check out more articles on my blog. Enjoy!
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