BE CAREFUL WHAT YOU WISH FOR: FORUM SELECTION PROVISIONS IN CREDIT AGREEMENTS
In the modern business world, the vast majority of contracts inevitably include a clause, commonly referred to as a “Forum Selection Clause”. This clause specifies the geographic locale, and in some cases the specific court, in which any lawsuit between the parties to the contract regarding its terms must be brought. This is done primarily by businesses to protect themselves from having to retain counsel and litigate cases far from their home office or nearest satellite, but may also be included to take advantage of certain favorable laws, regulations or procedural rules within a particular jurisdiction.
In the context of credit agreements and collections thereon, the concerns of the creditor are slightly different, since it is the creditor who is usually the Plaintiff and thus has the initial choice of forum. Moreover, rather than institute suit in the jurisdiction closest to the creditor’s home office, many creditors seek to locate and sue debtors wherever they can be found, since any attachable property belonging to the debtor is likely to be located there as well, and also because it avoids the time and costs of transferring judgment from a foreign jurisdiction. However, if a creditor has inserted a forum selection clause in its credit agreements which vests exclusive jurisdiction in the court where its home office is located, a local court with personal jurisdiction over the debtor may simply dismiss the case as being beyond its authority. The creditor must therefore take these concerns into account when drafting a forum selection clause.
The most important consideration in drafting an effective forum selection clause which favors the interests of the creditor is examining the applicable law of the jurisdiction selected as the forum. This is particularly true in the case of consumer credit agreements, since many States have strong consumer protection laws which may hamper, delay, or increase the cost of collection. Thus, simply choosing the jurisdiction of the creditor’s home office or state of incorporation, as is common in form contracts, may not be the best option, if for example, the creditor is located in California or Massachusetts. At the same time however, the creditor cannot simply choose among the fifty states the one whose law is most favorable if neither creditor nor debtor conduct any business therein or if the transaction has no relation thereto, since most courts require that there be a reasonable relationship between the parties or transaction and the forum state before they will enforce the forum selection clause.
Creditors must also be mindful that selecting a particular forum does not, in and of itself, guarantee that the laws of that jurisdiction will be the ones which are ultimately applied to the case. Each jurisdiction maintains its own “Choice of Law” rules which govern cases where parties from multiple jurisdictions with differing statutory and common law precepts are involved. In the case of credit agreements and contracts in general, many courts still apply the ancient rule lex loci contractus, which means that they will apply the substantive law of the jurisdiction where a contract was formed in rendering an interpretation of disputed provisions. Thus, it becomes vital that a creditor not only take into account the entire body of law of a particular jurisdiction when making a forum selection, including its choice of law rules, but also include in its credit agreements both substantive Choice of Law clauses and Place of Contracting clauses, the latter of which stipulates when and where a contract is formed.
Finally, the creditor must also account for the attitude of particular jurisdictions towards forum selection clauses. Traditionally, forum shopping is discouraged, hence the requirement of a reasonable relationship noted above. However, with the development of modern contract law, forum selection clauses are generally no longer disfavored, and will customarily be enforced subject to certain restrictions. A party challenging a forum selection clause has the burden of showing the clause is unreasonable. A party can show the clause unreasonableness if:
-
it was induced by fraud or overreaching;
-
the forum is so unfair and inconvenient that it deprives the plaintiff of a remedy or of its day in court;
-
enforcement would contravene a strong public policy of the State where the action is filed.
The Model Choice of Forum Act contains a balancing test, and states that an unselected court must give effect to the choice of the parties and refuse to entertain the action unless:
-
the plaintiff cannot secure effective relief in the other state, for reasons other than delay in bringing the action;
-
or the other state would be a substantially less convenient place for the trial of the action than this state;
-
or the agreement as to the place of the action was obtained by misrepresentation, duress, abuse of economic power, or other unconscionable means;
-
or it would for some other reason be unfair or unreasonable to enforce the agreement.
Due to all of the above considerations, it becomes paramount that the inclusion of a Forum Selection Clause in a credit agreement be treated with extreme care, and preferably in consultation with legal professionals with expertise in the field. While a careful choice can facilitate the collection of the debt and ease the path toward judgment and execution, a hasty choice or one made purely for convenience can just as easily cause the wheels of justice to grind at a snails pace, increase costs, and reduce the overall viability of an otherwise sound cause of action.
-------
For additional information on perfection of security interests and the usage of other credit enhancements, please see the other articles in this Publications section.
