Negotiating a Business Contract? Don’t Ignore Forum Selection Clauses

December 10, 2020

Businesses don’t typically enter into contracts thinking that one of the parties will breach and the matter will end up in court. As a result, the provision dealing with where the parties must litigate a dispute, known as a forum selection clause, often does not get the attention it deserves. It does not help that the provision is usually buried in boilerplate language near the end of the contract.

The forum selection clause specifies where the parties must litigate disputes arising under the contact. Businesses entering into contracts with out-of-state parties use the provision to ensure that a dispute will be litigated in their local court. Of course, this is advantageous to the entity selecting the forum. If a dispute arises, the other party may find itself facing a legal proceeding in a court a thousand miles away. This means hiring counsel in that jurisdiction and, if the matter goes to trial, providing airfare and accommodations for employees and third party witnesses.

Because of the difficulty and expense involved in litigating a dispute in a distant forum, the forum selection clause can give the favored party significant leverage in negotiations regarding disputes arising under the contract.

A recent Wisconsin Court of Appeals decision underscores that courts will uphold the provision and dismiss an action that is not brought in the specified forum. In Jones Sign Co., Inc. v. Consensus Construction & Consulting, Inc., No. 2019AP2189, (Wis. Ct. App., Nov. 3, 2020) Jones Sign, a Wisconsin corporation entered into a contract with Consensus, a South Carolina corporation, to build and install signs at a college in South Carolina. A dispute arose and Consensus withheld payment from Jones. In response, Jones brought an action in Wisconsin seeking payment. Consensus moved to dismiss on several bases, including that the contract required disputes be brought in the courts of South Carolina. The circuit court denied the motion and entered judgment in favor of Jones.

On appeal, the appellate court examined the various arguments raised by Consensus and focused on the forum selection clause, noting that the plain language of the contract was dispositive and therefore, the court need not consider other arguments. The court stated, “A contract’s forum selection clause is presumptively valid in Wisconsin and will be enforced unless it is demonstrated to be unconscionable or a violation of a public policy.” The appellate court found that the language of the provision was unambiguous and reversed the circuit court resulting in dismissal of the Wisconsin action.

When negotiating a contract with a one-sided forum selection clause, your business has several options.

  • Ask that the provision specify the courts of your state. The other party may agree to this for various reasons. For example, the party may have a business location in your state, making the forum selection clause less of an issue for them or, it may not want concerns over the forum selection clause to interfere with the deal.
  • Require that the clause specify the forums of choice for each party, or alternatively, that it be removed from the contract. While this option provides the potential to litigate a dispute in your forum, it may result in a race to the courthouse as each side tries to file first in the court of their choice.
  • Select a third state as the forum state. This levels the playing field, as both parties will be inconvenienced if a dispute goes to litigation.

Don’t ignore the forum selection clause when negotiating a contract. Failure to consider the clause could result in having to litigate a contract dispute in a distant forum. Wisconsin courts will grant a motion to dismiss an action brought in Wisconsin on the basis that a valid contract between the parties specifies that disputes must be brought in a different state.