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Operations Management Best Practice

Dispute Resolution: The Forum Selection Clause

by Elisabeth de Nadaland Víctor Manuel Sánchez

Executive Summary

  • The forum selection clause in a contract determines the process by which the parties to the contract will have their disputes resolved and the venue for such dispute resolution. These processes generally take the form of litigation in a national court, arbitration, or other dispute resolution process such as mediation.

  • The forum selection clause provides certainty to the parties in the often uncertain arena of international commercial transactions, where the uncertainty is due to the different countries and jurisdictions involved.

  • The specific forum selection clause that best meets the interests of the parties should be decided on the basis of several considerations, which will differ from case to case.

  • Given the relevance of the clause, and the legal consequences involved in the decision, it is advisable for managers to consult lawyers when such clauses are negotiated and drafted.

Introduction

When two companies start a business relationship, they do not wish future conflict or discrepancies to arise; company managers are human beings, and most human beings begin relationships confident that they will work out well.

However, as with all human relationships, it is natural that differences may occur. This is why contracts should include dispute resolution clauses and a forum selection clause—sometimes just called a forum clause. More importantly, it is why managers should negotiate the choice of forum clause for a contract as seriously and thoroughly as any other clause in the contract.

What Is a Forum Clause? What Is Its Purpose?

The forum clause is the clause in a contract that sets out the process whereby the parties will seek a resolution to any dispute that may arise between them, as well as the venue where the dispute is to be resolved.

Unless there is a reason to the contrary, contracts should contain a forum selection clause to give the parties certainty in national and international trade. Negotiating a forum clause gives the parties the opportunity to agree on the method they will use to resolve disputes that meets the specific needs of the parties and the business contracted, as well as the most convenient place.

When deciding the forum clause, major goals should be to ensure that: the clause fits the needs of both parties; the clause is valid and enforceable; the method chosen will allow enforcement of the court or arbitration decision.

How to Negotiate the Forum Clause

The following tips should be taken into account when negotiating a forum selection clause:

  • Managers should view the possibility of litigation as par for the course in a commercial relationship (as it is preferable to failure of the relationship).

  • The choice of a forum clause deserves the same attention and energy from negotiators as clauses setting the price, the representations and warranties, and any other material aspect of the contracted business.

  • Due to the complexity and legal technicalities of the various options open to the parties, it is always advisable to have a lawyer present when negotiating this clause.

Circumstances to Consider

When negotiating the forum clause to be included in a contract, several circumstances must be considered so that the interests of the parties are best served in the event that a dispute arises. First we consider two important general points.

If a contract contains no forum clause, national courts will ensure jurisdiction by default. Thus, litigation will take place in a venue defined by domestic or international regulations. This venue might be totally unknown to the parties when executing the contract.

The specific national court that ensures jurisdiction will be determined by international rules and conventions, or by the internal laws of the country in which the statement of claim is filed. For negotiation purposes, in commercial contracts the plaintiff tends to have more options open to it in influencing which national court will have jurisdiction, based on factors such as the defendant’s place of residence, where the contract is performed, and generally a close connection of the contract with a specific national court, etc. In view of the multiplicity of options open to the plaintiff, as a general principle it is not advisable to leave a contract without a forum clause. Having no agreed clause would amount to playing a football match without knowing in advance the rules of the game and the place where the game is to be played.

When the parties have decided to include a forum clause, the next decision is whether to opt for litigation before a national court or for some other means of dispute resolution. If the first option is chosen, the clause must refer to the courts of a specific country or city; if the second, the clause must refer to a specific dispute resolution method—for example arbitration or mediation. In the case of arbitration or mediation, certain particulars of the dispute resolution method must also be identified, such as the institution that will manage the arbitration or mediation, the procedure for appointing arbitrators, the place where the arbitration or mediation is to be held, the language in which the proceedings are to be conducted, how costs are to be allocated, and so on.

Other circumstances to be borne in mind to ensure that a satisfactory choice of forum clause is made are the following:

The parties’ nationalities and the need for neutrality: If the parties have different nationalities and one party is able to litigate in its home country, the other party may be disadvantaged by lack of knowledge of the legal system, in terms of procedural and material law applicable, the judges’ competence, and the legal culture and expectations of the outcome. General disadvantages relating to language and physical distance are other considerations, as are fears that a local judge may tend to protect national litigants and concerns about corruption; whether or not these have any basis in fact, the provisions of a forum clause should seek to allay such concerns. These are some of the reasons why international contracts include a forum selection clause that ensures neutrality for both parties by referring to the courts of a third country or to arbitration.

Complexity of the matter: The field and specific issue that may be the subject of a potential dispute, and thus the specialist competencies of courts and judges, are relevant. In national courts it is not possible to ensure that a person with specific competence in a certain field will judge a dispute. Some countries have courts that specialize in particular issues, and these may be able to resolve a contract problem, but other countries do not. Therefore arbitration may be a more suitable choice as it allows the parties to choose the most suitable independent arbitrators with expertise in the relevant field.

Amount at stake and costs: The amount involved and/or the strategic importance of the business contracted will also influence the decision. Litigating in the national courts of one country may be more costly than in others. On the other hand, litigating in national courts is generally less costly than arbitration.

Flexibility and speed: It is impossible for the parties to influence the flexibility and speed of a national court system (since the procedural rules that apply are mandatory), but other forms of dispute resolution such as arbitration allow the parties to design the way any proceedings will develop and enable them to build in flexibility to meet their needs.

Final decision: The system of appeals until a decision is rendered final is different in each country. Arbitration awards cannot be appealed, and can only be set aside on the basis of very restricted grounds.

Recognition and enforcement of the decision: If a court or arbitration decision made in one country will need to be recognized and enforced in another country, issues to consider are whether both countries are parties to international or bilateral conventions that allow the enforcement of decisions, and the internal rules of enforcement of decisions made in foreign countries in the target countries.

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Further reading

Books:

  • Bühler, Michael W., and Thomas H. Webster. Handbook of ICC Arbitration: Commentary, Precedents, Materials. 2nd ed. London: Thomson/Sweet and Maxwell, 2008.
  • Fawcett, James, and Janeen M. Carruthers. Cheshire, North and Fawcett: Private International Law. 14th ed. Oxford: Oxford University Press, 2008.
  • Gaillard, Emmanuel, and John Savage (eds). Fouchard Gaillard Goldman On International Commercial Arbitration. The Hague: Kluwer Law International, 1999.
  • Global Legal Group (GLG). The International Comparative Legal Guide to: International Arbitration. London: GLG, 2007.
  • Grubbs, Shelby R. International Civil Procedure. The Hague: Kluwer Law International, 2003.
  • Law Business Research. Global Arbitration Review 100 – 2009. London: Law Business Research, 2009.

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