January 31, 2014

Offensive Contract Drafting – Why Forum Selection Clauses Matter to You

Forum selection clauses determine more than just where contract disputes will be litigated. Because the procedural rules of the forum apply, the choice of forum can have a significant impact on leverage, strategy and expense. If your company finds itself in litigation, will you be in the forum most advantageous to you?
 
One example of a procedure that can catch litigants by surprise is Indiana's prejudgment attachment statute. Prejudgment attachment allows a court to freeze assets of a defendant at the start of a case. Many states allow prejudgment attachment if the defendant is removing assets from the jurisdiction or taking steps to hinder or delay creditors. However, Indiana also allows prejudgment attachment based simply on the fact that a defendant is incorporated outside of Indiana. Having such an aggressive option available when litigation arises could be good news for an Indiana company in a dispute with an out-of-state corporation that has assets in Indiana. Conversely, it could be terrible news if you are an Indiana-based corporation organized under Delaware law who has just been sued by a once-trusted business partner.

So what steps should a company take to best position itself? Thoughtful and deliberate forum selection is an essential aspect of contract negotiations and drafting. Review your contracts to ensure they include a forum selection clause that is appropriate, given both practical and procedural considerations. Factors such as convenience and familiarity with courts and judges may come into play, but forum selection decisions should not be made without a thorough understanding of how procedural rules could affect litigation.

In December 2013, the U.S. Supreme Court affirmed the enforceability of forum selection clauses, virtually without exception. If there were any doubt before, this decision makes it clear that companies trying to evade a contract's chosen forum will face a very difficult road. The bottom line is that companies must be proactive in choosing a forum for disputes because, as with many contractual provisions, the old adage that "the best defense is a good offense" applies.

This article also appeared in RV Focus: A Newsletter for the RV Industry Professional, authored by lawyers who understand the RV industry and take a practical look at legal issues that can affect a company. Legal problems are costly and distracting, and company time is better spent focusing on production, sales, cost control and business relationships.

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