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Forum selection clauses in contracts

When negotiating a contract, a party with bargaining power might ask to include a clause stating that litigation will occur in such-and-such a location, often the requesting party’s “home turf.” That might be OK for the other party, but it can also pose some risks.

Exclusive jurisdiction — possible dangers

Think very carefully before approving an exclusive-jurisdiction forum selection clause. You might not want to be forced to litigate in one particular place, even in your home jurisdiction.

Litigating in the other party’s home jurisdiction can significantly increase the expense of litigation for the “visiting team,” especially if the case ends up going to trial. Moreover, the visitors may have a legitimate concern about the other side’s home-court advantage.

On the other hand, if a potential plaintiff expects it will want speedy relief (for example, a preliminary injunction), it might make sense to agree that it will bring suit exclusively in the defendant’s home jurisdiction. Several crucial litigation tasks are likely to go faster there, such as service of process on the defendant and subpoenas for local witnesses.

(For the same reason, it might also make sense to agree to a governing-law clause stating that the law of the defendant’s home jurisdiction will apply — a judge in that jurisdiction will already be familiar with the local law, and proving up a ‘foreign’ law won’t be necessary.)

Non-exclusive jurisdiction — a compromise?

Sometimes a useful compromise is to agree that suit may be brought in either party’s home jurisdiction.

A downside of this approach is that it can trigger a race to the courthouse.

Agree to sue only in defendant’s jurisdiction

Another possible compromise is to require that any action must be brought in the court(s) having jurisdiction in the other party’s principal place of business. This suffers from some of the same defects as exclusive jurisdiction (see above) and in my experience does not seem to be found in many contracts.

Exclusive-jurisdiction clauses and unrelated actions

A court might not give effect to an exclusive-jurisdiction clause in a lawsuit not related to the contract. This happened when Yahoo! Inc. tried to enforce such a clause in a lawsuit brought by American Airlines.

American had sued Yahoo in Texas for trademark infringement. Yahoo filed a motion to transfer the case to California, invoking a forum-selection clause in its advertising agreement with American.

The U.S. district court denied Yahoo’s motion to transfer. The court’s reasons included that American’s claims arose out of a relationship completely separate from that created by the advertising agreement.

The U.S. Court of Appeals for the Fifth Circuit found that the district court had not abused its discretion; it refused to overrule the denial of Yahoo’s transfer motion. See In re Yahoo! Inc.; Overture Services, Inc., No. 09-10098 (5th Cir. Mar. 11, 2009) (denying petition for writ of mandamus).

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