The Location of Legal Proceedings is Determined by the Forum Selection Clause in Your Contract

Joel SowalskyAlmost all contracts, especially form contracts, have what is known technically as a “Forum Selection Clause.” This is the part of the contract that says something like, “All disputes or legal proceedings arising under this contract will be brought in the courts of [city, state].” Often, this clause is in the small, fine print of the contract, and sometimes it is barely readable. But, that doesn’t mean it’s not important.

As a small business owner, you might even skip this clause when you are reading over a contract before signing it. If the contract is about something you are buying, then your mind is focused on the quality and price of the product or service that you are buying and getting it on time. If you are selling something, then you are focused on what you need to do to get paid. The last thing you are thinking about is the possibility of legal procedings over the contract and where it will go to trial.

But, the locale of legal proceedings is important. If you are located in Boston, and you are selling something to the Boston office of a company that is based in California, and you sign a contract that says that the location of lawsuits must be in Los Angeles, what are you going to do if you do not get paid? It usually will be a lot harder and more expensive for you to hire an unknown lawyer to file a lawsuit in Los Angeles than to get a local lawyer to help you in a local court. In addition, the California company, with its local California lawyer, may use that clause against you to force a settlement of your valid claim. In hindsight, you will find that it would have been so much better for you if the lawsuit had been in Boston or even in a neutral place that did not favor one side over the other.

It used to be that courts could override the Forum Selection Clause if it was terribly unfair or inconvenient.  That no longer is true.  In a recent case, the U.S. Supreme Court decided that these clauses must be enforced “in all but the most exceptional cases,” and the Court did not say what kind of situation might be exceptional, just noting that it would be “rare.”

General Counsel says: Forum selection clauses are negotiated all of the time. You should negotiate to have the forum of any legal proceedings local for you, and if you cannot get that, then negotiate to have it in a neutral locale. Don’t put yourself at a strategic disadvantage in the event that there is a problem in your contract. If you do, it surely will be used against you.

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