Therefore, as part of your contract preparation, or review
before signing someone else’s contract, it is important to determine if it
contains what is called a “forum selection clause.” Those clauses specify where
any dispute must be heard. Examples include limiting suits to a particular
city, or even a particular court within that city – such as “all suits relating
to this contract must be filed in the Circuit Court for the City of Norfolk,
Virginia.”
Often those clauses limit the forum to the location of the
contracting party with the greatest leverage; for example, the owner as regards
its contract with the prime contractor or the prime contractor as regards its
subcontracts with its subcontractors.
The common refrain of the courts is typified by that of the U. S.
Supreme Court in the Burger King Corp. v.
Rundzewicz case decided in 1985 (471 U.S. 462), holding “where forum
selection provisions have been obtained through freely negotiated agreements
and are not unreasonable and unjust, their enforcement does not offend due
process.”
The Virginia Supreme Court has followed this approach. But what does that really mean? What is free
negotiation? What is unreasonable or unjust? As with many things associated
with legal issues, the answer is not black or white, but rather is subject to
interpretation. Again generally speaking, in Virginia the courts will not
renegotiate contract terms, even if the court concludes those terms were harsh
or one-sided. The short position of the
court is that the other side could have walked away from the deal, and that
ruling otherwise would open the proverbial litigation flood-gates.
While a common-sense judicial approach, it ends up
disregarding the realities of contract leverage, and can leave the side without
leverage with no realistic financial choice but to accept the forum terms. The
Virginia General Assembly has offered some relief to Virginia subcontractors by
statutorily voiding subcontract forum selection clauses for Virginia
construction projects if the forum is other than the project’s location. But
otherwise, absent compelling facts inapplicable to most negotiated contracts,
forum selection provisions are binding.
One way parties have sought to avoid forum selection clauses is to allege fraud in the inducement of the contract. If proven, fraud in the inducement can void a contract. But does it also void the forum selection clause? One would think that a void contract is a void contract, but in a recent opinion in Fill v. MidCoast Financial, Inc., Civil Action No. 1:12-cv-1054, USDC, EDVA, Alexandria Div. (filed 11/20/12), Judge O'Grady held that in order to void the forum selection clause the fraud must apply to the forum selection clause itself. Because under the facts of that case he held the forum selection clause was not agreed to because of the alleged fraud, the forum selection provision was enforced in that case.
No one likes to go into a contractual arrangement thinking
it is going to result in a dispute, but the financial reality is that if there
is a dispute a forum selection clause can significantly affect the cost of
litigation, or even the base practicality of pursuing a claim at all. Because
of this, the use of forum selection clauses, or minimally the negotiation of
the forum, is an important component of all contract negotiations about which
all contracting parties should be aware and should care about.
