When you sign a contract, do you read it to determine where a dispute under the contract must or may be litigated? Or mediated, if mediation is required? Or arbitrated, if arbitration is required?
Many contracts contain two clauses about the locality of disputes-
- What law governs, and
- Where are disputes resolved (a “Forum Selection Clause”).
This article is about the Forum Selection Clause- where disputes are resolved. There is some new Indiana law on the topic, which this article discusses.
Generally, contracts can allow the parties to determine in advance where the parties will resolve a dispute, either through mediation, arbitration or litigation. Here’s a sample of a typical clause describing where a dispute under the contract must be resolved-
“Any dispute arising under this agreement must be resolved by mediation first, and, if mediation is unsuccessful, by litigation in a state court in Marion County, Indiana.“
Here’s an example that governs ANY dispute between the parties, even disputes that are unrelated to the contract between the parties-
“Any dispute between the parties must be resolved by a federal or state court in Wisconsin.“
In most cases, the party who writes the contract (the author) will select the author’s state or even the author’s city or county as the location where a lawsuit must be filed. A Forum-Selection Clause can also specify whether the state or federal courts will have jurisdiction.
Unfortunately, many of our clients have signed contracts authored by the other party to the contract, and a foreign jurisdiction (a state other than Indiana) is selected as the place where disputes are to be resolved. That can have a huge impact on our clients’ ability to compel the author of the contract to honor the contract, because the client would have to go to the other state in order enforce the contract against the author who is breaching it. Or, the client is accused of breaching the contract and is sued in another state.
Here’s a scenario, based on real examples we have experienced, which example demonstrates the problem with a contract that requires resolution in a foreign jurisdiction-
Bill owns a small manufacturing company in Indiana (“Indy Co.”), and he signs a big contract with a Texas company (“Texco”) that supplies components to Indy Co. The contract was written by Texco’s lawyers, and it requires all disputes to be resolved in Texas. After a few successful months without any issues in supplying Indy Co. with good parts, Texco starts shipping bad parts. The situation escalates, and Bill decides that he can no longer accept the parts, and that he needs parts replaced or he needs a refund. To date, Indy Co. is owed $10,000 for bad parts. Texco is unwilling to replace bad parts or to refund monies to Indy Co. Bill’s lawyer explains to Bill that Indy Co. will have to hire a Texas lawyer and spend at least $14,000 in attorneys’ fees and travel expenses to get resolution. So, it will cost Indy Co. $14,000 to collect $10,000, resulting in a loss of $4,000, assuming Indy Co. wins the lawsuit. Add to that $4,000 net loss, the time value of money, lost opportunity costs, stress, aggravation, and Bill’s lost time.
Unfortunately, this scenario happens often, and a large number of our clients sign contracts without considering the impact of a Forum-Selection Clause.
Not too long ago, the Indiana Supreme Court considered the enforceability of Forum-Selection Clauses. In O’Bryant v. Adams, 123 N.E.3d 689 (Ind. 2019), the Indiana Supreme Court held that a valid forum-selection clause, in which the parties agree by contract to litigate their disputes in a specific forum, does not deprive a trial court of personal jurisdiction over parties that would otherwise be subject to the court’s jurisdiction. In other words, an Indiana court could look at a Forum-Selection Clause to determine if the lawsuit should be litigated in Indiana or in another state.
But the Indiana Supreme Court also held that a disputed Forum-Selection Clause, which was is mandatory and unambiguous in requiring that suit be brought in Texas, not in Indiana, had to be resolved in Texas. The Court also held that the Indiana company had the burden of showing that the Forum-Selection Clause was invalid, and the Indiana company failed to meet its burden of proof. Thus, the trial court was correct to dismiss the Indiana lawsuit, and the case presumably would be filed in Texas.
If you are signing or even drafting contracts, you should consider whether your contract contains or should contain a Forum-Selection Clause. You should also carefully draft any Forum-Selection Clause to address the scope of its impact. Finally, it might be advisable to review contracts you have already signed and determine whether you have issues that you might need to discuss with an experienced and knowledgeable business law attorney.
