The Use of Forum Selection Clauses in Sales Agreements and Credit Applications

By Harold Stotland

My client. Tool Manufacturing Co. ["Tool"], manufactures and distributes fasteners all over the United States. Its headquarters are in a Chicago suburb. Tool's orders come in by fax and telephone to its Chicago office, and larger orders are often serviced personally at the customer's locations.

When collection problems have required litigation. Tool has had to litigate all over the United States, often at great expense related to sending witnesses away from their jobs to testify. Tool obtains a full credit application from all of its customers, and the application provides for assessment of attorneys' fees and interest if Tool prevails in the litigation.

What is most important here is what the application does not contain. It fails to contain a forum selection clause. For example, the application could have contained the following provision:

Any claim or cause of action arising out of the purchase of product may be commenced at the option of Tool Manufacturing Co. in the Circuit Court of Cook County or the United States District Court for the Northern District of Illinois, and rights of the parties shall be governed by Illinois law.

Having a choice of forum clause would give Tool the option of filing suit for non-payment in Illinois, and forcing the customer to come to Illinois to defend their position. Any Illinois final judgment would have to be recognized for enforcement purposes by the courts of the customer's state pursuant to the "full faith and credit" provision of the United States Constitution. That provision requires all courts of the United States to honor the valid judgments of the sister states courts.

The use of a forum selection clause contemplates the use of two law firms. One law firm would obtain the judgment and another might have to enforce it. The decision to include a forum selection clause, or a choice of law provision, is as much a business decision as a legal decision. The creditor needs to consider some of the following factors:

1. How often are collections litigated?
2. How often are counterclaims asserted?
3. What is the average size of a collection suit?
4. What is the credit worthiness of debtor population?

The larger the claim, the more litigation required, the increased frequency of counterclaims, and the better credit worthiness of customers each support the use of a forum selection provision.

Illinois courts have held that forum selection clauses are prima facie valid, unless the opposing party shows that to enforce its provisions would violate a strong public policy of the State of Illinois. With respect to the inconvenience to the defendant, so long as the parties contemplate the inconvenience in the agreement, the defendant should not be heard to complain. See Calancia v. D & S Manufacturing Co. (1987), 157 III.App.3d 85, 109 III. Dec. 400, 510 N.E.2d 21.

Forum selection clauses are powerful devices to be used with care only in commercial transactions. The existence of the provision should be clear and understandable and set forth in a separate paragraph. Specifics, such as its use being optional or mandatory, need to be carefully considered by the creditor and the creditors' counsel. However, when properly drawn and enforced, forum selection clauses are of great assistance in collecting receivables.

The idea for this seminar stems from the increasing amount of claims we have received in our office requiring the registration of judgment, both in state and federal courts, and the increased number of matters we have commenced in our office in which the debtor is in a state other than Illinois, where we practice. Not all of the cases in which we use long arm service, or receive registration of judgment, arise out of forum selection clauses. We see this as a growth area of law, and the legal and practical implications of handling these matters suggested to us that it would be time to review these issues.

Historically, contractual forum selection clauses were deemed by most courts to be "illegal and void". Courts were traditionally hostile to the idea that if traditional jurisdictional requirements were met, a defendant could force the court to withdraw jurisdiction. The whole world regarding forum selection litigation changed with the decision in M/S Bremen v. Zapata Off-Shore Co. This case, which was decided by the United States Supreme Court in 1972 is for the forum selection clause what the international Shoe case was for long arm jurisdiction generally. The facts in M/S Bremen of the transportation by a German corporation with a Texas corporation, Zapata, to tow Zapata's oil drilling rig from the United States to Italy. The drilling rig was damaged, and Zapata Oil sought to sue the German corporation in the United States District Court in Florida. The Florida District Court and the Court of Appeals all ruled that the forum selection clause, which mandated London as the forum, was void. The United States Supreme Court found that the forum selection clause in an International commercial contract "should control, absent a strong showing that it should be set aside".

It should be noted that the Supreme Court, in reversing the trial and Appellate Court, did not state that the forum selection clause should be enforced, but rather where a forum selection clause was in place, that the party objecting to its implementation would have to show that a trial in the selected forum would be manifestly and gravely inconvenient so as to effectively deprive the party objecting to its enforcement to a meaningful day in court. While the M/S Bremen was an admiralty case, it opened the door to forum selection clauses in all kinds of contracts.

The next case that widened the door was Utschute v. Carnival Cruise, 1988. This is a case in which a passenger on a Carnival cruse line sought to sue for personal injury in the State of Washington where she resided, notwithstanding a choice of forum provision in the ticketing agreement which provided that all actions had to be commenced in the State of Florida, the headquarters of Carnival. This case went all the way up to the United States Supreme Court, and the Supreme Court upheld the forum provision. This was in spite of the fact that this was actually a contract of adhesion that deprived a consumer of a right to bring suit in her state of residence.

With the decision in Carnival Cruise, there was no longer any doubt that the Federal Courts recognized forum selection clauses, even in situations where there was not truly an arms length transaction and with parties who had unequal bargaining power.

Other speakers today will talk at greater length about the legal implications and the development of the law. We are going to start out with the assumption that forum selection clauses are enforceable. We all know there are venue requirements with respect to dealings with consumers, both in the Fair Debt Collection Practices Act and in many state statutes, and further, many states have acts governing franchise agreements and sales representative agreements which limit the use of choice of forum selection clauses. My colleagues will comment on those issues. In the course of adopting the concept of forum selection clauses as part of state law, states went through all kinds of stages. For example, Missouri created a hybrid situation in which they created a distinction between "outbound forum selection clauses and inbound forum selection clauses". To quote from a Federal Court applying Missouri law, it stated as follows:

"Missouri law and the enforceability of forum selection clauses is clear: Forum selection clauses which purport to prevent courts within the State of Missouri from exercising their jurisdiction to hear actions brought by Missouri citizens are void against Missouri public policy providing Missouri citizens with access to courts within the State of Missouri, in contrast, forum selection clauses which designate the State of Missouri or a particular court within the State of Missouri as the exclusive forum in which to bring actions are enforceable so long as the clauses are not unfair and are not unreasonable."

This was the state of law in Missouri for a while, until their courts recognized both inbound and outbound forum selection clauses.

Those of us representing creditors, even though we may not be general counsel to those creditors, will often be consulted with respect to the use of credit applications and credit agreements, and in giving advice to creditors, we will often recommend the insertion of a forum selection clause.

Let me digress a minute to talk about forum selection clauses within a state, intrastate selection clauses. Some of our clients do not do business across state lines, or that part of their sales is very limited. Illinois, for example, provides that if we are suing a non-resident defendant, we can fix venue in any county of the State. However, if the plaintiff is suing a resident defendant, suit must be filed where the cause of action or some part of it arose, or where the defendant can be found. Many of our clients sell by having a representative call on the customer, or there may be other circumstances which will not provide for venue at a convenient place to the creditor. It is often important, not only to provide that venue shall be in a specific state, but also in a specific county, or even division of that county.

One of my colleagues from Michigan brought to my attention the fact that while Illinois does not have any decision dealing with the validity of forum selection clauses as they apply intrastate, Michigan does, and Michigan's decision, while inconsistent with their inter-state recognition of forum selection clauses, was to hold these clauses as invalid. I have included this as one of the citations because I am certain that if this hasn't come up in your state, it is only a matter of time until there is an appellate decision dealing with this issue.

There was an Illinois case some time ago which dealt with this issue, but it was a consumer case, and it held that a forum selection clause between a student loan guarantee agency on a student loan and a consumer borrower, that fixed venue in one county of the state was void as violative of due process. It would only be conjectured whether this rule would be applied to a commercial transaction in which venue is fixed in a particular county of Illinois.

Returning now to the issue of forum selection clauses dealing with non-resident defendants, a recent experiences we had highlights how important it is to understand the creditor's business before advising the inclusion of a forum selection clause. Two examples come to mind.

Example No. l is a forum selection clause that was in a contract of a creditor whose average claim is about $3,000.00. It mandates that the only court that has jurisdiction over the claim is a court in Los Angeles. It happens that most of the debtor's customers are not California residents. When we see this provision, we are faced with the question of its effect. If a suit is filed in Illinois, does the Illinois court even have jurisdiction to enter a judgment if the defendant defaults? I am not too worried if the defendant files an appearance and a judgment is entered. This particular creditor, by limiting to the degree it has the forum selection, has created a monster.

We have a second creditor who has the clause in Example No. 2. That clause provides for arbitration of all claims in excess of $5,000.00. It turns out that just to arbitrate a claim for $5,000.00 or more can cost anywhere from $750.00 to $2,000.00 in the Chicago area. The debtor may not even be collectible by the time we have the arbitration award entered, and then the arbitration award has to be sued on here in Cook County. This client is changing its forum selection provision and arbitration provision to provide that the party initiating the litigation can choose arbitration or the court system, and that selection is binding on the parties of the contract.

Notwithstanding the development of the law of enforcement of registration of judgment, about which we will hear more later, we do run into judges who don^t like the fact that a defendant was sued in California, and somewhere in the Midwest, we are hired to enforce the judgment and thereby preclude any defense or mandatory counterclaim. Judges aren't fools. They understand that the forum selection clause often effectively deprives the defendant of the ability to economically defend the case.

In each situation the judge, and certainly defense counsel, will scrutinize the record from the court where judgment was initiated to make certain the record is clean and that service of summons is effective. I always recommend that any time a creditor contemplates the use of another court system to enforce a judgment, that summons be served in a manner that would be acceptable to every state. Many states provide for service of summons by ordinary or certified mail, and do not require that a party defendant actually sign for the mail. Judges are going to scrutinize this very carefully. The record should be clear that the defendant was served with summons in a traditional way if it is humanly possible with a reasonable expenditure of costs and effort to do so.

When I get a registration of judgment, I like to be able to note on my file that there was personal or substituted service in a manner that would be comparable to what we do here in Illinois.

Another practical issue we think about in accepting these matters for registration is the fee to be charged. I generally accept registration matters on the usual commercial rate without any suit fee. I generally provide that so long as the validity of the judgment is not contested, this contract stands through the conclusion of our handling of the case.

We always provide that if the defendant attacks the underlying judgment, that we are dealing with a totally different kind of litigation, and we reserve a right to renegotiate the fee arrangement.

It is always important to look at every multi-state transaction in terms of the best place to file the lawsuit. Obviously, if a claim is sent to me for litigation, I want to accept the case, keep it here, and litigate it here. That is the only way I serve the client and earn a fee.

On the other hand, if I am faced with the possibility of a counterclaim, then I go back to the principal that says we want to file the lawsuit in the venue that makes it most difficult for the defendant and most convenient for the plaintiff. On occasion, it has been necessary for me to recommend to a client that they not sue in my state, but instead file a suit in their home state where it will be much more difficult for the debtor to economically defend the case and assert a counterclaim or defense. Every multi-state transaction must be examined in the light of the most advantageous venue.

You will be hearing more from my colleagues regarding issues where you have a forum selection clause, and have a choice of filing in the U.S. District Court or the State Court, and what issues determine where you are going to file. With respect to the usual commercial contact that we get, it shouldn't really make any difference whether you file in State or Federal Court. If I am pretty certain that the defendant is going to defend the case and not allow it to go by default, I generally want to get into the State Court. Our State Court now has a faster calendar than the Federal Courts that cover a seven (7) county area here in Northeastern Illinois.

However, if I am pretty certain I am going to obtain a judgment that I am going to have to enforce in another locale, I want to think about whether I want to use the United States District Court, because registration in another district is so simple. It is the same court system. It is similar to taking a judgment from one county to another county within a state.

Virtually every state recognizes the validity of forum selection clauses. As receiving attorneys, who often do not have prior experience with a particular creditor, it is important to examine the writings related to any claim for the existence of a forum selection clause. Our experience tells us that certain kinds of claims, such as lease agreements, almost always have these provisions, and in representing a client, it is important to determine that we are suing in the appropriate and best forum for that client. Also important, to be prepared to advise creditors on the use of these provisions, and how these provisions, if improperly used, create more problems than they solve.

FORUM SELECTION CLAUSES

Example No. 1

This agreement shall be construed and governed by the laws of the State of California and the United States of America. Buyer hereby irrevocably agrees to the jurisdiction of any state or federal court sitting in Los Angeles County, California. Buyer agrees to the venue of said courts in any dispute or legal action arising from this agreement shall solely be entertained in said courts. Buyer further agrees to service of process by certified or registered mail and irrevocably waives the right to trial by jury.

Example No. 2

In the event of any controversy or claim in excess of $5,000.00 arising out of or relating to this agreement, including but not limited to questions regarding the authority of the persons who have executed this agreement, the question, controversy, or dispute shall be submitted to and settled by arbitration to be held in the city closest to the city in which the branch office of the company which serves the customer is located. The filing party may use either court or arbitration where the claim is less than $5,000.00. Venue for any court proceedings shall be in the county of the company's branch office servicing the customer.

Example No. 3

I freely consent to personal jurisdiction in the Pennsylvania courts and I waive trial by jury.

Example No. 4

Transactions shall be governed by the laws of the State of Illinois, and that jurisdiction and venue for hearing in any matter in dispute shall be with the Du Page County Court of the Eighteenth Judicial Circuit of the State of Illinois.

Example No. 5

All transactions arising under this agreement shall be governed by the laws of the state where supplier's branch supply the customer is located. At supplier's option, venue of any action to enforce this agreement shall be either in the county where supplier's branch supplying the customer is located or the county where customer's business is located. [CLLA Special Practice Suggested Venue Provision]

Example No. 6

GOVERNING LAW/JURISDICTION: Buyer and seller specifically agree that any dispute whatsoever arising from, or related to this transaction and contract, shall be adjudicated and governed by the law of the State of Illinois, and furthermore, the buyer expressly agrees to submit to the jurisdiction and venue of the Circuit Court of Cook County, Illinois, and that said Court will have jurisdiction in any and all matters arising from or related to this transaction and contraction. Additionally, the buyer specifically agrees that in any matter where Federal jurisdiction is involved, that said buyer will submit to the jurisdiction and venue of the Federal Court of the Northern District of Illinois to adjudicate any and all matters arising from or related to this transaction or contract.

Example No. 7

GOVERNING LAW: This agreement shall be governed by and construed in accordance with the laws of the State of New York. The lessee (you) and any guarantor hereby submit to the exclusive jurisdiction of the Courts of the County of Nassau, State of New York, and waives personal service upon them, and agrees that service of process via certified mail sent to the address designated on this agreement shall be deemed personal service.

Example No. 8

CONSENT TO MICHIGAN LAW, JURISDICTION, VENUE, AND NON-JURY TRIAL: Lessee and any guarantor consent, agree, and stipulate that (a) this lease shall be deemed fully executed and performed in the State of Michigan and shall be governed by and construed in accordance with the laws thereof with any interpretations being consistent with and/or filled by the provisions of Article A of the Uniform Commercial Code - Lease, and (b), in an action, proceeding, or appeal on any matter related to or arising out of this lease, the lessor, lessee, and any guarantor (1) SHALL BE SUBJECT TO THE PERSONAL JURISDICTION OF THE STATE OF MICHIGAN, including any State or Federal Court sitting therein, and all court rules thereof; (2) SHALL ACCEPT VENUE IN ANY FEDERAL OR STATE COURT IN MICHIGAN, and (3) EXPRESSLY WAIVE ANY RIGHT TO A TRIAL BY JURY, so that trial shall be by and only to the Court.

Example No. 9

This contract shall be deemed to be made in the States of Texas and Illinois. Vendor and customer consent to venue in Dallas County and in Cook County, Illinois, to the extent such consent is recognized by the law in the practice of the respective jurisdiction.