Forum What Clause? And Why Should I Care?

In legal parlance, the “forum” is the location of a particular court. Generally speaking, there are statutory constricts on where cases are properly filed. If an improper forum is used, there are mechanisms to dismiss or transfer the case so the action gets resolved in the “correct” forum. Beyond those statutes, though, also generally speaking, the courts have increasingly allowed parties to choose legal forums as part of their negotiated contract terms.

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.