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By Marion Dieval with assistance from Zachary Jellson and Aïcha Tazi Hnyine, University of Montpellier, Centre du Droit de l'Entreprise, Program of Master 2 "Droit du Commerce International"

Overview

Forum selection clauses are an important part of most transactions in today's international practice. In-house counsel should be familiar with this clause as it can be crucial when a dispute arises. This QuickCounsel reviews the purpose of Forum Selection Clauses, their advantages and limits, and alternatives.

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Definition of a Forum Selection Clause

A Forum Selection Clause ("FSC") is a provision in a contract stipulating that any dispute arising from the contract shall be litigated before a particular court or in a particular jurisdiction.

There are different types of FSCs. A material selection clause is a clause where the parties select a jurisdiction based on the subject matter of the dispute. For example, parties may agree that disputes relating to a distribution contract will be judged before a commercial court. A territorial selection clause is a clause where the parties select a jurisdiction based on its location. There can also be mixed clauses dealing with territorial and material competences.

Advantages of FSC's

There are important reasons for drafting an FSC. Firstly, the FSC can help a party to avoid a costly trial. Secondly, an FSC enables a party to strategically choose the court with the most favorable procedural and evidentiary rules. In France, for example, commercial courts will be more likely to accept oral evidence than civil courts. Thus, the parties should carefully research the selected forum and understand the repercussions of this selection.

Limits to FSC's

National Statutory Limits to FSC's

There are several national provisions that limit the force of an FSC.

In France, the validity of FSC is affected by the party's position. Article 48 of the French civil procedure code states that territorial selection clauses are only valid if all parties are merchants. The purpose is to protect a weaker party from being summoned before an inconvenient and potentially expensive, court. Therefore, a consumer could not be bound by an FSC introduced by a professional.

Moreover, article 48 of the French Civil Procedure Code requires that an FSC be readily apparent in the parties' agreement to effectively designate territorial competence. Thus, FSCs should always be expressed in writing in the agreement. It is vital that the contract clearly manifests the parties' agreement on a particular jurisdiction. For example, the parties should not insert FSCs in invoices sent after the contract has been concluded.

In the case of bankruptcy, article R 662-3 of the French commercial code provides that there are only a few competent courts. Thus, an FSC would not override this legislative exclusivity.

Public order laws will also contour which courts have material competence. There are some courts with exclusive jurisdiction that cannot be avoided. For example, if there is a labor contract, the parties must go before the "Conseil des prud'hommes". Thus, in the case of a corporate agreement made to transfer shares to an employee, the French Court of Cassation held that the FSC inserted into the bylaws of the company was overridden by the fact that the shareholder was an employee. The exclusive jurisdiction of the "Conseil de prud'hommes" could not be avoided through an FSC in the shareholders' agreement. The French Court of Cassation has also held that FSCs will not apply to a party seeking interim relief measures.

According to the French Court of cassation, even if the contract is terminated, the FSC is still applicable as it is a stand-alone provision.

In Italy, article 6 of the Italian code of civil procedure provides that "Competence cannot be waived by agreement of the parties except in cases established by law." This exception was introduced by the May 31, 1995 Reform Act of International Private Law. Article 4 of this Reform Act provides that Italian courts have jurisdiction when the parties have conventionally accepted it and this acceptance was evidenced in writing. Moreover, article 4 of this act states that Italian jurisdiction may be waived in favor of a foreign court or a foreign arbitration if the derogation is evidenced in writing and the case concerns actionable rights.

In Germany, article 38 of the German code of civil procedure provides that if at least one of the parties has no general venue in Germany, competence can be granted to a court, of first instance, by an agreement. This agreement can be concluded either in writing or orally, but must be confirmed in writing. Moreover, article 38 of the German civil code states that the choice-of-court agreement shall have no legal effect if it does not refer to a certain legal relationship and to the arising legal dispute. Furthermore, an FSC shall be inadmissible if the legal dispute concerns non-pecuniary claims or if there is another established exclusive jurisdiction.

International Limits

There are also international rules that need to be considered before drafting an FSC.

In the European context, article 23 of the Brussels Regulation 44/2001 states that "if the parties, one or more of whom is domiciled in a member state, have agreed that a court or the courts of a Member State are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction."

"This FSC should be either in writing or in a form that accords with the practices established between the parties. In international trade and commerce, the agreement may also be valid if it accords with a usage that the parties knew or ought to have known."

The French Court of Appeals of Colmar held that the FSC included in the international contract between a foreign company and French company conformed to French usages and was thus applicable.

International contracts sometimes use vague FSCs. Thus, parties sometimes accept a provision selecting "French Civil Courts." In this case, a country's internal laws will settle the issue to decipher which court has competence. Thus, in this example, the French civil procedure code will define the exact court competent over the matter.

Contractual Limits to FSC's

Companies often provide an FSC in their bylaws. There are often issues when these bylaws coexist with shareholders agreements, which do not designate the same forum.

In the European context, the first issue relates to the applicable law. The Court of Justice of European Community (CJEC) considered that an FSC located in the bylaws was an FSC within the terms of article 16 of the Brussels Regulation 44/2001 (formerly Brussels Convention) and was thus applicable to every lawsuit which could arise between the shareholders and the company. (Case Powell Duffryn plc c/Wolfgang Petereit n°C-214-89 10th March 1972).

Even though the issue of the applicable law is clarified, the second issue is to determine whether the FSC contained in the bylaws prevails over the FSC contained in shareholders' agreements. Some scholars have stated that bylaws' FSC should prevail. Others consider that it depends on the intent of the parties. According to this test, the preference is to be given to the most recently agreed upon FSC.

FSC's can also be included in a group of contracts. If the contracts were indivisible, the clause would be applicable to every contract that belongs to the same group of contracts. Whereas if the group of contracts were divisible, the clause would not be applicable to every contract unless the parties had so decided. In order to appreciate the indivisibility, court can check the economy of the contracts. For example, in a subcontracting contract, an FSC inserted in the contract between a contractor and a subcontractor was applicable to the action of the client.

Alternatives to FSC's

Arbitration and mediation clauses are alternative dispute clauses with a different purpose than the classical FSCs above.

If there is any conflict between an FSC and an arbitration clause, the arbitrator is able to judge is own competence so the arbitration clause will probably override the FSC.

If a mediation clause is inserted in a contract, the parties, even if they decide to go to court, need to first attempt mediation. If they do not, they will be barred from the court. Parties need to check whether the mediation will suspend the statute of limitation. This is the case when the mediation is agreed upon once the dispute has started (article 2238 French Civil Code). This is not necessarily the case when the mediation is agreed upon in the contract.

Conclusion

Finally, one may wonder whether the safest option for the drafter, is to not include an FSC. Considering the numerous articles governing the efficiency of FSCs, it may not be prudent to draft this provision at the beginning of the agreement. An FSC can always be drafted at a later date. The contract's silence on this issue will not preclude the parties from drafting an FSC when the conflict arises.

Additional Resources

Region: European Union, France, Germany, Italy, Belarus
Interest Area: Commercial and Contracts
The information in any resource collected in this virtual library should not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or ACC. These resources are not intended as a definitive statement on the subject addressed. Rather, they are intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers.
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