FORUM SELECTION CLAUSES
What, Where, Why and How
A forum selection clause is a contract provision that states that any dispute or enforcement action under the contract will be litigated in a particular state, country or before a particular court or administrative body. Depending on the way the provision is drafted, the selected forum can either specify a) the exclusive forum for lawsuit to be filed ("exclusive") or b) a forum where the lawsuit could be filed while not excluding the possibility of filing in other forums ("non-exclusive").
Note that this is not the same as a choice of law clause, which specifies the state law that is to be applied by the court, wherever the lawsuit is brought. In other words, while a forum selection clause provides the location where the suit may or must be maintained, the choice of law clause tells the judge which state law should govern the interpretation or enforcement of the contract. Obviously, the two provisions ideally work together so that a judge in the state where the suit is brought will be applying the law of the same state.
Without a forum selection clause, a lessor is likely to find itself in one of two uncomfortable positions. 1) The lessee/debtor beats you to the courthouse. In some cases, the lessee will file a defensive action before the lessor can act on the default. For example, the lessee might file suit in its home state arguing that the lease violates state law, that the lessor has failed to act in good faith or that the equipment does not work properly and the lessor is responsible. With an exclusive forum selection clause, on motion by the lessor, the court should dismiss such as case. Without such a clause the lessor will be stuck litigating in the lessee's home state. 2) The lessee may fight over the lessor's right to sue in its home state. Absent a forum selection clause, the lessor may find itself embroiled in a dispute about where a trial should be held even if it is the first to bring the suit in the state it prefers. With a well drafted forum selection clause the lessor should quickly get beyond this issue.
For years, courts were divided about whether to honor forum selection clauses. Today, most state and federal courts will honor forum selection clauses. However, they will review the facts surrounding the transaction to determine whether they will honor the particular clause. Courts may look at various factors such as: (1) whether the selected forum is inconvenient, unfair or unreasonable, (2) whether the forum selection violates a strong public policy, (3) whether the objecting party was induced to enter into the selection clause by fraud, and (4) whether the forum selection clause was an adhesion contract (where the parties have unequal bargaining power) rather than negotiated by equals. Nevertheless, courts are very likely to enforce a forum selection clause between two commercial parties.
Forum selection clauses are common in equipment finance transactions and will generally stipulate that any lawsuit can (or must) be filed in the home state of the lessor/lender. If the chosen state has no relation to either contract party the court is less likely to enforce it. Another type of forum selection clause is the "floating forum selection clause". In those clauses no particular state is stipulated for the forum; the parties agree that the lawsuit can be brought in the home state of the lessor or any subsequent assignee of the lessor. We still see floating forum clauses in contracts; but the courts are less likely to enforce these. Note that in in consumer transactions the power of the parties to stipulate a particular forum state is more limited. For example, UCC 2A-106(2) provides "[i]f the judicial forum chosen by the parties to a consumer lease is a forum that would not otherwise have jurisdiction over the lessee, the choice is not enforceable."
Why don't all leases include forum selection clauses? Some leases are old forms which their owners haven't updated. Some lessors are concerned that a forum selection clause might limit their options or require two suits. In our opinion you should at least have a non-exclusive forum selection clause if not an exclusive one.
It is true that, where an exclusive forum selection clause is selected, the parties are required to maintain litigation in the specified state. However, if the lessee/defendant does not raise forum selection as an issue in the case, the court, most likely, will allow the case to proceed where it is filed. So, you may be able to sue the debtor in its home state if the court has jurisdiction over the lessee and the lessee never moves to dismiss the case based on the clause. This will be true where the lessee does not answer the pleading or recognizes that fighting about the location of the suit will only increase its costs. The principal advantage of the exclusive clause is that it prevents the lessee racing to the courthouse in its home state when it receives a default notice.
With a non-exclusive forum selection clause the lessor has the right to sue either in the selected forum, presumably its home state, or the lessee's home state. Of course, if the clause is a non-exclusive forum selection clause, the lessee could sue you before you file suit for collection. However, this is unlikely and, as discussed below, the lessor may benefit from the added flexibility of being able to bring the suit in the debtor's home state.
So, assuming that you have the choice, should you sue in the stated forum or in the debtor's home state? It may come down to an analysis of several factors for each matter. If you file suit and obtain a judgment against the debtor in your home state, that judgment alone may do you no good if the debtor has no assets in your state. For the judgment to really be collectible, you will need to "domesticate" the judgment in the debtor's home state by filing the judgment with a court in that state. When you file the judgment in another state court you will most likely follow the Uniform Enforcement of Foreign Judgment Act which has been adopted by almost all states to facilitate judgment domestication. In Federal Court once you obtain a final judgment you may file a "Certification of Judgment for Registration in Another District" with a copy of the judgment. In general the process of judgment domestication should not be long but the debtor may be able to slow this as other litigation with delaying tactics. So, the process of filing suit in your home state could be more time consuming and expensive (two sets of lawyers and court fees). When you are pursing a defaulted debtor the speed of the litigation can be crucial to success. The first creditors to pounce on the debtor may get paid while the rest recover nothing.
If the transaction is a lease or secured loan and you are unable to get possession of the equipment by self-help repossession you may need to file a lawsuit to get court and law enforcement assistance in recovering the equipment. In such cases the court may grant an order prior to entry of a judgment granting the creditor the right to possession of the equipment. However, a court in your home state does not have the authority to order law enforcement in another state to seize the equipment. In these cases, it may be best to simply file the case in the state where the lessee and the equipment are located.
What factors weigh in favor of suing in the chosen forum? How important is the "choice of law" provision of your contract? Does your home state have important statutory or case law that upholds particular contract provisions that could be troublesome on other states? For example, if your contact has a high interest rate that is acceptable in your home state but exceeds the usury rate of your customer's residence it is best to file suit in your home state. A judge in the customer's home state may disregard the choice of law based on that state's public policy or may simply be more hostile to your positions on the issues in the case in light of the interest rate that exceeds the usury rate in that state.
If there is a genuine dispute about the debt (rather than just the inability of the debtor to pay) then you probably should file suit in your home state. Actively fighting a case in your customer's home state may result in higher costs for you and lower costs for the debtor. Additionally, the court may favor the local debtor over the out-of-state lender and give the debtor every benefit of the doubt in the case. (We call that "home cookin' in Alabama). Even the area of the country where your debtor is located may be a factor. Periodically, certain counties and states may become hotbeds for large jury verdicts over seemingly minor matters. If your customer is located in such an area then that may be a factor in your decision to file the case in your home state versus the debtor's home state. Keep in mind that if you file suit in the debtor's home state you will probably not be able to dismiss that case and start over in your home state, even if you have an exclusive forum selection clause.
With these factors in mind, we suggest two courses of action. First, talk to your lawyer to determine the most appropriate type of forum selection clause for your document. Do the risks of lawsuits or counterclaims by your customers justify the inclusion of an exclusive jurisdiction clause? Secondly, before you send out the next collection case for a lawsuit, consider which your home state or the debtor's state would be best for the particular case.