Forum Selection Clauses: A Little Time and Thought Now Could Save You a Lot of Time and Headaches Later
When drafting or negotiating a contract and after working through the substantive provisions, do you too often just use the same-old boilerplate provisions from an earlier contract, e.g., forum selection, merger clause, choice of law, etc.? These items can indeed be afterthoughts. Do they really matter?
Well, as litigators, we can tell you that these seemingly mundane clauses can and do have ramifications when a dispute arises. Nowhere is this more immediately felt than in a forum selection clause or the related dispute resolution clause. Along with a choice-of-law provision, these are some of the first places we look when we begin to analyze the dispute and help the client come up with a game plan.
A forum selection clause could be outcome determinative and will also play a role in how quickly and efficiently your dispute may get resolved, which in itself can be outcome determinative if, for example, there is a large discrepancy in resources or leverage between the parties. Perhaps never before has this been more important as courts struggle to clear dockets suffering from pandemic-related backlogs. The focus of the courts will almost certainly land first on criminal and family proceedings, with your business dispute falling much further down the line.
The good news is that, as one attorney famously quipped, you are not a potted plant.1 You can negotiate where and how your disputes will get resolved. Forum selection clauses are simply a matter of contract and presumptively valid. The parties can waive personal jurisdiction and select any forum they can agree upon, subject to a court’s subject matter jurisdiction. Thus, a wide variety of options arms you with the ability to choose (or at least negotiate for) the best possible forum for these times and your business.
What are the factors to consider? Most business- people want a convenient, fair, predictable and prompt decision with minimal expense. It may also be important to have a decision maker with some specialization in business disputes generally, or some expertise in a specific industry. You should also consider whether there is a need for confidentiality. And in this post-COVID world where a new wave of infections could disrupt proceedings, you should consider whether the forum has embraced virtual proceedings and has invested in the necessary information technology resources and staff.
You should also consider the law of the jurisdiction that you choose. While you can utilize a choice-of-law provision to select the law governing the contract, a court may still tend to revert to the law of the state where it sits (i.e., the forum state) or may decline to apply the parties’ chosen law if it is contrary to the forum state’s public policy. And for tort claims that may be brought in the same proceeding as a breach of contract claim, such as breach of fiduciary duty, the court will apply the choice-of-law and conflict-of-laws principles of the forum state to determine what law to apply. This can have enormous consequences. For example, for these kinds of claims, most jurisdictions might apply the law of the jurisdiction where the conduct occurred or the jurisdiction with the greatest interest in the claim, but some jurisdictions will simply apply the forum state’s law. Even in arbitration, the law of the forum state can have a significant impact on the proceedings, as discussed below.
So, what are your options?
Do nothing: You could, of course, have no provision governing where and how your disputes will get resolved.This certainly gives you some flexibility in choosing where to assert a claim if you act first.But having no forum selection provision and being subject to suit anywhere jurisdiction and venue exist leave you open to litigating in an inconvenient forum chosen by your opponent.You could find yourself in your opponent’s home forum, one with common law bad for your position, and/or one suffering from a pandemic-related backlog of criminal cases.Why take this chance?
The boilerplate – “the federal and state courts of [fill in the blank]”:At least you have narrowed it down to a (presumably) convenient state.But you again put yourself at the mercy of the luck of the draw.Since the judge oversees the litigation process, and, in addition, many contractual and commercial disputes are decided as a matter of law by the judge, he or she will have an enormous impact on whether you receive a fair, predictable and prompt decision.Don’t leave it up to your opponent to choose the court and don’t leave it up to chance to choose your judge.You could end up with a judge whose background is in criminal or family law or a judge who rarely sees a complicated business dispute, as is often the case in rural areas.You could also end up with a judge whose docket moves at a snail’s pace or a judge who refuses to handle matters virtually if another wave of COVID-19 infections threatens to disrupt proceedings.Or you could end up with a judge whose approach is to never make a decision and instead force litigants to settle out of frustration on the eve of an expensive trial, playing into the hands of those who litigate through delay.Don’t just go with the boilerplate.
Designate a specific court: You can improve your odds by selecting the court in a specific county, circuit or city.However, you could do even better by selecting a court with some specialization in business disputes and no crowded criminal dockets.According to the Pew Charitable Trusts and data collected by the American Bar Association’s Subcommittee on Business Courts, over half of the states have business courts focused on handling business disputes.2
Most of these courts are of limited jurisdiction, meaning not every dispute can get resolved there. For example, one of the preeminent forums for corporate disputes, the Delaware Court of Chancery, is generally limited to hearing equitable claims or claims involving the interpretation of Delaware corporate documents. Likewise, the newly created Georgia State-wide Business Court is limited to certain types of commercial disputes and amounts in controversy.
However, this limited jurisdiction is also what makes these courts so attractive. Business courts were created to secure the just and efficient resolution of business disputes by judges who are not overburdened by criminal or family law dockets and have attained some specialization in resolving complex commercial disputes, and also to foster a bar of experienced attorneys with expertise in commercial disputes who appear regularly before these same judges. All of this has been shown to lead to more fair, predictable and efficient outcomes for businesses.3
Lawyers and their clients should therefore give serious consideration to selecting a business court through a forum selection clause. Indeed, it may be the only way to get in front of such a court. For example, unlike the Metro Atlanta Business Case Division, a separate business court here in Atlanta, the Georgia State-wide Business Court requires the consent of both parties. The Georgia State-wide Business Court will, however, enforce a forum selection clause choosing that court for the resolution of disputes.4
Mandatory arbitration: Mandatory arbitration can be a good option, especially if you believe it is important to have a decision maker with particular expertise in your industry or certain types of disputes.For example, if your contract concerns health care payments, you could require that the arbitrator(s) have experience with such disputes, which can add predictability to the result.Because arbitration is confidential, it can also be an excellent choice for disputes concerning confidential or trade secret information.
However, with pages of rules and some arbitrators permitting dispositive motions, arbitration can often feel just about the same as litigation, rather than the sleek, alternative dispute resolution proceeding you envisioned. There is also the risk of a compromise decision by the arbitrator(s).
Moreover, arbitrator fees, administrative costs and attorney fees can amount to an off-putting expense. The number of arbitrators is certainly a factor to consider in this regard. Paying for three experienced litigators or businesspeople to serve as arbitrators can get very costly. And having three arbitrators rather than one can slow the process.
Creating a private, party-driven arbitration process rather than going through an established arbitration system (e.g., the American Arbitration Association) can often keep the costs down, provide predictability and the desired confidentiality and result in a prompt decision. However, great care will need to be taken to make sure the process and procedures are clear so disputes regarding the process don’t themselves end up in court.
There are also some potential disadvantages to not being in court. For example, third-party discovery in arbitration can be very limited or perhaps not permitted at all.
You could find yourself confronting an important third-party witness or reviewing their documents for the first time at the final hearing. And if you obtain an award in arbitration, you still have to go to court to enforce it. For these reasons, it is important to consider the location of the arbitration because the forum state’s law may control on these types of issues.
In the end, decisions regarding forum selection are not made in a vacuum. One size does not fit all. Each contract and each transaction can be unique. The above factors will likely carry different weight in each situation, and you cannot foresee all of the potential situations that may arise. But the point of this article is to take some time and try to contract for the best forum for you. Don’t leave it to your opponent or chance.
3 See State of Georgia, Court Reform Council, Final Report at 19, http://georgiabusinesscourt.com/wp-content/uploads/2020/07/FINAL-REPORT_Court-Reform-Council.pdf.
4 See O.C.G.A. § 15-5A-4(a)(1).