Choice of Forum Clause

As global trade increases so does the number of contracts between parties in different countries. If, as may easily happen, a dispute arises out of a contract it is very important to both parties to know which court or body has the authority to decide that dispute. A choice of forum clause is a term in such a contract that specifies that authority. In the case of a lawsuit it stipulates the particular court or jurisdiction where it may be tried. Alternatively it may specify an arbitrator or conciliator to have the authority to decide a dispute. Such clauses have become particularly relevant with the growth of electronic commerce, much of which is cross-border.

If an international contract does not include a choice of forum clause, then a great deal of legal wrangling may be needed in order to determine a competent court or jurisdiction to settle a dispute. In such a situation neither party is likely to be comfortable as different forums may well make different decisions. However, it cannot be assumed that a choice of forum clause will always be respected. In many jurisdictions there is significant difference between business-to-business (B2B) and business-to-consumer (B2C) contracts. For example, within the European Union, in the event of a dispute over a B2C contract, consumers may in general take suppliers to court in their own country, irrespective of any prior agreement. This is an example of an absolute right that takes precedence over the terms of the contract. The assumption here is that a business is in a more powerful position than a consumer in the formation of a contract; hence, the consumer needs a greater level of protection.

While a choice of forum clause may specify a specific jurisdiction, it does not necessarily specify the corresponding law, although these will usually be the same. The jurisdiction chosen will determine the procedural law that will apply in a particular dispute (e.g., whether or not cross-examination is available to the parties), but not the way in which the contract will be interpreted; this is determined by the “governing” (or “applicable”) law, which should be specified in a separate choice of law clause.

Usually a consumer does not have the opportunity to negotiate a choice of forum. However, in the case of B2B, it is normal for negotiation to take place when entering a contract. Issues likely to arise include “hometown advantage” (neither party will normally want to accept the other's home jurisdiction, so they will probably agree a “neutral” jurisdiction), language of the jurisdiction, remedies available in a jurisdiction, and levels of costs and rules relating to them. A particularly important issue in choosing a forum is its power to enforce a judgment; if damages are awarded can the forum enforce their payment?

In the case of B2B contracts it is reasonably common to specify an arbitrator as the forum for dispute resolution, with both parties agreeing that any decision is binding. Advantages of arbitration include faster and cheaper settlement of disputes, the possibility of proceedings being kept secret, and the appointment of technical experts (e.g., in shipping or medicine) as arbitrators. Clauses that specify arbitration are supported in the United States, where compulsory and binding arbitration is permitted by the Federal Arbitration Act.

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