Be Wary of Forum Selection Clauses When Executing a Contract
A client approaches us about a contract they entered into where the other party purportedly breached certain contract terms. They want to know what their recourse is and if we can file a lawsuit. Upon our review, we stumble upon a forum selection clause that looks like this:
“In the event of a dispute relating to this Agreement, the parties consent to the exclusive jurisdiction and venue of the federal and state courts located in the State of Nevada.”
This short and innocent-looking phrase, often known as a contractual forum selection clause, can have a major consequence on a lawsuit. In the example above, our client—presumably a New York entity—would likely be prohibited from suing in New York State and instead would have to bring a lawsuit in the State of Nevada.
A contractual forum selection clause is a provision that designates the court and the location where the parties would like to have their legal dispute decided.[1] It can be either mandatory or permissive. A mandatory selection clause, like the example above, expressly requires a lawsuit to be filed in a specific designated forum. In contrast, a permissive selection clause permits a lawsuit in a particular forum, but it does not prohibit litigation elsewhere.
In New York and other states, contractual forum selection clauses are generally enforceable. Courts have held that “where a party to a contract has agreed to submit to the jurisdiction of a court, that party is precluded from attacking the court’s jurisdiction…”[2]
However, there are exceptions, as New York courts will not uphold a contractual forum selection clause if “it can be shown by the challenging party to be unreasonable, unjust, in contravention of public policy, invalid due to fraud or overreaching, or it is shown that a trial in the selected forum would be so gravely difficult that the challenging party would, for all practical purposes, be deprived of its day in court”.[3]
These exceptions create a high standard and are not easily met. Indeed, a party has quite an uphill battle if they are to have a court rule that a forum selection clause should not be enforceable.
Because forum selection clauses are an ancillary component to an agreement, many businesses often overlook these provisions. A forum selection clause can have a substantial impact on either bringing or defending a lawsuit—potentially forcing a business entity to litigate in a distant state. Careful attention to drafting a contract could ensure that the forum selection clause is an appropriate and favorable forum to resolve a lawsuit.
[1] Contractual forum selection clauses are not to be confused with a choice of law clause, which designates the state law that is to be applied to govern the dispute.
[2] Sterling Natl. Bank v. Eastern Shipping Worldwide, Inc., 35 A.D.3d 222, 223 (1st Dep’t 2006).
[3] Casale v. Sheephead Nursing & Rehabilitation Ctr., 131 A.D.3d 436, 437 (2d Dep’t 2015).
This is not intended to be legal advice. You should contact an attorney for advice regarding your specific situation.
Gregory Picciano is Senior Counsel and practices civil and commercial litigation. He can be reached by phone at 845-764-9656 and by email.