Introduction
The traditional forum selection doctrine, hostile to choice of law provisions, has disappeared. In its place, a new doctrine, clothing such provisions with a presumption of validity, has taken its place. For some litigants, the costs of defending or prosecuting a case in a distant forum may be an effective bar to litigating at all.
The embrace of choice of forum clauses
The seminal case that marks the beginning of the elevation of forum selection clauses from an unenforceable attempt to “oust” a court from its jurisdiction to a virtually unassailable, irrevocable agreement is M/S Bremen v. Zapata Offshore Company. The case involved a towing contract that required a tow of an oil rig from the Gulf of Mexico to the Adriatic Sea. The rig was lost in a storm in the Gulf of Mexico. The agreement, negotiated in Europe, had a forum selection clause requiring arbitration in England. Zapata sued the towing company, Unterwesser, in the Federal Court of the Southern District of Florida, which denied Unterwesser’s motion to dismiss, on the grounds that the forum selection clause was ineffective.
The Supreme Court held that the District Court, in treating Unterwesser’s motion as a matter of forum non conveniens, had given “far too little weight and effect … to the forum clause in resolving this controversy. It reasoned, “We cannot have trade and commerce in world markets and international waters exclusively on our terms, governed by our laws and resolved in our courts.” The Court observed that the contract was made by two sophisticated business entities and that its performance required the rig to go through international waters and the waters of many different countries. The Court also suggested that if the forum clause were unreasonable and unfair, a court could decline to enforce it. The Court concluded that the party seeking to avoid the enforcement of a choice of forum clause must carry a “heavy burden” to establish that the clause was so unreasonable as to effectively deprive it of its day in court, was affected by fraud, undue influence or overweening bargaining power.
It found nothing in the record to support that heavy burden. Even in such a case, if it appeared (as in the case before the court) that the parties reasonably contemplated such an inconvenience, there would be little reason to relieve the parties from their agreement. The facts that the contract was the result of negotiation between sophisticated business entities and the international nature of this maritime contract drove the decision.
In later cases, courts have enforced clauses in contracts that had little or no international scope and were not negotiated in any meaningful sense. The defenses mentioned in the dicta of the Bremen decision — fraud, unfairness, overweening power — rarely have been effective. Commercial predictability appeared to have trumped them all.
Avoiding the forum selection clause in the federal courts— fraud in the inducement
Scherk v. Alberto-Culver Co. involved a claim of fraud in the inducement of a contract to license trademarks that Scherk, a citizen of Germany, falsely represented were unencumbered. The contract had a choice of forum clause that designated the International Chamber of Commerce in Paris for arbitration. Alberto-Culver sued for rescission. The Supreme Court reversed the decisions of the District Court and Court of Appeals for the plaintiff and held that the international nature of the contract and the U.S. Arbitration Act required recognition of the forum selection clause. The Supreme Court stated in a footnote:
In The Bremen we noted that forum-selection clauses ‘should be given full effect’ when ‘a freely negotiated private international agreement (is) unaffected by fraud’ … [citations omitted]. This … means that an arbitration or forum-selection clause in a contract is not enforceable if the inclusion of that clause in the contract was the product of fraud or coercion.
The Bremen’s footnote 14 has been the foundation of a virtually impregnable defense of forum selection clauses from claims of fraud in the inducement. The Arbitration Act should not have been a shield for Scherk. The relevant provision of the act provided that an arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” A fundamental principle of contract law is that fraud in the inducement renders a contract voidable at the option of the victim. By its own terms, the Arbitration Act should not have applied, particularly because even Illinois law embraced that fundamental principle.
Moreover, selection clauses and arbitration clauses are analytically different. Arbitration may or may not affect the geographical location of the forum, but it is a different form of litigation, generally following rules different from those that govern litigation in courts. The policy based on interpretations of state and federal arbitration acts, favoring arbitration over trials, has no bearing on whether an ordinary forum selection clause governing only the location of the litigation should be voidable along with the rest of the contract. A forum selection clause should be unenforceable when the contract of which it is a part was induced by fraud. If a party were induced to enter a contract by fraud, would it have agreed to the forum selection clause if it knew the true facts? It seems fanciful even to imagine a scenario in which a party agreed to an unfavorable forum selection clause by fraud, other than through the deceit that induced it to agree to the contract.
The concern that seems to underlie the doctrine that fraud renders a forum selection clause voidable only if the fraud induced the choice of forum clause, rather than the contract of which it is a part, is the fear that a party will, with “artful pleading,” avoid a contractual obligation to litigate disputes where it had agreed they would be heard. It appears that this concern is much overblown. If the plaintiff seeks expectation damages under the “benefit of the bargain” doctrine, instead of rescission, it makes sense to enforce the choice of forum to which the parties agreed. On the other hand, if the main focus of the pleadings is the defendant’s conduct that led to the signing of the contract, that should suggest that the claim is really for damages or other relief for tortious conduct and not for disappointment of expectations. The rationale of the rule requiring that fraud be specific to the forum selection clause seems a weak argument. Federal Rule of Civil Procedure 9 and many state rules require that allegations of fraud be particularized. Those procedural rules combined with the power of the court to sanction, under Rule 11 bad faith allegations and even shift expenses (including counsel fees) should be protection enough. Moreover, with careful analysis, courts have been able to determine whether a claim was for fraud or breach of contract by discerning the true nature of the case through an analysis of the contracts and the relief that the plaintiff seeks.
Massachusetts—fraud in the inducement
The Massachusetts Supreme Judicial Court, in Jacobson’s v. Mailboxes Etc. USA Inc, explicitly accepted the U.S. Supreme Court holding in M/S Bremen v. Zapata Offshore Company and The Restatement (Second) of Conflict of Laws §80 (1988 revision) (“The parties’ agreement as to the place of the action will be given effect unless it is unfair or unreasonable.”), abandoning its older precedents disfavoring choice of forum and choice of law ex ante agreements. In Jacobson v. Mailboxes, the Supreme Judicial Court dealt with a franchising contract that stipulated two provisions: First, that the contract was to be construed under and governed by the laws of California, and second, that California was to be the forum to enforce the contract. The plaintiff claimed that he was led into the contract by fraud and that the defendant had engaged in the pre-contract violations of G.L. c. 93A and breached various obligations of the franchise agreement.
The Supreme Judicial Court held that if the pre-contract claims were not contract claims mislabeled “fraud,” California would not recognize and enforce a choice of forum clause in an action based on pre-contract wrongs. The Court remanded the case with instructions to the Superior Court to determine if “the greater focus of the plaintiff claims” was on the defendants’ “misleading conduct that induced the agreement” and other unfair or deceptive pre-contract conduct. If so, “the judge should not enforce the forum selection clause by banishing contract enforcement claims to California for separate treatment,” otherwise it should decline, on the grounds of forum non conveniens, to permit any part of the action to be maintained in Massachusetts.
The defendant cited Scherk arguing, unsuccessfully, that “unless there is some showing that fraud or undue influence induced the party opposing a forum selection clause to agree to inclusion of that provision (emphasis in the original), a general claim of fraud or misrepresentation as to the entire contract does not affect the validity of the forum selection clause.” Enforcing a forum selection clause in the face of well-pleaded, specific allegations of fraud seems to be contrary to the public policy of requiring good faith and fair dealing in every contract. In at least one egregious case, the Federal Trade Commission has held that the use of a forum selection clause as part of a pattern of oppressive and fraudulent business dealings was a violation of the Federal Trade Commission Act by Leasecomm, a business opportunity lender.
Defenses to forum selection clauses — when enforcement is unreasonable and unjust
Many courts have said, but few cases have held, that a forum selection clause in an oppressive and unreasonable contract of adhesion is unenforceable. Establishing that a contract with a burdensome forum selection clause is a contract of adhesion may be a necessary element for the avoidance of the disadvantageous forum, but it is rarely a sufficient one. In Casavant v. Norwegian Cruise Line, Ltd., the Appeals Court refused to enforce a choice of venue forum tucked away in the back of a ticket. In that case, the defendant sent the ticket to the customer only two weeks before the scheduled departure on Sept. 16, 2001. The Casavants, about a week after having received the tickets, asked that they be allowed to reschedule the cruise because of their anxiety for safety following the Sept. 11 attack on the World Trade Center. The court distinguished Shute on the basis that “the manner and means of the delivery of the terms of the contract for passage did not fairly allow the Casavants “the option of rejecting the contract with impunity” as did the contract in Shute. The court held that a passenger would not be bound to a forum selection clause unless given a reasonable time within which to reject the ticketing contract and forum selection clause without incurring disproportionate penalties.
Few cases have spelled out the factors that determine whether a forum selection clause is fair and reasonable. Judge Bruce M. Selya of the Court of Appeals for the First Circuit, while a District Court judge, distilling federal cases, endeavored to do that in D’Antuono v. CCH Computax Systems, Inc. Some of the factors are the relationship of the contract to the selected forum—what law governs the contract, where the contract is to be performed and where it was executed. The relationship of a party seeking enforcement of a forum selection clause with the contractually designated forum is another factor of some importance. One factor that should weigh heavily is the importance of the forum selection clause to the agreement taken as a whole. Some courts have weighed the fairness with which the parties dealt with each other and whether the parties actually bargained. Courts also have weighed the availability of adequate remedies in the selected forum and the public policy of the forum chosen by the plaintiff (if different from the contractually selected jurisdiction). No one factor, other than perhaps violation of a strong public policy, fraud or gross oppression, appears to be determinative.
Forum non-conveniens — and other escape hatches
Courts may refuse to enforce a forum selection clause when the burden on one party is truly oppressive. If there is also no rational connection between the contractually chosen forum and the contract or its performance, courts have used forum non conveniens as the tool to avoid enforcing an oppressive forum selection clause, such as in United Rentals Inc. v. Pruett. In Pruett, the District Court, relying on Stewart Organization Inc. v. Ricoh Corporation, 487 U.S. 22 (1988), in which the Supreme Court held whether a case would be transferred was a federal question, governed by statute and not by state law or the contract between the parties, refused to enforce the forum selection clause. The Supreme Court had held that although an enforceable forum selection clause should be the significant factor on whether to transfer the case to another district, a district court must take into account other important considerations other than those that bear solely on the parties. These various factors — convenience of the witnesses, systemic integrity, fairness — come under the heading of the “interest of justice.”
Because the Pruett had no contacts with Connecticut and all other relevant contacts with California, the District Court found no interest of justice factors that favored keeping the case in Connecticut. Of particular importance to the court was that California had a particular interest in the issues of the case because California held that restrictive covenants and employment contracts were contrary to its public policy. The court combined traditional forum non conveniens analysis with consideration of the interest of the state where the contract was performed.
In Lava Laundry, Inc. v. Daniels Equipment Company, Inc., the defendant, using very aggressive and somewhat disingenuous sales tactics, took an order from the plaintiff for laundry equipment. After the plaintiff signed the order, the defendant gave him a copy of the order that had on its back a “boiler plate” forum selection clause, naming New Hampshire as the forum where any dispute must be litigated. Judge Raymond J. Brassard refused to enforce the clause. He reasoned that the court must look to the law of the selected state to see if the clause would be enforced. New Hampshire had adopted the Uniform Model Choice of Forum Act. The New Hampshire Supreme Court in Stafford Technology, Inc., had held that the purpose of the statute was “to enforce forum selection clauses that are bargained for by contracting parties.” Since the parties did not bargain for the forum selection clause, the judge concluded that New Hampshire would not enforce it. Therefore, a Massachusetts court should not implement it.
Forum non conveniens in Massachusetts is governed by its Long Arm Statute, which provides in its relevant part, “When the court finds that in the interest of substantial justice the action should be heard in another forum, the court may stay or dismiss the action in whole or in part on any conditions that may be just.” However, the court can impose conditions to assure that the plaintiff will have a suitable forum, such as requiring the defendant to waive the statute of limitations defense. When considering a motion to dismiss, the most important issue for a Massachusetts court is the availability of another suitable forum. Green v. Manhattanville College.
Perceived ambiguity
When there is a great disparity of power between the parties, the forum selected in the contract bears little relationship to the dispute and the choice of forum appears to be burdensome or unfair, courts have found ambiguities in the clauses, which they construe against the clause. The word “may” will often not prevent a party from suing in a different court from that specified in the contract. Even the word “shall” may not be determinative. Thus, a clause that states that courts of a particular jurisdiction “shall” have jurisdiction over any dispute may be read as non-exclusive of other jurisdictions. In King v. PA Consulting Group, a case in which the consulting firm attempted to enforce a non-compete agreement, the employer sought to enforce a forum selection clause that provided:
This agreement and all matters arising in connection with. . . . shall be subject to the jurisdiction of the New Jersey Courts.
The court held that the contract provision only meant that the jurisdiction of the New Jersey courts was unchallengeable, but it did not require that venue was exclusive in New Jersey. A year earlier, the court, citing a dictum in Paper Express, Ltd. v. Pfankuch Maschinen GmbH, stated:
Generally speaking, the circuits that have addressed the issue are in agreement that where venue is specified [in a forum selection clause] with mandatory or obligatory language, the clause will be enforced; where only jurisdiction is specified [in a forum selection clause], the clause will generally not be enforced unless there is some further language indicating the parties’ intent to make venue exclusive.
Would not predictability be better served if courts, rather than straining to find ambiguities, explicitly declined to enforce forum clauses that were unfairly and unreasonably burdensome to one of the parties or had the effect of diminishing substantive rights? If courts were explicit about the reasons for the refusal to enforce these clauses, they would articulate principles that guided their decisions. If parties knew the kinds of circumstances and the boundaries of acceptability for these clauses, they could draft clauses that would withstand critical scrutiny.
It is noteworthy that both Pruett and King involved attempts by an employer to prevent an employee from working for a competitor. Just as courts approach differently non-compete clauses when the ability of an employee to earn a living is at issue than when the seller of a business agrees not to compete against the buyer, the nature of the litigation often does and should affect how a court handles a forum selection issue.
Conclusion
Forum selection clauses are useful and, in this writer’s judgment, salutary devices to enhance predictability, so necessary for commercial life. Enforcement of these clauses also validates the important liberty of freedom of contract. On the other hand, courts need to recognize that fairness and honesty are also important, not only as moral imperatives, but as lubricants for the functioning of commerce. The existence of the Federal Trade Commission Act and the many state “little” FTCAs are ample evidence of the strong public policy favoring fairness and honesty in business dealing. Public confidence in the business community, now at a nadir, is not enhanced by the rigorous enforcement of contract provisions so oppressive that they effectively prevent the redress of wrongs. Forum selection clauses in consumer contracts should be enforced if there is complete openness and disclosure.
Endnotes
1. M/S Bremen v. Zapata Offshore Company, 407 U.S. 1 (1972).
2. Id.
3. Id. at 9.
4. In Hourihan v. GT Group Management SDN BHD et al, the court in the Business Litigation Session upheld a forum selection clause in a severance agreement between a Massachusetts resident and a Malaysian corporation on the grounds that the contract was an international contract negotiated by sophisticated parties who were aware of the clause. Hourihan v. GT Group Management SDN BHD et al, 02-1255 BLS (Super. 2002) http://socialaw.gvpi.net/sll/lpext.dll/sll/bls?f=templates&fn=main.htm
5. Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974).
6. 9 U.S.C. §1-307 (2006).
7. Scherk, 417 U.S. at 519 (The Court characterized the arbitration clause as a “specialized” forum selection clause).
8. Id. at 519 n. 14.
9. 9 U.S.C. §2 (2006).
10. Int’l Harvester Co. of America v. Rieke 9 F. 2d 776, 780 (1925). See also Strong v. Repide 213 U.S. 419, 429 (1909); Nash v. Trustees of Boston University, 946 F.2d 960, 966 (1st Cir. 1990) (“We discern no sound reason that a failure to satisfy so central a contract principle, foreordaining the absence of any meaningful meeting of the minds, should not be considered a baseline element in any coherent body of federal common law developed under the congressional charter implicit in ERISA.”).
11. Grane v. Grane, 143 Ill.App.3d 979, 984, 493 N.E.2d 1112, 1115 (Ill. App. Ct. 1970) (arbitration agreement).
12. Terra Int’l, Inc. v. Miss. Chem. Corp. 119 F.3d 688, 695-97 (8th Cir. 2004) (claims plaintiff had asserted were covered by provisions in the contract).
13. Jacobson's v. Mailboxes Etc. USA Inc., 419 Mass 572, 575 (Mass. 1995).
14. Supra.
15. Jacobson’s, 419 Mass at 579.
16. Brief of Defendants/Appellees at 19, Jacobson’s v. Mailboxes Etc. U.S.A., Inc., No. SJC-06692 (Mass. 1995).
17. Id. at 21.
18. Federal Trade Commission v. Leasecomm Corporation et al. CA 03 11034 REK (D. Mass. 2003); http://www.ftc.gov/opa/2003/05/leasecomm.htm (follow links to complaint and consent decree).
19. 15 U.S.C. §§45(a), 53(b), 57(b) (2006).
20. Carnival Cruise Lines, Inc. v. Schute, 499 U.S. 585, 591-95 (1991) (passenger cruise ticket presumptively valid and not necessarily unreasonable or unjust); but see Cameron v. Group Voyagers, Inc., 308 F. Supp. 2d 1232, 1237 (D. Col. 2004) (enforcement refused; provision “tucked” away in informational packet given at beginning of trip, no evidence of bargaining).
21. 63 Mass. App. Ct. 785 (2005).
22. Id. at 788.
23. 570 F. Supp. 708 (D.R.I. 1983).
24. Id. at 712.
25. Id. at 714. See also W. Granger & Sons, Inc. v. Rojac Co., 885 F. Supp. 319 (D. Mass. 1995) (Massachusetts general contractor with projects in many states and subcontractors from different states on each project).
26. Bremen, 407 U.S. at 16-17.
27. Walker v. Carnival Cruise Lines, 107 F. Supp. 2d 1135, 1143 (D.N.D. Cal. 2000) (enforcement declined because of “strong national policy of eradicating disability discrimination”); Red Bull Ass’n v. Best Western, 862 F.2d 963, 966 (2d Cir. 1988) (same; Civil Rights Acts of 1867, 1964, and 1968); Jones v. GNC Franchising, Inc., 211 F.3d 495, 498 (9th Cir. 2000) cert. den. 531 U.S. 928 (2000) (California Franchisees Act voided forum selection clauses in franchise agreements, evidencing strong public policy to be respected by Federal Courts).
28. 28 U.S.C. 1404(a) (2006).
29. The financial difficulty that a party might have in litigating in the selected forum is not a sufficient reason, by itself, for refusal to enforce a valid forum selection clause. E.g. Bonny v. Soc’y of Lloyd’s, 3 F. 3d 156, 160 (7th Cir. 1993); Moses v. Bus. Card Exp., Inc. 929 F.2d 1131, 1138-39 (6th Cir., 1991); However, great disparity of financial resources is a factor that courts do consider when faced with a motion to transfer under 28 U.S.C. §1404(a). Compare Holmes v. Freightliner, LLC, 237 F. Supp. 2d 690, 692 (M.D. Ala. 2002) (a factor) and Houk v. Kimberly Clark Corp., 613 F. Supp. 923, 929 (D. Iowa 1985) (a factor, but not entitled to great weight).
30. United Rentals Inc. v. Pruett, 296 F. Supp. 2d 220 (D. Conn 2003).
31. Id. at 228.
32. 18 Mass. L. Rptr. 414 (Mass. Super. Ct. 2004).
33. 147 N.H. 174, 177, 784 A.2d 1198, 1201 (N.H. 2001).
34. Lava, 18 Mass. L. Rptr. at 1.
35. A surety may be bound to a forum selection clause in a contract for which it issues a performance bond, even though the bond does not explicitly refer to the contract. Ionics, Inc. v. Liberty Mutual Insurance Company 15 Mass.L.Rptr. 508, 3 (Mass. Super. Ct. 2002).
36. Mass. Gen. Laws ch. 223A, §5.
37. 40 Mass.App.Ct. 76, 81 (Mass. App. Ct. 1996), appeal denied, 422 Mass. 1107 (Mass. 1996).
38. Trans Nat’l Travel, Inc. v. Sun Pac. Int’l, Inc. 10 F. Supp. 2d 79, 82 (D. Mass. 1998) (“consent to jurisdiction and venue in...Arizona” held, not mandatory); Wai v. Rainbow Holdings, et al, 315 F.Supp.2d 1261, 1270 (S.D. Fla. 2004).
39. King v. PA Consulting Group, 78 Fed. Appx. 645, 646, 2003 U.S. App. LEXIS 18783 (10th Cir, 2003) (May be cited as precedent only under 10th Cir R. 36.3).
40. Judge Van Gestel, sitting in the Business Litigation Session of the Massachusetts Superior Court in a commercial performance bond case, ruled that the use of the words “shall. . .only” be instituted in the courts of Florida was mandatory. Ionics, Inc. v. Liberty Mutual Insurance Company 15 Mass.L.Rptr. 508, 2-3 (Mass. Super. Ct. 2002).
41. Paper Express, Ltd. v. Pfankuch Maschinen GmbH, 972 F.2d 753, 757 (7th Cir. 1992).
42. K & V Scientific Co., Inc. v. Bayerische Motoren Werke Aktiengesellschaft, 314 F.3d 494, 499 (10th Cir., 2002). But see Davis Media Group, Inc. v. Best Western Int’l, Inc., 302 F. Supp.2d 464, 468-69 (D. Md. 2004) (“[A]ll suits. . .shall be subject to the jurisdiction of the Courts. . .of Arizona” held to be a “mandatory” forum selection clause.). This case should be viewed with caution. Most of the cases it relies on are distinguishable.
43. E.g., Boulanger v. Dunkin’ Donuts, 442 Mass. 635, 639 (Mass. 2004); H & R Block Tax Services, Inc. v. Circle A Enterprises, Inc., 269 Neb. 411, 417, 693 N.W.2d 548, 554 (Neb. 2005) (“Nebraska courts are generally more willing to uphold promises to refrain from competition made in the context of the sale of goodwill as a business asset than those made in connection with contracts of employment”).