Forum Selection Clauses and Their Limits

A forum clause is the cheapest litigation insurance available. It costs a sentence, it is generally enforced, and it converts an unpredictable question about contacts into a settled one. The reason it so often fails to deliver is that the sentence is copied from an unrelated agreement and never read against the disputes it will actually have to cover.

Why they are enforced

Certainty has commercial value. Parties who know where disputes will be heard can price risk, choose counsel and structure agreements accordingly.

The bargain is presumed genuine. Courts treat the clause as a negotiated allocation of a real risk rather than as an obstacle to justice.

The alternative is litigation about litigation. Without a clause, the parties argue about contacts and convenience before reaching the dispute, as described in the contacts a court looks for.

It supplies consent to jurisdiction. The named court has power over the parties by agreement, independently of any contacts analysis.

And it narrows forum shopping. Which is worth something to both sides, even the one that did not choose the forum.

The drafting that decides it

Exclusive or permissive. The most consequential distinction and the most commonly botched. Consent to jurisdiction is not the same as an agreement to sue only there.

Scope. A clause covering disputes under this agreement may not reach a fraud claim about how it was procured; one covering all claims arising out of or relating to it generally does.

The named court must exist and be able to hear the case. Naming a federal court in a district with no basis for subject matter jurisdiction produces a clause that cannot be honored, and the interaction with removal is set out in diversity of citizenship explained.

State or federal, specified. Courts of a state and courts in a state have been read differently, the first sometimes confined to state courts and the second including federal ones sitting there.

And the governing law, addressed separately. A forum clause is not a choice-of-law clause, and the difference is examined in what a choice-of-law clause achieves.

The grounds for refusal

Fraud or overreaching in the clause itself. An allegation that the whole contract was procured by fraud is not enough; the challenge must be to the inclusion of the forum provision.

A forum so inconvenient as to deny a day in court. A demanding standard, and one that ordinary expense and distance do not satisfy.

Conflict with a strong public policy. Some states prohibit clauses sending particular disputes elsewhere — construction contracts for local projects and certain employment matters are recurring examples.

Consumer and employment context. Not a separate rule everywhere, and a setting in which courts examine notice, negotiation and unconscionability more closely.

And nothing about ordinary unfairness. A clause that favors the drafter is doing what it was written to do, and that is not a ground.

How it is enforced

By transfer, in the federal system. Where the selected forum is another federal district, the mechanism is a venue transfer rather than dismissal, and the clause is given controlling weight in that analysis.

By dismissal, where the forum is a state court. A federal court cannot transfer to a state court, so a clause naming one is enforced by dismissal so the case can be refiled there.

The private interest factors drop away. Where a valid clause exists, the parties are treated as having settled convenience between themselves, leaving only public interest considerations of the kind discussed in forum non conveniens between two states.

The choice-of-law consequences do not travel. A transfer to enforce a clause generally carries the transferee forum's conflicts rules, which can change the governing law as well as the location.

And the objection must be raised early. Like other venue and jurisdiction objections, it can be waived by conduct, as set out in appearing to object without submitting.

Drafting one that works

Say exclusively. The word does the work, and its absence is the most frequent reason a clause fails to prevent a suit elsewhere.

Cover all claims arising out of or relating to the agreement. Which pulls in tort, statutory and pre-contractual claims that a narrow clause leaves outside.

Name a court that can hear the case. Including a fallback to the state courts of the same place if federal jurisdiction is unavailable.

Pair it with a governing law clause. The two together remove both questions, and either alone leaves half the uncertainty in place.

And check it against the counterparty's state. A clause that a court in the other party's home state will refuse to honor is worse than none, because it creates confidence that turns out to be misplaced.

The reason this clause repays attention out of all proportion to its length is that it operates before anything else does. Where a dispute is heard determines which conflicts rules select the governing law, which procedural rules apply, which discovery is available, which jury pool decides the facts and how long the case takes to reach trial. Each of those is worth more than most of the substantive terms parties spend their negotiating time on.

It also works quietly in circumstances where litigation never happens. A counterparty considering a claim that would have to be brought a thousand miles away, in a state where it has no counsel, frequently decides the claim is not worth pursuing. That deterrent effect is invisible, it never appears in any judgment, and it is probably the clause's largest practical benefit.

What it cannot do is worth knowing too. A forum clause does not prevent a regulator from acting, does not bind parties who never agreed to it, and does not survive a finding that the whole agreement is unenforceable for reasons going to formation. Nor does it help with claims that fall outside its scope, which is why the wording about what it covers matters as much as the wording about where.

For anyone reviewing a standard form, the practical test is short. Read the clause and ask three questions: does it say exclusively, does it cover claims other than breach of this contract, and does the named court have the power to hear the disputes this agreement is likely to generate. A clause that answers yes to all three is doing its job. Most clauses in circulation answer no to at least one, and their owners do not find out until the answer matters.

One further consideration belongs in the drafting decision: whether the clause is actually in the company's interest. A business that sues more often than it is sued benefits from naming its home courts. A business that is sued more often than it sues may prefer a permissive clause, or none at all, so that a claimant must establish jurisdiction the hard way in a forum of its own choosing. Standard forms are usually written from the first perspective regardless of which describes the business, because they were adapted from somebody else's template.