Where Can I Sue You?

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Is your forum selection provision mandatory or permissive? What’s a forum selection provision? That’s the one your agreement says where you can file suit to enforce your agreement. What is often confused with a forum selection provision? That would be a choice of law provision. That’s where the parties agree as to which state’s law will apply to their agreement. Once you are properly in any state’s courts, those courts can apply whatever law you’ve agreed should be used. It doesn’t have to be the law of that state. [Yes, there are exceptions, but that’s the overriding principle.]

This isn’t going to be a treatise over whether a court will accept jurisdiction over an out-of-state dispute. One reason is that it varies from state to state. Some states don’t want to get involved, but others “almost” solicit the business. For example, New York’s General Obligations Law (GOL) says that, with certain commercially irrelevant exceptions:

The parties to any contract, agreement or  undertaking, contingent or otherwise, in consideration of,  or  relating  to any obligation arising out of a transaction covering in the aggregate not   less   than  two  hundred  fifty  thousand  dollars,  including  a transaction otherwise covered by subsection one of section 1-105 of  the uniform  commercial  code,  may  agree  that the law of this state shall govern their rights and duties in whole or in part, whether or not  such contract,  agreement  or undertaking bears a reasonable relation to this state.

and

any person may maintain an  action  or  proceeding against a foreign corporation, non-resident, or foreign state where the action or proceeding arises out of or relates to any contract,  agreement  or  undertaking  for  which a choice of New York law has been made in whole or in part pursuant to section 5-1401 and which (a)  is  a contract, agreement   or  undertaking,  contingent  or  otherwise,  in consideration of, or  relating  to  any  obligation  arising  out  of  a transaction  covering  in  the  aggregate,  not  less  than  one million dollars, and (b) which contains a provision or provisions  whereby  such foreign corporation or non-resident agrees to submit to the jurisdiction of the courts of this state.

New York is not alone.

We’ve seen a lot of agreements that include something like the following we found in a recent case heard by Delaware’s Court of Chancery:

[e]xcept as otherwise provided by the [Delaware Revised Uniform Limited Partnership Act], this Agreement and the rights and obligations of the parties hereunder shall be governed by and interpreted, construed and enforced in accordance with the laws of the Commonwealth of Kentucky (regardless of the choice of law principles of the Commonwealth of Kentucky or of any other jurisdiction). Each of the Partners hereby consents to the jurisdiction of the courts of the Commonwealth of Kentucky and further consents that venue shall lie in the Franklin Circuit Court located in Franklin County, Kentucky.

The litigants agreed that Kentucky law would apply to their dispute but we’re not sure if the named Delaware law permitted that.  That’s because of the following provision of Delaware partnership law (something of little interest to all but a handful of readers, so readers can skip right over it):

[I]n a written partnership agreement or other writing, a partner may consent to be subject to the nonexclusive jurisdiction of the courts of, or arbitration in, a specified jurisdiction, or the exclusive jurisdiction of the courts of the State of Delaware, or the exclusivity of arbitration in a specified jurisdiction or the State of Delaware, and to be served with legal process in the manner prescribed in such partnership agreement or other writing. Except by agreeing to arbitrate any arbitrable matter in a specified jurisdiction or in the State of Delaware, a limited partner may not waive its right to maintain a legal action or proceeding in the courts of the State of Delaware with respect to matters relating to the organization or internal affairs of a limited partnership.

[Actually, there is a separate lesson here. When we write: “except as provided by [some state’s] law,” we are really obligated to know that’s state’s applicable law.]

Now, let’s get back to: “Each of the Partners hereby consents to the jurisdiction of the courts of the Commonwealth of Kentucky and further consents that venue shall lie in the Franklin Circuit Court located in Franklin County, Kentucky.” Can the parties initiate (and maintain) a suit outside of Franklin County? Well, a lot of people think they can’t. We’re not sure why that’s the case. We’ve never thought this limited where suit could be brought, but we’ve seen a lot of cases where people argue that this formulation of a forum selection provision bars suits outside of Franklin County. It doesn’t. It’s called a permissive clause.

What would be a mandatory clause? What’s the difference? Here’s how the Delaware Chancery Judge describes it:

Permissive forum selection clauses, often described as “consent to jurisdiction” clauses, authorize jurisdiction and venue in a designated forum, but do not prohibit litigation elsewhere. [In contrast,] [m]andatory forum selection clauses contain clear language indicating that litigation will proceed exclusively in the designated forum.

So, what would a mandatory forum selection provision look like, one that would make a particular jurisdiction the exclusive venue (location) where a suit could be filed? Here are some examples:

In the event that any dispute shall arise with regard to any provision or provisions of this Agreement, this Agreement shall be subject to, and shall be interpreted in accordance with, the laws of the State of Colorado. Jurisdiction shall be in the State of Colorado, and venue shall lie in the County of El Paso, Colorado

Venue of any action brought hereunder shall be deemed to be in . . . Virginia.

Should an action be commenced by either Vendor or Agency with respect to this Agreement, then both the Vendor and Agency agree that said action shall be venued in the County of Ramsey, State of Minnesota.

Our preferred formulation would look like:

This Agreement shall be interpreted in its entirety in accordance with the laws of the State of New Jersey as if it had been executed in New Jersey and fully performed in New Jersey. All disputes or legal actions must be adjudicated in State or Federal courts venued in Essex County, New Jersey.

Now, here are two cautions, both informed by a 2002 New Jersey unpublished court decision interpreting the following provision:

Any and all legal actions resulting from this order shall be venued and decided pursuant to the laws in the county and state of the Buyer’s location.

The first caution has to do with “choice of law.” In the 2002 case, one party insisted that the provision meant that New Jersey law had to apply. To that, the court said it didn’t and rubbed it in by saying that there is no such thing as “county” law.

The second is that there is no federal court venued (located) in Bergen County, New Jersey. So, lawsuits could only be heard by a New Jersey state court.

What are the bottom lines today? First, choice of law and choice of forum are independent of each other. Second, you need to specify both your choice of law and your choice of forum. Third, decide whether your forum choice will be permissible or mandatory and then write your provision accordingly. Fourth, if you want to choose the applicable law, know whether there are any restrictions on your choice (such as we’ve cited from Delaware partnership law). Fifth, if you choose a state seemingly unrelated to the agreement to be your “forum,” then make sure your chosen state will accept jurisdiction (see the dollar threshold in the New York law we cited above). Sixth, if you specify a particular court, make sure it exists.

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Comments

  1. STEPHEN C ANDERSON says:

    What handsome “forum” have you included a picture of?

  2. Great article as usual. Thank you.

    Question: Say, Tenant, a resident business of Covington, Kentucky, is presented with an offer to lease commercial property in Covington, Kentucky by Landlord, also a resident business of Covington, Kentucky. In the lease, there is a cognovit provision authorizing any attorney at law to confess judgment against Tenant. Tenant, realizing that the courts of Kentucky will not give effect to the cognovit provision – and suspecting (or being told that) Landlord will refuse to sign the lease without that provision – cunningly accedes to include the provision that is, after all, unenforceable in Kentucky.

    The lease contains a mandatory forum selection clause requiring disputes to be adjudicated in Hamilton County, Ohio. Since the county seat of Hamilton County is Cincinnati, which is right across the Ohio River from the little hamlet of Covington, KY, Tenant doesn’t think much of it. (Going to Cincinnati isn’t like going to East Berlin in 1971, after all, and pretty much everything is done over there, anyway.)

    What Tenant missed is a clause like: “this Agreement and the rights and obligations of the parties hereunder shall be governed by and interpreted, construed and enforced in accordance with the laws of the State of Ohio (regardless of the choice of law principles of the State of Ohio or of any other jurisdiction)”.

    Later, when there is a dispute over an alleged tenant default, Landlord simply drives across the river to Cincinnati, Ohio; there an Ohio court renders judgment for Landlord and against Tenant without even giving notice to Tenant of the proceeding. Landlord then returns to Kentucky and seeks to obtain enforcement of the Ohio judgment by a Kentucky court under (I suppose) the Full Faith and Credit Clause of the Constitution.

    Is that sort of thing possible?

    • Jeremy J. Deeken says:

      Rob, based on your last sentence, I presume you are presenting a hypothetical.

      I can’t speak to the particularities of Kentucky or Ohio law, but on the Constitutional questions, I think their would be a procedural due process problem based upon lack of personal jurisdiction if the defendant was never served with notice – particularly if the judgment awarded money damages against the defendant.

  3. Jeremy J. Deeken says:

    Under the conflict of law doctrine known as ‘Renvoi’, the selection of a choice of law is not always the end of the story. If the parties agree to apply the laws of State A, they may be agreeing to apply the totality of that states substantive law, not just its “internal law”. Internal law being defined as that subset of law which would be applied to a purely domestic issue. Unless the parties specify that they intend to apply the internal law of State A, the court may consult State A’s choice of laws provisions and determine that the law of the forum state should apply (called “reversion”), or even the substantive law of a third state (called “transmission”). If parties truly intend to apply the ‘internal law’ of State A, they should take care to specify that they do not intend to apply State A’s statutory or common law ‘choice of law’ provisions.

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