Ways To Avoid Litigation Pitfalls In Contracts

Donald L. Knapp, Jr.
Fausone Bohn, LLP

August 1, 2007

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.

What is a choice of law clause? Anyone who has reviewed the tiny print on the back of a purchase order has seen one. Choice of law clauses provide that the law of a particular state will be used to resolve a dispute or lawsuit between the parties to a contract. For example, a typical choice of law clause will state: "This Agreement shall be governed by, and construed in accordance with the laws of the state of Michigan without regard to its conflict of laws provisions."

What is a forum selection clause? Forum selection clauses advise the parties to a contract of the court(s) in which a lawsuit must be filed. In short, the parties are agreeing in advance that they will avail themselves only to a particular court to resolve their disputes. Clearly, it is cheaper and more convenient to prosecute or defend a lawsuit that is filed in your home county rather than a court in another county or another state.

A recent case highlights their importance. 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 other states, like Florida or Montana.

Michigan courts long ago joined the majority of jurisdictions that uphold forum-selection clauses contracted to by consenting parties. However, Michigan courts must first ascertain whether the parties actually entered into a valid contract before enforcing the forum-selection clause. 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.

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.

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. Just as the parties to a contract can change the price, payment terms, and quantity, forum selection clauses can be waived if they are not enforced because they are nothing more than a contractual provision. Understanding that, what constitutes a waiver of your right to enforce a choice of law/forum selection clause? In my opinion, there is no bright line test.

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 enforce the choice of law/forum selection clause contract provision. Besides, there is most often a tactical and economic advantage to fighting a lawsuit in your home jurisdiction.

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, with offices 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. You can reach Mr. Knapp at [email protected], 248-468-4536 or 888-674-1189.