Consider a Forum Selection Clause When Contemplating Cross-Border Business

By Michael Bentley

ProBizMS Contributing Columnist

In today’s global marketplace, state and national boundaries are no longer barriers to trade and commerce.  Modern communications technology and delivery systems allow Mississippi businesses to ship products, consult on projects, or provide services wherever customers or business partners need them, be it Panama City, Florida or Panama City, Panama.  As modern business ventures grow in complexity and increasingly involve participants from far-flung locations, being able to resort to a business’s home court if a dispute arises is critical.

While the modern economy has rendered borders less important, courts increasingly view state and national borders as limits on their power over foreign companies and individuals. Simply because a foreign company does some business in Mississippi, or enters into a contract with a Mississippi entity, does not mean that the foreign company is subject to the jurisdiction of a Mississippi court.  Constitutional due process principles prevent Mississippi courts from exercising jurisdiction over an out-of-state business unless that business has substantial and meaningful contacts with Mississippi.

This is problematic because, in many cases, litigation is an important extension of business – a formal means of resolving disputes and enforcing bargains when informal efforts have been exhausted.  Enforcing a contract or vindicating legal rights in a distant state or foreign country can be complicated and costly.  In fact, a small business may find that cost constraints associated with foreign litigation make enforcing valid claims impractical.

Contracting parties, however, may remove these uncertainties on the front end by including a “forum selection clause” in their agreement with the foreign partner or customer.  A forum selection clause waives the traditional due process restrictions and designates Mississippi (or another forum) as a permissible jurisdiction for disputes arising out of the business arrangement.  Any Mississippi business engaged in trans-border commerce should consider a forum selection clause when negotiating with foreign customers or business partners.

The due process doctrine of “personal jurisdiction” limits a court’s power to issue judgments against foreign persons and businesses.

Constitutional due process principles provide that no person may be forced to defend himself in the courts of particular state unless he is a resident of that state or has enough meaningful contacts with the state that the exercise of jurisdiction over him would not offend “traditional notions of fair play and substantial justice.”^[1]  This legal doctrine of “personal jurisdiction” limits the court’s power to people that can fairly be said to be living or conducting meaningful operations within its jurisdiction.  The manner in which a particular court may view the reach of its personal jurisdiction is often unpredictable.  Recent decisions by the U.S. Supreme Court, however, suggest that a court’s jurisdictional reach should be viewed more narrowly than previously thought.

In June 2011, in the companion cases of Goodyear Dunlop Tires Operations, S.A. v. Brown^[2]and J. McIntyre Machinery Company v. Nicastro,^[3] the Supreme Court signaled that courts should carefully scrutinize an out-of-state company’s contacts with the state in which it has been sued to ensure that the exercise of specific personal jurisdiction comports with due process.  In order for an out-of-state company’s contacts to satisfy due process, the contacts must show that the company purposefully availed itself of the privilege of conducting business in the forum state.  Contacts that are unrelated to the claims in the lawsuit, even if significant, cannot be counted in the analysis.^[4]

In January 2012, following the Supreme Court’s decisions in Goodyear and J. McIntyre, the Fifth Circuit Court of Appeals (which announces federal law for the states of Mississippi, Louisiana, and Texas) also applied a narrow approach to personal jurisdiction.  In the case of ITL International, Inc. v. Constenla, S.A.,^[5] the plaintiff sued in Mississippi to terminate an exclusive distribution agreement with a Costa Rican company and prevent the foreign company from using its trademark.  The Fifth Circuit held that the Mississippi court lacked jurisdiction over the Costa Rican company even though the company had accepted delivery of the trademarked goods at the Port of Gulfport (Mississippi) on 55 occasions.  The court explained that these contacts, while substantial, were not sufficiently related to the substance of the lawsuit, which was “oriented almost exclusively toward activity that has taken place or may eventually take place in Costa Rica,” not Mississippi.  The case was dismissed.

Of course, in ITL International, the focus of the lawsuit was Costa Rica because that was the primary location of the parties’ business arrangement.  This will often be the case if a Mississippi business is providing support, consulting or other services from its headquarters in Mississippi on a business project in another state or country.  The mere fact that a foreign company contracts with the Mississippi business, or has significant contacts with Mississippi in the course of the business arrangement, will not necessarily subject the foreign company to the jurisdiction of a Mississippi court.  If something goes wrong, the Mississippi company may be forced to sue in a distant state or foreign country in order to vindicate its legal rights.

A forum selection clause resolves uncertainties regarding the site of litigation.

Recognizing the uncertainties of the “personal jurisdiction” doctrine is important whenever a Mississippi company is contemplating a business arrangement with a foreign company or work on a project that is centered in another state or country.  If disputes arise in the course of the work, the local company may be forced to file suit in order to enforce its contractual or other legal rights.  If the breaching party, however, does not have sufficient contacts with Mississippi, the local company will be forced to make a choice:  institute legal proceedings in a foreign jurisdiction or simply forgo its valid legal claims and write-off its losses.  The value of enforcing its contractual rights, for example, may not justify the expense and burdens of pursuing litigation in a foreign jurisdiction with unfamiliar counsel.

These uncertainties, however, can be overcome if the parties agree to a “forum selection clause” that establishes the proper jurisdiction for disputes at the outset of their business arrangement.  There are two types of forum selection clauses:  permissive and mandatory.  Both types are enforceable so long as they are clearly-worded and agreed upon by the parties.^[6]

A “permissive” forum selection clause provides for jurisdiction in the courts of one forum, but does not rule out other jurisdictions as acceptable forums.  A permissive forum selection clause might be worded:

The undersigned consents and yields to jurisdiction in any state or federal court in Mississippi, and waives any plea of jurisdiction on account of residency elsewhere.

A “mandatory” forum selection clause, on the other hand, makes a particular court or jurisdiction the exclusive forum for all litigation arising out of or relating to the agreement.  A typical mandatory forum selection clause might be worded:

The undersigned agrees that the state and federal courts in Mississippi will have exclusive jurisdiction over any disputes arising out of or related to this contract and expressly waives its right to proceed in any other forum.  Further, the undersigned consents and yields to jurisdiction in such courts and waives any plea of jurisdiction on account of residency elsewhere.

These are merely boilerplate examples.  A forum selection clause should be tailored to the needs of the particular business and should be drafted in consultation with an attorney.

A forum selection clause can be an important safeguard for any small or medium-sized business conducting business in other states or countries, especially if it is sharing intellectual property with foreign companies.  While business relationships and the relative bargaining power may dictate whether a forum selection clause is appropriate or attainable, there is no reason that one should not be considered.  At minimum, a permissive forum selection clause, which does not limit the rights of the other contracting party, but merely permits a local business to seek a remedy in Mississippi if necessary, may be attainable. Such clauses, if properly drafted and employed, can ensure that a local business has a practical and cost-effective remedy in its home state in the event that a contract is breached or business relations break down in the course of performing work in another state or foreign country.

(Michael Bentley is an attorney with Bradley Arant Boult Cummings LLP in Jackson, MS)