Forum selection clause

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Forum selection clauses often gravitate towards the courts of large commercial centres, like London, New York (pictured) and Hong Kong. New York Supreme Court at 60 Centre Street.jpg
Forum selection clauses often gravitate towards the courts of large commercial centres, like London, New York (pictured) and Hong Kong.

In contract law, a forum selection clause (sometimes called a dispute resolution clause, choice of court clause, governing law clause,jurisdiction clause or an arbitration clause , depending upon its form) in a contract with a conflict of laws element allows the parties to agree that any disputes relating to that contract will be resolved in a specific forum. They usually operate in conjunction with a choice of law clause which determines the proper law of the relevant contract.

Contents

There are three principal types of clause:

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.

When the clause chooses a particular jurisdiction for the resolution of disputes, it may do so either as an exclusive jurisdiction clause or a jurisdiction clause. An exclusive jurisdiction clause mandates that all disputes must be resolved by a particular court, whereas jurisdiction confirms that a particular court may be used by the relevant parties, but does not preclude a party from commencing proceedings in another court if they wish to do so. [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:

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):

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.

Where a contract does not contain a forum selection clause, the defendant may bring an action to have the plaintiff's action stayed based on the fact that the selected forum is not convenient (forum non conveniens).

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.

Effect of breach

Although most contractual clauses are enforced by way of either an award of damages for breach, or by an injunction to restrain breach, the operation of jurisdiction clauses tends to operate at the interlocutory stage of a dispute. The existence of a jurisdiction clause in an agreement will normally operate to enable a court to take jurisdiction in a particular matter, or may provide strong grounds for another court (not the chosen court) to decline jurisdiction. [2]

Such clauses are sometimes enforced against proceedings in foreign courts by use of an anti-suit injunction. [3]

Although it is theoretically possible to sue for damages for bringing proceedings in breach of a jurisdiction clause, examples are rare. [4]

In a complex agreement the forum selection clause will often be accompanied by a number of related clauses (either in the same contract or in a collateral document). These may include:

Clauses in void contracts

Despite the general rule that if a contract is void each of the individual clauses in the contract are void, numerous legal systems, including English law, provide that jurisdiction and arbitration clauses are a special case, and that such clauses may still be relied upon even when it is part of the case of the person relying upon them that the contract is void. [5] [6]

Asymmetric clauses

Typically a forum selection clause applies to all parties to the contract. However it is possible for a contract to state that if A wishes to sue B, then one procedure applies, and if B wishes to sue A, a different procedure applies. The legality of asymmetric clauses differs in various legal system. For example, they are generally enforceable under English law, but not under French law. [7] [8]

Similarly, one party may be afforded alternative dispute resolution options. For example, a loan agreement may provide that if the borrower wishes to bring proceedings against the lender, that can only be done by way of arbitration. But if the lender wishes to make a claim against the borrower they may do so by way of arbitration or by proceedings in a certain court. These are various called "option clauses", "asymmetric clauses" or "hybrid clauses". [9]

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, [10] the United States Court of Appeals for the Second Circuit in New York City affirmed the dismissal of a case that 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, [11] 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 and if the transaction involved an amount more than $1 million.

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. [12]

Specific issues

Corporate bylaws

Prior to 2010, it was uncommon for American corporations to insert forum selection clauses in their bylaws. But that situation changed. Surveying the case law in 2015, Bonnie Roe, Daniel Tabak, and Jonathan Hofer have argued (in Lexology) [13] that forum selection bylaws have become an established part of corporate governance in only a few short years. Their conclusion is that a board of directors adopting a forum selection bylaw "can reasonably expect" that the bylaw will be enforced.

Consumer contracts

The enforceability of forum selection clauses in the consumer field is controversial. Many opponents of enforcement argue that the contracts that include such forum selection clause are contracts of "adhesion". This position is well summarized in an article in the Chicago-Kent Law Review by Marty Gould, who argues that, unlike most federal courts – which have enforced such clauses in the consumer context – a state court in Illinois correctly refused enforcement in connection with a claim relating to an online dating service contract. [14] Proponents of enforceability take issue with the assertion of "adhesion".

Scope of a forum selection clause

Courts are often required to determine whether a forum clause covers all parties (including non-signatories) to a transaction. Many courts resolve the scope issue by applying the "closely related" test. See e.g. Manetti-Farrow, Inc. v. Gucci America, Inc. [15] and Roby v. Lloyd’s. [16] Writing in International Aspects of U.S. Litigation, [17] Eric Sherby argues that most courts that have addressed the issue have glossed over the circular nature of the finding of "closely related" and that even those few judicial decisions that evince an awareness of the circularity problem have themselves fallen into the circular reasoning trap.

Franchise and dealership disputes

A number of American states have enacted statutes that require franchisors to agree to litigate disputes with franchisees in-state. Those states include California, Wisconsin, and New Jersey. Although not all of these statutes contain language of exclusivity, the case law has generally interpreted these statutes as invalidating contractual clauses that require disputes to be resolved out of the franchisee’s home state. [18]

The situation in Canada

Forum selection clauses were addressed by the Supreme Court of Canada in Z.I. Pompey v ECU Line, 2003 SCC 27. The dispute arose after a breach of a bill of lading resulted in damage to equipment in transit. The exclusive forum selection clause indicated that any claims had to be brought forth in Antwerp. The Supreme Court endorsed forum selection clauses for providing "certainty and security in transaction". [19] The Court reaffirmed the strong cause test found in the English Eleftheri case.

Absent other applicable legislation, the Pompey Test asks whether there is an enforceable contract binding the parties. If there is, the court must grant a stay unless the plaintiff demonstrates sufficiently strong reasons to show that they should not be bound by the forum selection clause. [20] The Court, in exercising its discretion, should consider factors such as: where evidence is situated or more readily available, whether foreign law applies and whether it differs from domestic law, the country with which the parties are connected and how closely, whether the defendants are seeking procedural advantages, and whether the plaintiffs would be prejudiced by the need to sue in a foreign court. [19]

Specific issues

Commercial contracts

Forum selection clauses in a commercial contract are typically strictly enforced. In Expedition Helicopters Inc. v Honeywell Inc. [2010 ONCA 51], the Ontario Court of Appeal outlined factors which may justify departing from enforcement including: the plaintiff was induced to agree to the clause, the contract is otherwise unenforceable, the selected forum is unwilling or unable to accept jurisdiction, the claim or circumstances are outside of what was reasonably contemplated by the parties in agreeing to the clause, the plaintiff cannot longer expect a fair trial in the forum due to subsequent events that could not have been reasonably anticipated, or the enforcement of the clause would frustrate clear public policy. [21]

Consumer contracts

In Douez v Facebook, 2017 SCC 33, the Supreme Court of Canada refused to enforce a forum selection clause between Facebook and a class of users. The plurality of the Court found that the contract was enforceable. However, the plaintiff met the burden of demonstrating strong cause as to why the clause should not be enforced. [20] Factors considered in the majority's decision included: the nature of the right (constitutional right to privacy), the gross inequality of bargaining power between the parties, the lack of alternatives for the consumers, the interest of the courts, clarity and certainty. Secondary factors included the relative cost and inconvenience to parties as well as the purpose and intent of the legislation. [22] Justice Abella found that the contract was unconscionable and thus unenforceable under step one of the Pompey test. [20]

In Uber Technologies Inc. v Heller , 2020 SCC 16, the Supreme Court of Canada also refused to enforce an arbitration clause between Uber and a class of drivers. The clause indicated that disputes were to be resolved by arbitration in the Netherlands. The majority held the clause was unconscionable and thus unenforceable. They assert that standard form contracts can create inequality of bargaining power between the parties. The Court asserted that choice of law, forum selection and forced arbitration clauses can deprive parties of possible remedies thus violating their reasonable expectations. [23]

Consumer contracts (Quebec)

Quebec's Civil Code renders forum-selection and arbitration clauses in consumer and employment contracts unenforceable. In consumer transactions involving Quebec residents, Article 3149 provides jurisdiction to Quebec Courts to hear the dispute. [24]

Proposed international convention

In 2005, the Hague Conference on Private International Law issued the Hague Choice of Court Convention. The Hague Convention does not apply to disputes involving consumers, for example Quebec's Consumer Protection Act.

Related Research Articles

Arbitration, in the context of the law of the United States, is a form of alternative dispute resolution. Specifically, arbitration is an alternative to litigation through which the parties to a dispute agree to submit their respective evidence and legal arguments to a neutral third party for resolution. In practice arbitration is generally used as a substitute for litigation, particularly when the judicial process is perceived as too slow, expensive or biased. In some contexts, an arbitrator may be described as an umpire.

Conflict of laws is the set of rules or laws a jurisdiction applies to a case, transaction, or other occurrence that has connections to more than one jurisdiction. This body of law deals with three broad topics: jurisdiction, rules regarding when it is appropriate for a court to hear such a case; foreign judgments, dealing with the rules by which a court in one jurisdiction mandates compliance with a ruling of a court in another jurisdiction; and choice of law, which addresses the question of which substantive laws will be applied in such a case. These issues can arise in any private-law context, but they are especially prevalent in contract law and tort law.

In contract law, a choice of law clause or proper law clause is a term of a contract in which the parties specify that any dispute arising under the contract shall be determined in accordance with the law of a particular jurisdiction. An example is "This Agreement shall be governed by, and construed in accordance with, the law of the State of New York."

Forum non conveniens (FNC) is a mostly common law legal doctrine through which a court acknowledges that another forum or court where the case might have been brought is a more appropriate venue for a legal case, and transfers the case to such a forum. A change of venue might be ordered, for example, to transfer a case to a jurisdiction within which an accident or incident underlying the litigation occurred and where all the witnesses reside.

Choice of law is a procedural stage in the litigation of a case involving the conflict of laws when it is necessary to reconcile the differences between the laws of different legal jurisdictions, such as sovereign states, federated states, or provinces. The outcome of this process is potentially to require the courts of one jurisdiction to apply the law of a different jurisdiction in lawsuits arising from, say, family law, tort, or contract. The law which is applied is sometimes referred to as the "proper law." Dépeçage is an issue within choice of law.

<span class="mw-page-title-main">Unconscionability</span> Doctrine in contract law

Unconscionability is a doctrine in contract law that describes terms that are so extremely unjust, or overwhelmingly one-sided in favor of the party who has the superior bargaining power, that they are contrary to good conscience. Typically, an unconscionable contract is held to be unenforceable because no reasonable or informed person would otherwise agree to it. The perpetrator of the conduct is not allowed to benefit, because the consideration offered is lacking, or is so obviously inadequate, that to enforce the contract would be unfair to the party seeking to escape the contract.

<span class="mw-page-title-main">Arbitration clause</span> Contract clause requiring parties to resolve disputes via arbitration

In contract law, an arbitration clause is a clause in a contract that requires the parties to resolve their disputes through an arbitration process. Although such a clause may or may not specify that arbitration occur within a specific jurisdiction, it always binds the parties to a type of resolution outside the courts, and is therefore considered a kind of forum selection clause.

<span class="mw-page-title-main">Arbitration</span> Method of dispute resolution

Arbitration is a form of alternative dispute resolution (ADR) that resolves disputes outside the judiciary courts. The dispute will be decided by one or more persons, which renders the 'arbitration award'. An arbitration decision or award is legally binding on both sides and enforceable in the courts, unless all parties stipulate that the arbitration process and decision are non-binding.

<span class="mw-page-title-main">Canadian contract law</span> Contracts in Canada

Canadian contract law is composed of two parallel systems: a common law framework outside Québec and a civil law framework within Québec. Outside Québec, Canadian contract law is derived from English contract law, though it has developed distinctly since Canadian Confederation in 1867. While Québecois contract law was originally derived from that which existed in France at the time of Québec's annexation into the British Empire, it was overhauled and codified first in the Civil Code of Lower Canada and later in the current Civil Code of Quebec, which codifies most elements of contract law as part of its provisions on the broader law of obligations. Individual common law provinces have codified certain contractual rules in a Sale of Goods Act, resembling equivalent statutes elsewhere in the Commonwealth. As most aspects of contract law in Canada are the subject of provincial jurisdiction under the Canadian Constitution, contract law may differ even between the country's common law provinces and territories. Conversely; as the law regarding bills of exchange and promissory notes, trade and commerce, maritime law, and banking among other related areas is governed by federal law under Section 91 of the Constitution Act, 1867; aspects of contract law pertaining to these topics are harmonised between Québec and the common law provinces.

Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), is a United States Supreme Court case concerning contract law and arbitration. The case arose from a class action filed in Florida against a payday lender alleging the loan agreements the plaintiffs had signed were unenforceable because they essentially charged a higher interest rate than that permitted under Florida law.

<span class="mw-page-title-main">Contract</span> Legally binding document establishing rights and duties between parties

A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more mutually agreeing parties. A contract typically involves the transfer of goods, services, money, or a promise to transfer any of those at a future date. In the event of a breach of contract, the injured party may seek judicial remedies such as damages or rescission. A binding agreement between actors in international law is known as a treaty.

Southland Corp. v. Keating, 465 U.S. 1 (1984), is a United States Supreme Court decision concerning arbitration. It was originally brought by 7-Eleven franchisees in California state courts, alleging breach of contract by the chain's then parent corporation. Southland pointed to the arbitration clauses in their franchise agreements and said it required disputes to be resolved that way; the franchisees cited state franchising law voiding any clause in an agreement that required franchisees to waive their rights under that law. A 7-2 majority held that the Federal Arbitration Act (FAA) applied to contracts executed under state law.

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985), is a United States Supreme Court decision concerning arbitration of antitrust claims. The Court heard the case on appeal from the United States Court of Appeals for the First Circuit, which had ruled that the arbitration clause in a Puerto Rican car dealer's franchise agreement was broad enough to reach its antitrust claim. By a 5–3 margin it upheld the lower court, requiring that the dealer arbitrate its claim before a panel in Tokyo, as stipulated in the contract.

<i>Club Resorts Ltd v Van Breda</i> Supreme Court of Canada case

Club Resorts Ltd v Van Breda, 2012 SCC 17, is a decision of the Supreme Court of Canada that has brought greater certainty to the question of a real and substantial connection in the assumption of civil jurisdiction by Canadian courts in matters concerning the conflict of laws.

Disputes between consumers and businesses that are arbitrated are resolved by an independent neutral arbitrator rather than in court. Although parties can agree to arbitrate a particular dispute after it arises or may agree that the award is non-binding, most consumer arbitrations occur pursuant to a pre-dispute arbitration clause where the arbitrator's award is binding.

<i>In re Zappos.com, Inc., Customer Data Security Breach Litigation</i>

In re Zappos.com, Inc., Customer Data Security Breach Litigation, 893 F. Supp. 2d 1058, was a United States District Court for the District of Nevada case in which the Court held that Zappos.com's customers were not held to the browsewrap terms of use because of their obscure nature. The courts also held that the agreement was unenforceable because Zappos had reserved the right to change it at any time without informing the customers. This court decision set a precedent for businesses that use browsewrap agreements and/or include a clause in their agreements that allow them to change the agreements at any time. The decision encouraged conversation on how a business should most fairly display its terms of use and how to avoid unfairness and ambiguity when writing them.

Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas, 571 U.S. 49 (2013), was a United States Supreme Court decision dealing with the enforcement of forum selection clauses.

<i>Uber Technologies Inc v Heller</i> Supreme Court of Canada case

Uber Technologies Inc v Heller, 2020 SCC 16, is a 2020 decision of the Supreme Court of Canada. The Court held 8–1 that an arbitration clause in a contract the plaintiff David Heller had signed with Uber was unconscionable, and hence unenforceable. As a result, it held that Heller's proposed class action lawsuit against Uber could go forward.

<span class="mw-page-title-main">Douez v. Facebook</span> Supreme Court of Canada case

Douez v Facebook Inc., 2017 SCC 33 is a Supreme Court of Canada case which analyzes the enforceability of forum selection clauses in consumer facing contracts.

<i>Peace River Hydro Partners v Petrowest Corp</i> Supreme Court of Canada case

Peace River Hydro Partners v Petrowest Corp, 2022 SCC 41 is a case of the Supreme Court of Canada on the applicability of arbitration laws on the authority of a receiver appointed under the Bankruptcy and Insolvency Act.

References

  1. ↑ "Governing Law and Choice of Forum Clauses Explained | LexisNexis Canada". www.lexisnexis.ca. Retrieved 2021-02-18.
  2. ↑ Cooper Grace Ward (27 July 2016). "Foreign judgments, foreign contracts and dangers of jurisdiction clauses". Lexology.
  3. ↑ See for example the decision of the United Kingdom Supreme Court in Ust-Kamenogorsk Hydropower Plant JSC v AES Ust-Kamenogorsk Hydropower Plant LLP [2013] UKSC 35 and the Privy Council in Société Nationale Industrielle Aérospatiale v Lee Kui Jak [1987] UKPC 12.
  4. ↑ Gisele Ruehl (31 July 2014). "English Court of Appeal confirms Damages Award for Breach of a Jurisdiction Agreement".
  5. ↑ "Court has jurisdiction even when the underlying contract is void". Allen & Overy. 6 November 2008. Retrieved 28 September 2017.
  6. ↑ "Relying on an exclusive jurisdiction clause in a disputed contract". Kennedys. 18 December 2015. Retrieved 28 September 2017. (Singapore)
  7. ↑ "Asymmetric jurisdiction clauses protected by Brussels Recast anti-torpedo rules". Allen & Overy. 27 March 2017. Retrieved 28 September 2017.
  8. ↑ "The validity of unilateral "hybrid jurisdiction" clauses has become less certain under French law". Norton Rose. Retrieved 28 September 2017.
  9. ↑ Claudio Perrella (8 April 2013). "Italian Supreme Court Considers Unilateral Jurisdiction Clauses". Mondaq. Retrieved 28 September 2017.
  10. ↑ US Court of Appeals document [ dead link ]
  11. ↑ Court document uscourts.gov [ dead link ]
  12. ↑ Suskin, Howard; McWilliams, Emily. "Using Forum Selection Clauses to Avoid Default Arbitration Rules". Transaction Advisors. ISSN   2329-9134.
  13. ↑ "Forum selection bylaws continue to gain ground, but questions remain". July 2015.
  14. ↑ Marty Gould, "The Conflict Between Forum-Selection Clauses and State Consumer Protection Laws: Why Illinois Got It Right in Jane Doe v. Match.com", 90 Chi.-Kent. L. Rev. 671 (2015).
  15. ↑ Manetti-Farrow, Inc. v. Gucci America, Inc., 858F.2d509 (9th Cir.1988).
  16. ↑ Roby v. Lloyd's, 996F.2d1353 (2d Cir.1993).
  17. ↑ Sherby, Eric. "Forum Selection Clauses In International Commerce". In Berger, James, International Aspects of U.S. Litigation. American Bar Association. pp. 292–293. ISBN   978-1-63425-558-5 (hereinafter: "Sherby").
  18. ↑ Sherby, pp. 276–278
  19. 1 2 Canada, Supreme Court of (2001-01-01). "Supreme Court of Canada - SCC Case Information - Search". scc-csc.lexum.com. Retrieved 2021-02-18.
  20. 1 2 3 "Douez v Facebook: Forum Selection Clauses in Contracts of Adhesion". TheCourt.ca. 2016-11-17. Retrieved 2021-02-18.
  21. ↑ Monestier, Tanya (2018). "Forum Selection Clauses and Consumer Contracts in Canada". Boston University International Law Journal.
  22. ↑ www.airdberlis.com. "Forum Selection Clauses in Canada: Enforceability in Consumer Contracts May be an Issue after Recent Supreme Court of Canada Decision". Aird Berlis. Retrieved 2021-03-04.
  23. ↑ "Uber Technologies v Heller". CanLii. 2020.{{cite web}}: CS1 maint: url-status (link)
  24. ↑ "Contracting Out of Access to Justice: Enforcement of Forum-Selection Clauses in Consumer Contracts". McGill Law Journal. Retrieved 2021-03-04.
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