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What is a Forum Selection Clause?

A forum selection clause in a contract is an agreement by both parties to adjudicate any disputes resulting from the contract, such as a breach of contract, in a specified forum.  Forum selection clauses are included in many commercial contracts and are extremely popular in electronic contracts.  Basically if there was a dispute between the parties of the contract, the forum selected in the clause will designate where the litigation will take place.

Why Do Contracts Have Forum Selection Clauses?

Forum selection clauses predetermine how and where a disagreement over the contract will be resolved. Large companies which enter into an enormous amount of contracts each year, such as Facebook, T-Mobile, and other businesses which compel a consumer to sign a contract before using their products or services, often have forum selection clauses placing disputes in courts near their corporate headquarters.

This often gives the party creating the forum selection clause a “home field advantage”, as the party enforcing the forum selection clause is often familiar with the judges and legal procedures of that specific court.  

One party might favor a certain court or process because of location or the court’s experience in handling such cases. For example, an American automotive company might want a dispute resolved in Detroit, because a court located in the center of the American automotive industry would have more experience in hearing a disagreement about vehicle manufacture.

What Type of Contracts Contain Forum Clauses?

Forum clauses are found in a variety of contracts. Here are some examples:

  • Employment Contract: Many employment contracts will specify exactly what type of forum an employment dispute will take place in. For example, many employment contracts require that a dispute be resolved only through arbitration or mediation.
  • Franchise agreement: These agreements often have forum clauses. Forum clauses are included so that the franchisor does not need to answer disputes wherever a franchisee is located.

Are There Different Kinds of Forum Selection Clauses?

There are two main types of forum selection clauses. 

  1. Specify a Particular Court, in a Particular Jurisdiction: For example, Federal District Court in the Middle District of Pennsylvania
  2. Specify an Alternative Dispute Resolution Process: These types of clauses are very common, and most contracts/agreements include terms like “mandatory arbitration” which means that is a type of forum selection clause. Examples include Arbitration or Mediation

Each of these types can be further broken down into two additional categories: mandatory clauses and permissive clauses. Mandatory forum selection clauses specifically indicate which court will hear the case or which alternative dispute resolution process will be used in the event of a disagreement.

Permissive forum selection clauses, however, allow a specific party to choose which court shall hear the case or which alternative dispute resolution process shall be used. A mandatory clause might state that the dispute must be heard by a state court in Texas. A permissive clause on the same topic might state that the lender can choose between a state court in Texas or a state court in New York.

Are Forum Selection Clauses Enforceable?

It depends on the state and the issue in the lawsuit. For example, when dealing with consumer issues, some states will not enforce the forum or choice of law clauses in consumer agreements even if it is valid.

Instead, these states allow a consumer to bring a contract dispute under state consumer protection laws. Courts do this because of fairness; sometimes forum clauses are put in the contract so that a law will favor one party while hurting the other. In situations where one party is a multi-million dollar company and the other party is an individual without a large legal team, it is likely that consumer protection laws will come into play.

Supreme Court decisions have repeatedly upheld forum selection clauses so long as:

  1. They are made in good faith;
  2. Would not deny a party representation in a court of law; and
  3. Enforcing the clause would not violate a strong public policy in the state that the case originated from.

Although forum selection clauses are commonly used in adhesion contracts to the benefit of the stronger party, they are enforceable when they are included for the convenience of that party, rather than for the sole purpose of discouraging lawsuits.

When are Forum Selection Clauses Not Valid?

In order for a forum selection clause to be found invalid and unenforceable, the party wishing to avoid it must meet the heavy burden of showing that its enforcement would be unreasonable, unfair, or unjust. Evidence of this may include fraud, duress, or undue influence.

Additionally, forum-selection clauses are not automatically enforceable if the court finds that the contract is unenforceable because it is unreasonable or unjust to enforce the contract; it is against public policy; or it is the result of fraud or overreaching.

Examples of this will be a forum selection clause that purposefully picks a remote forum or offers the other party the chance to settle for a set amount. It is clear in (rare) cases like this that the party who wants to enforce the clause simply wishes to force the other party to settle to an advantageous amount.

Do I Need a Lawyer For My Forum Selection Clause Problem?

Contract law is very complicated. Issues of forum, venue and jurisdiction are especially difficult.  In order to ensure that your rights are protected, you should contact a local business attorney to help you determine the enforceability of your forum selection clause. Your attorney will be able to help you get your case heard in the right court.

 

Photo of page author Ki Akhbari

, LegalMatch Legal Writer and Attorney at Law

Last Modified: 08-24-2018 06:14 AM PDT

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