What is Forum Selection Clause?

Legal Definition
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.”
-- Wikipedia
Legal Definition
"It has been held that the right to make contracts is embraced in the conception of liberty as guaranteed by the Constitution ... [however] ... that freedom of contract is a qualified, and not an absolute, right."

- United States Supreme Court Justice Charles Evans Hughes

A contractual agreement that designates the court and location where the parties would like to have their legal dispute decided is commonly known as a "forum selection clause."

A forum selection clause seeks to provide a court with "personal jurisdiction" and to establish "venue." Personal jurisdiction is the court's power to exercise authority over a party. Venue is the physical location where a court exercises its power. Thus, a forum selection clause seeks to provide a court located in a specific location with the power to resolve a dispute.

Courts have historically declined to enforce forum selection clauses. In M/S Bremen v. Zapata Off-Shore Co. the Court stated that they were often perceived as being contrary to public policy or to prevent an otherwise proper court from hearing a dispute. However, Bremen marked a paradigm shift. The Court stated that "in the light of present-day commercial realities ... we conclude that [a] forum clause should control absent a strong showing that it should be set aside."

Congress has established rules that govern venue under 28 U.S.C. § 1391. Once a case is filed at a particular venue, 28 U.S.C. § 1404(a) empowers a federal trial court to transfer a case, for the parties' "convenience" and in the "interest of justice," to a different federal venue where the case could have been brought or where the parties have consented. To determine whether a case should be transferred, the trial court must consider various factors relating to the parties' private interest and the public interest and it must give some deference to plaintiff's choice of forum. After considering these factors, the trial court decides whether a case should be transferred to a different federal court.

In Stewart Organization, Inc. v. Ricoh Corp., the plaintiff filed a lawsuit at a federal court in violation of the parties' forum selection clause. The defendant, relying upon §1404(a), requested the trial court to transfer the case to the federal court described in the forum selection clause. In addressing the interplay between §1404(a) and a forum selection clause, the Court stated that a forum selection clause is not controlling but is a "significant factor" for a court to consider when deciding whether it will transfer a case under §1404(a). The Court stated that a forum selection clause "should receive neither dispositive consideration ... nor no consideration ... but rather the consideration ... provided in §1404(a)."

In Atlantic Marine Const. Co., Inc. v. U.S. Dist. Ct. for the Western District of Texas, the Court further refined the relationship between a forum selection clause and §1404(a). The Court held that a forum selection clause shall be "given controlling weight in all but the most exceptional cases" and, consequently, drastically altered a trial court's analysis under §1404(a). First, the plaintiff's choice of forum has no weight and the plaintiff bears the burden of demonstrating why the case should not be transferred to the court described in the parties' forum selection clause. Second, the parties' private interest factors weigh entirely in favor of the court described in the forum selection clause. Third, a court may continue to consider public interest factors, however, the Court stated that they will "rarely" prevent a case from being transferred.

Other than the existence of compelling public interest factors, Atlantic Marine does not state whether other factual circumstances may constitute an "exceptional case." However, in Bremen, the Court held that the presence of fraud and overreaching in negotiating a contract invalidates the forum selection clause itself and, therefore, their presence should constitute an exceptional case under Atlantic Marine. Moreover, Bremen arguably supports the general proposition that any legal theory that allows a party to invalidate the forum selection clause itself, for example mutual material mistake, constitutes an exceptional case under Atlantic Marine.

A "form contract" may also provide an opportunity for a litigant to demonstrate an exceptional case. A form contract, sometimes called an "adhesion contract," is drafted by one party with superior bargaining power and is signed by a party who has no bargaining power; it is a take-it-or-leave-it contract where no bargaining or negotiation takes place. In Carnival Cruise Lines Inc. v. Shute, the Court stated that a forum selection clause contained in a form contract is generally enforceable. Therefore, the mere fact that a form contract is not the product of negotiation and bargaining likely does not constitute an exceptional case under Atlantic Marine.

However, Carnival Cruise stated that form contracts are "subject to judicial scrutiny for fundamental fairness."To make this determination, a court can considered whether the forum selection clause contains an inconvenient venue, which has no real connection to the parties' contract, that is designed to discourage the party with no bargaining power from filing a lawsuit. This consideration is all but eliminated in a negotiated contract because there is actual bargaining between the parties and mutual agreement regarding venue.

Forum selection clauses have evolved from being nearly inoperative to controlling unless exceptional circumstances exist. Exceptional circumstances appear to exist when there are compelling public interest factors under §1404(a), or when there is a basis to invalidate the forum selection clause itself. In certain circumstances, a forum selection clause contained in a form contract may constitute an exceptional case. However, the breadth of Atlantic Marine's exceptional case limitation is unclear and will be defined over time in the federal trial courts.