Ways to Avoid Potential Choice of Law / Forum Selection Clause Pitfalls in Contracts

by
Donald L. Knapp, Jr.
Fausone Bohn, LLP

In this new age of globalization, outsourcing, home-sourcing and supply-chaining, how and where do you resolve conflicts between two companies who do business outside their home state? Forum selection clauses are not new; however, they are taking on greater importance as even small businesses become affected by our ever flattening world.

A recent case highlights this problem. We were retained as local counsel by an Ohio-based company that was sued in Michigan by a Michigan-based business who performed work for our client in Florida and Montana. The contract between these two small businesses contained a choice of law provision and a forum selection clause. The contract provided that Ohio law shall govern and disputes must be brought in the appropriate court in Cuyahoga County, Ohio. Recognizing that the Ohio-based company hired subcontractors in several states throughout the U.S., it was good planning to include such a provision in its contract to ensure legal home-field advantage and minimize the need to hire local counsel to fight lawsuits in foreign jurisdictions. However, how does this Ohio-based company make sure that it has not waived its right to assert jurisdiction? What law interprets the choice of law / forum selection clause if the Plaintiff contends the contract has been modified or if the forum selection / choice of law provision is ambiguous – the law of the state in which the lawsuit is filed (Michigan) or the law of Ohio?

In Michigan, a choice of law provision is effectuated unless the chosen state has no substantial relationship to the parties or the transaction, or there is no reasonable basis for choosing that state's law. Chrysler Corp. v. Skyline Indus. Servs ., 448 Mich. 113, 126 (1995). The application of the chosen state's law is denied if it would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which would be the state of the applicable law in the absence of an effective choice of law by the parties. Id.

Michigan courts also long ago joined the majority of jurisdictions that uphold forum-selection clauses contracted to by consenting parties. National Equipment Rental, Ltd. v. Miller , 73 Mich. App. 421, 424 (1977). However, Michigan courts may first ascertain whether the parties actually entered into a valid contract before enforcing the forum-selection clause. Blackburne & Brown Mortg. Co. v. Ziomek, 264 Mich. App. 615, 621 (2004) . Additionally, Plaintiffs who wish to avoid enforcement of a forum selection clause may argue that the circumstances surrounding the contract formation justify voiding the provision.

Specifically, MCL 600.745 provides that parties may agree in writing to bring an action in the State of Michigan even if the basis for jurisdiction is only the forum selection clause in the contract provided that (a) the Court has the power under law to entertain the action; (b) the state is a reasonably convenient place for trial action; (c) the forum selection clause was not obtained by misrepresentation, duress, abuse of economic power, or other unconscionable means; and, (d) defendant is served with process pursuant to the Court rules. The statute provides that the parties to a contract can agree in writing to bring a controversy in a state other than Michigan and the Court shall dismiss the Michigan complaint unless: (a) the Court is required to entertain the action; (b) the plaintiff could not secure effective relief in another state for reasons other than delay; (c) the other state would be a substantially less convenient place for trial other than Michigan; (d) the forum selection clause to litigate the case in another state was obtained by misrepresentation, duress, use of economic power, or other unconscionable means; or (e) some other reason the forum selection clause is unfair or unreasonable.

If you have reason to believe that the other party may try to avoid a forum selection clause by contending that it had unequal bargaining power or that the forum selected is substantially less convenient, you should also consider contract language that recognizes that both parties participated in negotiating the contract with the advice of counsel and/or which recognizes that both parties conduct business in Michigan. Thankfully, the Michigan Court of Appeals in Turcheck v. Amerifund Financial, Inc . –NW2d—, 2006 WL 2820890 (Mich App) noted that the inconvenience of a party contesting the enforceability of the forum-selection clause should not be an issue as it wrote: “Allowing a party who is disadvantaged by a contractual choice of forum to escape the unfavorable forum-selection provision on the basis of concerns that were within the parties’ original contemplations would unduly interfere with the parties’ freedom to contract and should generally be avoided.”

Unfortunately, as the Turcheck court also noted: “The Michigan courts have never squarely addressed whether the enforceability of a contractual forum selection clause should be governed by the law in the state where the action was filed, or in the alternative, the law selected by the parties in the choice of law provision. ”There are two schools of thought. Some jurisdictions will utilize the law of the state identified in the choice of law provision provided that the law of the state to be applied permits for the enforcement of such provisions. Those same jurisdictions will enforce the choice of law provision. Pursuant to this approach, if the contract calls for Ohio law to govern a dispute between the parties and for the parties to resolve their disputes in Ohio, it will be necessary to establish that Ohio law would permit the enforcement of the forum selection clause in that case. Courts employing this methodology seemingly recognize that two sophisticated parties should be free to choose via contract the law that will govern their disputes and the jurisdiction that is best suited to resolve them.

Other jurisdictions interpret the forum selection clause independent of the choice of law provision. As also noted in by the Court in Turcheck , states that undertake this second approach believe “that because choice of law provisions only require application of the chosen state’s substantive law, the state where the action was filed remains free to apply its own law on matters of procedure, including the question whether the forum-selection clause is valid in the first place. ”In other words, if contract provided for Ohio law to govern a dispute between the parties and for the parties to resolve their disputes in Ohio, Courts using this second approach would not apply Ohio law in determining whether to uphold the forum selection clause. Instead, the law and procedure of the state in which the complaint was filed would determine whether to enforce the forum selection clause and dismiss the complaint because it was not filed in Ohio. As such, Ohio law would only be applied in the event that the court decided to retain jurisdiction and apply Ohio substantive law. While I prefer the first approach in that it enforces the terms of a contract negotiated by the parties that agreed to be bound by it and provides certainty to both parties, because Michigan’s appellate courts have not adopted this approach, it is necessary to understand and be prepared to address both methodologies.

Assuming that a court treats a forum selection clause just like another term or condition of a contract, it is important for it to be enforced sooner than later. Everyone knows that there is a distinction between personal jurisdiction and subject matter jurisdiction. However, it is also important to remember that personal jurisdiction, unlike subject matter jurisdiction, can be waived. Even though MCR 2.111(F) provides that the affirmative defense of subject matter jurisdiction cannot be waived, it is also important to acknowledge that, pursuant to MCR 2.116(D)(1), personal jurisdiction is waived if it is not asserted in the parties first responsive pleading.

While the Court in the unpublished case, Reliableone Staffing Services, LLC v. Staffsoft Corporation , 2004 WL 1486051 (Mich App) suggests that forum selection clauses decide subject matter jurisdiction, they are really modifiable contractual provisions that determine personal jurisdiction. The court in Turcheck explained the distinction well as it wrote:

While not identical, dismissal on the basis of a forum-selection clause is similar to a grant of summary disposition for lack of personal jurisdiction. Although a valid forum-selection clause does not divest the Michigan courts of personal jurisdiction over the parties, it evinces the parties’ intent to forgo personal jurisdiction in Michigan and consent to exclusive jurisdiction in another forum. See James v. Midland Co Agricultural & Horticultural Society , 107 Mich App 1, 5; 308 NW2d 688 (1981). Indeed, forum-selection clauses are inherently bound up with notions of personal jurisdiction.

Therefore, forum selection clauses can be waived because they are nothing more than contractual provisions that involve decisions regarding personal jurisdiction rather than subject matter jurisdiction. Understanding that, what constitutes a waiver of personal jurisdiction assuming that the issue was raised by a defendant in its answer to the complaint and affirmative defenses? If you raise the issue of personal jurisdiction in your answer to the complaint and affirmative defenses and proceed to litigate the case, has personal jurisdiction been waived? In my opinion, there is no bright line test.

In Electrolines, Inc. v. Prudential Assurance Company, Ltd., 260 Mich App 144, 164 (2004), the Michigan Court of Appeals indicated that a defendant who waited less than eight months to file a motion for summary disposition did not waive its right to assert personal jurisdiction as a defense. In reaching its decision the Court in Electrolines noted that the defendant’s participation was not so active that it constituted a waiver because the defendant did nothing other than (1) participate in a status conference, (2) file a witness list, (3) responded to the plaintiff’s motion to compel production of documents and entry of an order on that matter; and, (4) answered the plaintiff’s interrogatories and requests for admissions. On the other hand, the Court in Dundee v. Puerto Rico Marine Management, Inc., 147 Mich App 254 (1985) upheld the trial court’s ruling that the defendant waived the defense by waiting more than four years until the eve of trial to assert it.

Therefore, the safest decision is to file a motion for summary disposition early in the case to avoid any argument by a plaintiff that a defendant has waived its right to assert lack of personal jurisdiction as a defense. Alternatively, the Court may be asked to decide whether a defendant’s participation in litigation constituted a waiver. Depending upon the length of discovery, the timing of the motion for summary disposition, the amount of participation in litigation, and the disposition of the judge, waiting too long to file the motion could mean that a defendant lost a successful defense had it been asserted earlier.

Clearly, forum selection clauses and choice of law provisions can be useful and advantageous provided that their limitations are understood. In short, for those who draft, negotiate, and litigate contracts, important things to remember include: (1) if a choice of law clause or forum selection provision is for a state other than Michigan, know whether that state enforces each of them and the ways that they can be avoided, and (2) if Michigan is the state selected in the choice of law and/or forum selection clause(s), the language of the contract should make it clear that (a) both parties negotiated, drafted, and agreed to the provisions and, if possible, (b) establish that both parties conduct business in Michigan. Finally, if parties agree to a forum selection clause and it is in your client’s best interests to enforce it, file a motion for summary disposition as soon as possible in order to avoid responding to the argument that personal jurisdiction was waived by your participation in litigation of the case.

Donald L. Knapp, Jr. specializes in the areas of commercial litigation and general corporate matters at the law firm of Fausone Bohn, LLP in Northville, Michigan. He has handled cases that involve construction law, real estate law, contract law, and environmental law. Mr. Knapp also serves as the Vice President of the Livonia City Council.