NH Legal Perspective: Beware of forum selection clauses embedded in commercial contracts
New Hampshire businesses execute contracts every day. These contracts are often littered with boilerplate provisions that businesses overlook or do not understand. In these situations, many businesses simply sign on the dotted line and cross their fingers in order to rapidly close the transaction and to avoid the costs associated with having a lawyer review the contract. Next time your business is reviewing its own contract, or is presented with a draft contract, make sure to look for one particular provision: the forum selection clause.
Forum selection clauses specify where disputes between the parties can or must be litigated. Generally speaking, "forum" means the place (court, state or country) where litigation will occur. There are two types of forum selection clauses: mandatory clauses and permissive clauses. A mandatory clause requires the parties to file suit in a designated court, state or country and typically uses terms such as "shall" or "exclusive." A permissive clause confers jurisdiction in the designated forum, but allows parties the right to file suit in a different forum.
Although forum selection clauses can take many forms, a standard forum selection clause might read, "Any and all disputes arising from this contract may be litigated in Kentucky." This clause seems straightforward, right? Wrong. Actually, this clause raises many questions. For instance, must the parties litigate in Kentucky, or can they litigate elsewhere? Can the parties file suit in Kentucky federal court, or are they required to litigate in Kentucky state court? Do all disputes between the parties (contract and tort) have to be litigated in Kentucky or does this clause only cover contract claims? Can third-party beneficiaries be forced to litigate their related claims or defenses in Kentucky when they never signed the contract?
While a poorly drafted clause can force a business to spend exorbitant amounts of time and money prosecuting or defending a lawsuit in another state or country, a properly drafted forum selection clause can provide certainty in the event that litigation arises.
So, why is it important for businesses to be aware of forum selection clauses? Put simply, because courts actually enforce these clauses.
U.S. courts, including those in New Hampshire, treat forum selection clauses as presumptively enforceable except under very limited circumstances, such as fraud, duress or unequal bargaining power. Indeed, the New Hampshire Legislature has enacted a model statute, RSA 508-A, which codifies this presumption.
Unaware of this legal landscape, businesses often assume that they can escape these clauses by arguing that it would be extremely expensive or inconvenient to litigate in the agreed-upon forum. This assumption is incorrect. Courts uniformly hold that sophisticated business parties should understand the risks and costs inherent in selecting a particular forum for litigation.
As a result, businesses are often forced to litigate their claims, or present their defenses, in another state or country.
In addition to losing "home field advantage," this colossal and expensive effort typically involves, among other things, flying corporate representatives and employees at the company's expense to the distant forum for deposition or trial, paying company counsel's travel expenses for trial or court appearances, and hiring local counsel familiar with the rules and procedures governing the applicable court procedures.
Forum selection clauses can be a business's best friend or its worst enemy. The good news is that careful attention to and drafting of these clauses can eliminate uncertainty about the location of future litigation. To this end, businesses should ask themselves the following questions about forum selection clauses contained in their contracts: (a) is the clause mandatory or permissive (e.g., "shall" vs. "may"); (b) must the dispute be filed in state or federal court; (c) does the clause require cases to be litigated in a specific court; and (d) does the clause govern both contract and tort claims or just contract claims.
The list is not exclusive and businesses looking to perfect their own contracts, or assess the risks associated with a client's contract, should promptly consult with legal counsel.
NH Legal Perspective is a bi-weekly column sponsored by Sheehan Phinney Bass + Green PA. This column does not provide legal advice. We recommend that you consult an attorney for specific guidance on legal questions.