Share purchase agreements, technology license agreements, partnership agreements, professional services agreements, and virtually all of the other agreements I draft in my practice include a forum selection clause. A section of an agreement that identifies the particular court or arbitrator that may hear a dispute between the contracting parties.
In order to draft these provisions effectively, it’s helpful to examine how the courts interpret them. The following is a discussion of the primary issues that arise when courts consider forum selection clauses. Based on those cases, I’ve come up with a few practice pointers that you may consider when you write a forum selection provision into your next contract.
I. Permissive or Mandatory.
Some forum selection clauses permit the parties to a contract to bring a dispute in a particular court, but do not require it. The following is an example of such a permissive clause.
“The parties enter into this agreement in the State of Idaho and any dispute arising out of this agreement may be brought in the courts located in the State of Idaho.”
This is easy enough to understand. The clause uses the word “may.” In agreeing to the above clause, the parties reserve a right to bring a dispute in Idaho, but they do not make Idaho the only jurisdiction in which a case may be brought. If Idaho had been named as the only forum for suits, the provision would be a mandatory forum selection clause.
The language of a forum selection clause can take many forms. It can be difficult to decide whether a particular clause was meant to be permissive or mandatory. A review of the case law indicates that in California a forum selection clause will be deemed mandatory when its wording clearly requires litigation exclusively in a particular jurisdiction.
The following forum selection clauses have been interpreted by California courts on the question of whether they are permissive or mandatory.
A. Permissive Clause.
“The courts of California, County of Orange, shall have jurisdiction over the parties in any action at law relating to the subject matter or the interpretation of this contract.”
Hunt Wesson Foods, Inc. v. Supreme Oil Co., 817 F.2d 75 (9th Cir. 1987) (clause is permissive; language falls short of designating an exclusive forum; lawsuit brought in Central District of California not dismissed).
B. Mandatory Clause.
“This Agreement shall be governed by the law of Ontario, Canada and any claims arising hereunder shall, at the Licensor’s election, be prosecuted in the appropriate court of Ontario. The Licensee hereby attorns to the jurisdiction and judgment of the courts of the Province of Ontario, Canada, and agrees that a judgment of an Ontario court shall be enforceable in the jurisdiction in which the Licensee is located.”
CQL Original Products, Inc. v. National Hockey League Players’ Assn. (1995) 39 Cal.App.4th 1347, 46 Cal.Rptr.2d 412 (clause is mandatory; mandatory character is reflected by the use of the word “shall”).
C. Permissive Clause.
“[A] decision of the Board of Adjustment . . . or the decision of a permanent arbitrator shall be enforceable by a petition to confirm an arbitration award filed in the Superior Court of the City and County of San Francisco, State of California.”
Council of Laborers v. Pittsburg-Des Moines Steel Co., 69 F.3d 1034 (9th Cir. 1995) (clause is permissive; the words “shall be enforceable” are permissive only; action to enforce arbitrator’s decision brought in US District Court not dismissed).
D. Permissive Clause.
“The company has expressly submitted to the jurisdiction of the State of California and United States Federal courts sitting in the City of Los Angeles, California, for the purpose of any suit, action or proceedings arising out of this Offering.”
Berg v. MTC Electronics Technologies Co. (1998) 61 Cal.App.4th 349, 71 Cal.Rptr.2d 523 (clause is permissive; clause does not specify an exclusive forum; it merely states that company may not resist jurisdiction of Los Angeles courts).
E. Mandatory Clause.
“To the extent permitted by the applicable laws the parties elect Hamburg to be the place of jurisdiction.”
Intershop Communications AG v. Superior Court (2002) 104 Cal.App.4th 191, 17 Cal.Rptr. 847 (clause is mandatory, Hamburg is “the” place of jurisdiction).
F. Permissive Clause.
“THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS APPLICABLE TO AGREEMENTS MADE IN AND WHOLLY TO BE PERFORMED IN THAT JURISDICTION, AND THE PARTIES HERETO SUBMIT AND CONSENT TO THE JURISDICTION OF THE COURTS PRESENT IN THE STATE OF TEXAS IN ANY ACTION BROUGHT TO ENFORCE (OR OTHERWISE RELATING TO) THIS AGREEMENT.”
Animal Film, LLC v. D.E.J. Productions, Inc., (2011) 193 Cal.App.4th 466, 123 Cal.Rptr.3d 72 (clause is permissive; clause provides for submission and does not mandate litigation in Texas; lawsuit brought in California state court not dismissed).
Practice Pointer. While courts, as a general matter, will respect the wishes of the parties and enforce forum selection clauses, judges must find the intent of the parties through careful examination of the text. If the parties desire that disputes be brought only in a particular forum, then the written agreement between them should make this exclusivity obvious. Importantly, to say that a particular court “has jurisdiction” is not enough to make a provision mandatory. Be wary of using the word “submit” in a clause that you intend to be mandatory. It seems to me that use of that word gets drafters into trouble. To say that the parties “submit” to a particular jurisdiction is not the same as saying that they agree to use that jurisdiction “exclusively.”
Consider the following forum selection clause.
“Any action brought by either party against the other party arising out of this agreement shall be brought only in a state or federal court located in California.”
In the above provision, the parties promise to resolve any dispute arising out of the agreement only in courts in California. The operative scope of the provision is, therefore, any action arising out of the agreement. This forum selection clause defines rather broadly the scope of disputes that must be heard in California. Alternatively, the parties could have agreed to a provision with a more limited scope by promising that only disputes concerning the interpretation or enforcement of the agreement must be brought in California courts. Or, that disputes under the agreement are to be brought in California courts.
When a court is asked to dismiss a case because it was brought in the wrong forum in violation of a forum selection clause, it needs to decide whether the scope of the applicable clause includes the particular claims brought in the instant lawsuit. If the causes of action in the litigation are not captured within the clause’s scope, the court will not dismiss the case.
Here are some forum selection clauses with differing scope and the summary of a court’s analysis of each.
A. “[Any controversy] regarding interpretation or fulfillment [of the contract will be brought in] Florence, Italy.”
In Manetti-Farrow, Inc. v. Gucci America, Inc., 858 F.2d 509 (9th Cir. 1988), the Ninth Circuit ruled that tort causes of action brought by the plaintiff, including conspiracy to interfere with contract, conspiracy to interfere with prospective economic advantage, tortious interference with contractual relations, tortious interference with prospective economic advantage, breach of the implied covenant of good faith and fair dealing, and unfair trade practices were included within the scope of the above forum selection clause because each of the claims could not be adjudicated without analyzing whether the parties were in compliance with the contract. Each claim related to the central conflict over interpretation of the contract and thus the parties were required to bring suit only in Florence, Italy.
B. “Any conflict which may arise regarding the interpretation or fulfillment of this contract, shall be submitted expressly to the courts of the City of Ensenada, B.C. [Mexico].”
In Bancomer, S.A. v. Superior Court (1996) 44 Cal.App.4th 1450, 52 Cal.Rptr.2d 435, a California appellate court interpreted the above forum selection clause found in a real estate purchase agreement. The court ruled that claims of pre-contract fraud did not relate to “any conflicts” “regarding the interpretation or fulfillment of the agreement.” Since the terms of the contract were irrelevant to the claim of pre-contract fraud, those claims fell outside the scope of the clause and the plaintiff was not limited to suit in Ensenada, Mexico.
C. “The parties agree to submit to the exclusive jurisdiction over all disputes hereunder to the federal and state courts in the State of New York located in New York County.”
According to a District Court in California, the scope of the above forum selection clause includes copyright claims. This was true because the copyright claims would require the court to determine whether defendants had obtained a license to the allegedly infringed copyrighted work under the agreement that included the clause. Graham Tech. Solutions, Inc. v. Thinking Pictures, Inc., 949 F.Supp. 1427 (N.D.Cal.1997).
D. “Those purchasing furnishing [sic] from Outdoor Lifestyle, or obtaining services from the company, agree that should conditions arise where a situation needs to be redressed through arbitration, legal proceedings shall be pursued solely through the local courts of Gaston County, North Carolina.”
The Court of Appeals of California wrestled with this very unorthodox forum selection clause and found that a lawsuit for failure of warranty was not captured within its scope and that the case could therefore remain in California court. The appellate court found that under the provision only arbitral proceedings must be pursued in North Carolina. The court wrote that if the provision been intended to apply to civil actions, it could have omitted the reference to arbitration altogether. Starbucks Corporation v. Outdoor Lifestyle, Inc., D064637 (Cal. Ct. App. Sept. 17, 2014) NOT FOR PUBLICATION.
E. “The venue of any lawsuit that may be filed will be Pinellas County, Florida.”
This simple forum selection provision was read narrowly, not because of the words chosen for this sentence but because of its placement within the larger agreement. Despite its words, a California appellate court ruled that this clause did not apply to a claim for indemnity lawsuit between the parties. This was because the clause was the final sentence in a lengthy paragraph entitled “Examination of Records.” The paragraph described the defendant’s right to an accounting, its right to bring suit to enforce that right, and its right to access and audit the plaintiff’s records. In the sentence immediately preceding the forum selection clause, the paragraph described a prevailing party’s right to recover attorney’s fees and interest. The court found that the clause did not apply to any lawsuit brought by a contracting party. Rather, the provision applied only to lawsuits brought to enforce the obligation of each party to submit its records for examination because the provision appeared at the end of a lengthy paragraph dedicated to that topic. Park Plaza II, LTD. v. American Bankers Insurance Co., G048916 (Cal. Ct. App. October 31, 2014) NOT FOR PUBLICATION.
F. “[The parties] expressly consent to the exclusive personal jurisdiction and venue in the state and federal courts located in Clark County, Nevada for any action brought by either party to interpret or enforce any provision [of the agreement].”
A District Court in California found that the above forum selection clause required transfer of a suit claiming violation of Section 2 of the Sherman Act. Because the plaintiff alleged that certain provisions of the contract at issue were part of an anticompetitive scheme, the court that ultimately adjudicates the claim will need to interpret the contract. Thus, the Section 2 claim was within the scope of the forum selection clause. Cung Le v. Zuffa, LLC, 108 F. Supp. 3d 768, 776 (N.D. Cal. 2015).
Practice Pointer. I believe it is fair to say that in most instances parties intend that a forum selection clause will have a broad scope. That not only breach of contract claims but also tort actions and intellectual property disputes that may arise between the parties should be heard in the chosen forum. When you intend the scope to be broad, the best textual construction is to state that any dispute arising from or relating to the agreement shall be brought exclusively in the chosen forum. Use of these three magic words– “arising,” “relating,” and “exclusively” –are your best bet if you mean to write a broadly inclusive and mandatory provision. Of course, the use of plain and clear English also helps in any case.