Bridging the Gap in Forum Selection
BRIDGING THE GAP IN FORUM SELECTION*
You shall not be partial in judgment …
Deuteronomy 1:17
A. Introduction
The fear that foreign judges might not always respect Moses’ admonition to impartiality often leads business managers to seek enhancement of adjudicatory neutrality through various forum selection devices. Concern to avoid the other side’s “home court advantage” usually results in either an arbitration agreement (entrusting the controversy to a private decision-maker) or a court selection clause (granting power to courts at a designated location). Both mechanisms tend to enhance political and procedural neutrality, thereby facilitating business ventures when parties have a mutual mistrust of the other side’s courts and a mutual interest in looking for a predictable dispute resolution process at the time of contract signature. However, the effectiveness of the two devices can differ radically, due to quite disparate statutory and treaty enforcement frameworks.
The growing disjunction between arbitration and court selection was recently underscored in Richards v. Lloyd’s of London,1 one of a spate of cases2 involving forum selection clauses3 calling for resolution in England of claims brought by American investors in the well-known Lloyd’s insurance syndicates.4 Worried that such forum selection arrangements operated as de facto waivers of rights under the federal securities laws, the Ninth Circuit initially refused to enforce a set of clauses granting exclusive jurisdiction to English courts,5 rejecting a line of decisions enforcing arbitration agreements in analogous situations.6 The Court distinguished the arbitration cases on the basis that they enforced a statutory mandate—the Federal Arbitration Act (FAA)7—rather than an “amorphous policy” favoring court selection.8 Although the Ninth Circuit later reversed its position and enforced the forum clauses,9 the case illustrates the potential for expensive incongruity in the treatment of two functionally equivalent types of contractual waiver of forum selection.
To bridge this gap between public and private dispute resolution, the United States might enact a statute similar to the Model International Court Selection Act (the Act)10. This chapter will take the Act as a springboard to explore the divergent legal frameworks for enforcing choice-of-court clauses and arbitration agreements. After a brief summary of how the Act is intended to work, this chapter attempts to anticipate some of the objections to the Act as well as potential jurisdictional conflicts between the court allegedly designated by the contract and the court that would otherwise hear the dispute.
B Treaties and Statutes
The framework for arbitration agreement
The New York Arbitration Convention11 and the FAA,12 backed by a network of state and foreign arbitration acts,13 require courts in the United States and abroad to enforce an arbitration clause and the resulting award. The Convention directs courts to refer the parties to arbitration if their contractual relationship is covered by a valid agreement to arbitrate,14 and gives to an arbitral award covered by the Convention the same force as a domestic award.15 The FAA16 directs that arbitration clauses “shall be valid, irrevocable and enforceable”17 and that courts shall stay proceedings as to any issue referable to arbitration.18 Although peculiarities of local contract law play a role in determining the validity of an arbitration clause, American case law has made it clear that states may not place special limits on the validity of an agreement to arbitrate that would not apply to contracts in general.19
The non-framework for court selection clauses20
No statutes
With the exception of New York State, no American jurisdiction has a statute that treats court selection clauses as conclusive,21 and no federal legislation does for choice-of-court clauses what the FAA does for arbitration agreements. Although the United States Supreme Court has manifested a benevolent attitude toward court selection clauses,22 its decisions say only that court selection agreements will be respected if “reasonable” by reference to a multiplicity of factors that vary from jurisdiction to jurisdiction. One lower court decision set forth nine factors relevant to the reasonableness of a jurisdiction clause, emphasizing “the totality of the circumstances measured in the interests of justice.”23 A jurisdiction clause thus constitutes only one factor to be weighed among many others in balancing the relative convenience and fairness of different litigation venues.
The situation is even more complex when one looks at state law.24 Several states still refuse to enforce court selection clauses, either in general or with respect to particular contracts such as franchise agreements.25 Even if a state does accept the theoretical validity of jurisdiction clauses, courts in practice may give a clause a restrictive interpretation that vitiates its effect. Some court selection clauses have been construed as non-exclusive, therefore inviting competing actions in different fora,26 or read to exclude actions based on extra-contractual wrongs such as deceit and unfair business practices.27
Subject matter jurisdictional limits may also vitiate an otherwise valid jurisdiction clause. Unless a case implicates a question of federal law, federal court power generally is limited to cases arising on the basis of diversity of citizenship. Thus one foreigner may not normally sue another in federal courts. State courts may likewise be restrained by statutory limits on their power to hear cases.28
Even a court possessing jurisdiction may as a matter of discretion decline to hear a case on forum non conveniens grounds because of the location of witnesses and documents, or the drain on public resources.29 The risk of judicial default is heightened in cross-border transactions, where disputes often lack a judicially significant connection with the potential forum. Although one judge might “export” a case pursuant to a court selection clause in order to unclog the docket, judicial counterparts at the “importing” court may not be eager to increase their workload by hearing a dispute with little connection to the forum.
No treaties
Court selection clauses also remain problematic due to the United States’ failure to conclude any treaty, or to enact any statute, providing for the enforcement of court selection clauses or the resulting judgments when one party resists the bargained-for venue. While the absence of any court selection statute may be the result of legislative inadvertence, the American inability to conclude any foreign judgments treaty is due principally to apprehension among our allies and trading partners with respect to the peculiarities of litigation in the United States: civil juries, punitive damages, strict tort liability and the perceived extraterritoriality of assertions of jurisdiction.30
C. Why Court Selection Matters
The special needs of international business
Whether justified or not, concern over litigation bias against foreigners will inevitably chill international transactions unless there exists a relatively neutral alternative to the judicial system of the potential adversary. In the international commercial arena, there exist no non-national commercial courts of compulsory jurisdiction.31 Cross-border economic cooperation has therefore come to rely on forum selection mechanisms of a contractual nature, to provide the neutrality and predictability which commercial actors in a single-country context take for granted. Contracts do not enforce themselves automatically, but need the intervention of flesh-and-blood adjudicators. Thus the identity of who interprets the agreement may be more significant than what the applicable law says about its construction.32
In a domestic transaction, litigation will usually proceed in a relatively homogeneous linguistic and procedural context notwithstanding a court’s failure to give effect to the parties’ choice of forum. Proceedings will go forward in some variant of the English language according to a relatively familiar set of federal or state civil procedure rules.
On the other hand, when an international venture goes awry, the dramatically disagreeable consequences of a failed forum selection clause can include unfamiliar procedures, a foreign language, and sometimes a judge in a country without a tradition of judicial independence. The consequences to a Boston merchant of having to litigate a dispute in Atlanta are hardly comparable to the prospect of court proceedings in Algiers or Athens.
Without a relative measure of certainty in court selection, many otherwise beneficial international commercial relationships either will be concluded at higher costs, or will not be concluded at all. While some transactions may be consummated even in a climate of adjudicatory uncertainty, others will not.33 The enhancement of international economic cooperation thus argues for a more hard-and-fast approach to the enforcement of court selection clauses, notwithstanding the benefits of more flexible principles applied in a domestic context.
The reality of litigation bias against foreigners may be less significant than the perception that such prejudice exists. The consequences of imagined prejudice often will be as disruptive as the real thing, in the sense that a transaction may not go forward due to lack of confidence in the adjudicatory mechanism.
The prevalence of this fear of judicial xenophobia was underscored by a recent study of federal civil actions in the United States. It was found that foreign litigants actually fare better than domestic parties but the most plausible explanation is distressing: foreigners’ anxiety over the American civil justice system causes them to continue to final judgment only when they have particularly strong cases.34
As mentioned earlier, arbitration law has already recognized the international business manager’s special need for reliability in dispute resolution. For example, France, Switzerland and Belgium, as well as UN countries that have adopted the (UNCITRAL) Model Arbitration Law, subject arbitral awards in international disputes to less restrictive control mechanisms and a different degree of judicial scrutiny than in domestic arbitration.35 In the United States, case law considering cross-border dispute resolution has permitted arbitration of what might otherwise have been non-arbitrable subject matters.36
Some lawyers see no need for such special treatment of international arbitration.37 And certain countries have retreated from divergent legal regimes for domestic and international arbitration,38 fearing that distinctions based on nationality might conflict with international commitments.39
Yet there should no mystery about the need for a special status for international arbitration. The legal framework for dispute resolution often represents a compromise between two or more competing goals, each of which would be extended but for the other. One such objective is judicial flexibility in dealing with potentially abusive contractual choices that purport to modify the way cases are heard by otherwise competent government tribunals. A rival aim is to permit parties to international contracts to level the playing field in the event of disputes so as to reduce the risk of “home-town justice” in the other side’s judicial system. One way to balance these contending policy aspirations is to provide a separate regime for international transactions, as set forth in the statute outlined in Part C.
D. A Court Selection Statute
Thumbnail sketch
The statute was inspired in part by Swiss conflict of laws principles40 and provisions of the Bruxelles and Lugano Conventions.41 It is designed to give jurisdiction clauses much of the same force now accorded arbitration agreements. The operative portion of the statute takes a tripartite structure, dealing separately with (i) litigation brought in disregard of the parties’ agreement, (ii) the chosen court’s duty to hear a case and (iii) recognition of the resulting judgment.
First, all courts in the United States would be required to stay actions inconsistent with a valid choice-of-court clause. Inconsistent state law would be pre-empted in much the same fashion that the FAA generally overrides conflicting state arbitration statutes.
Second, the Act would require federal courts to hear cases pursuant to such clauses, as long as Constitutional jurisdictional requirements are met.42 Thus a court could not decline to hear a case covered by an exclusive jurisdiction clause on the basis of forum non conveniens. Finally, the statute would require recognition of judgments based on a valid choice-of-court clause. This would be consonant with the Uniform Foreign Money Judgments Recognition Act, but going further than those states that require reciprocity in the foreign jurisdiction.43 It would also be in line with the positions taken by the Restatement (Second) Conflicts of Law44 and the Restatement (Third) of Foreign Relations Law,45 which generally recognize foreign court decisions other than penal and tax judgments.46
The Act excludes from its coverage contracts entirely between American residents and/or citizens. This limitation in scope should make the Act more acceptable to those who would otherwise oppose such a statute, while preserving its benefits for those who need it most.
In addition, the statute should operate in conjunction with bilateral and/or multilateral treaties for the enforcement of judgments, to give to American judicial decisions an international currency abroad. To be within the realm of reality, however, such treaties might have to be limited in scope to judicial decisions based on party consent in a written court selection clause. The widespread foreign fear of the American civil justice system with its civil juries and punitive damages make it highly unlikely that very many countries would accept a treaty that covered judgments not based on the consent of the parties. Subject to this caveat, however, there is no reason that an American court decision should not be treated as favorably as an arbitral award rendered in the United States, provided it is subject to defenses similar to those available under Article V of the New York Convention. The parallel provisions of the Bruxelles47 and Lugano48 Conventions would provide an excellent model for such a multilateral treaty.
Exegesis
International disputes For what might be termed political reasons, the Act limits its scope to international transactions. Many scholars mistrust binding forum selection, whether through arbitration clauses or choice-of-court agreements.49 These thinkers thus resist limitations on judicial discretion to refuse enforcement of such litigation control devices. Only mischief, they would argue, comes from mandating recognition of mechanisms that lend themselves to abuse, either through imposition of a forum predisposed toward the stronger contracting party or by facilitating avoidance of mandatory public policies.