Texas has a strong public policy of freedom to contract firmly embedded in its jurisprudence. Parties generally have the right to contract as they see fit, so long as the contract does not offend public policy and is not illegal. Texas courts, like others across the country, historically had invalidated forum-selection clauses for violating public policy. However, following landmark decisions by the U.S. Supreme Court in the 1970s and 1990s, Texas courts now regularly enforce forum-selection clauses.
Forum-selection clauses are contractual provisions in which parties select in advance a particular jurisdiction for resolving their disputes. Forum-selection clauses in contracts are important terms that govern where a certain dispute will be litigated. For example, parties to a contract that provides for performance in one state may agree that all disputes will be litigated in another state. Forum-selection clauses are not to be confused with choice-of-law provisions in contracts, which dictate which state’s law will apply.
Contractual forum-selection clauses are presumed to be valid and enforceable in Texas. The following are tips to include in forum-selection clauses to enhance the chance of their enforcement and exceptions to the enforcement of a forum-selection clause.
Include Mandatory Language
To be enforceable, a forum-selection clause must be mandatory, not permissive. A mandatory clause states that a suit must be brought only in a designated forum; that is, there must be some language explicitly excluding other forums. A permissive clause states that a suit may be brought in a designated forum; that is, the clause does not require that the suit be brought in that forum.
Although the term “shall” in a forum-selection clause is generally mandatory, without other exclusive language, the clause may be deemed permissive. To ensure that the lawsuit is brought in Texas, a contracting party should include language that Texas is the “exclusive” jurisdiction, the parties submit to Texas jurisdiction, and the jurisdiction “shall” and “must” be in Texas.
Within Scope of Litigation
For a court to enforce a forum-selection clause, a plaintiff’s claims must fall within the scope of the clause. In determining whether a claim falls within the clause’s scope, the court will focus on the substantive factual allegation; the causes of action alleged are not determinate.
While the court should use a “common sense” approach in determining whether a forum-selection clause covers the plaintiff’s claims, a contracting party can draft the forum-selection clause broadly to ensure its applicability.
Forum-selection clauses commonly state that they apply to any “claims or disputes arising out of or arising from” the contract that contains the forum-selection clause. As long as the operative facts of the claim involve the validity, terms or performance of the contract or are substantially connected to it, it will likely fall within the scope of a broadly worded forum-selection clause.
Exceptions
Though forum-selection clauses are routinely enforced, a contracting party may still face the prospect of the opposing party filing a motion to dismiss based on the unenforceability of the forum-selection clause. The party opposing the forum-selection clause has a heavy burden of proof to overturn the clause. However, even if all of the best practices are performed, a party can invalidate a forum-selection clause by showing that: 1) the selected forum is seriously inconvenient; (2) the clause is invalid because of fraud or over-reaching; or (3) the enforcement would contravene a strong public policy
First, a forum-selection clause may be found to be unreasonable and unenforceable if the enforcement is so “gravely” difficult and inconvenient for the party resisting enforcement that it would, for all practical purposes, be deprived of its day in court. This is essentially a fundamental fairness inquiry. In determining the fairness of such a clause, courts consider, in part, whether there is an indication that the forum was selected to discourage legitimate claims.
Second, if a party asserts a contractual defense such as fraud or over-reaching, the forum-selection clause could be set aside. The fraud exception to enforceability requires that the forum-selection clause itself must be fraudulently induced, and not merely the agreement of which the forum-selection clause was only one provision. Stated another way, the fraud claim must apply solely to the forum-selection clause and not the contract in general.
Third, in the construction context, the Business and Commerce Code makes a forum-selection clause “voidable.” Under Chapter 272, if a construction contract concerning real property in Texas contains a forum-selection clause making the contract subject to litigation in the courts of another state, that provision is voidable by the party who is obligated to perform the work that is the subject of the construction contract.
With a bit of careful consideration during drafting, forum-selection clauses are useful for preventing parties from being hauled into different courts across the country. While various exceptions could potentially derail a well-drafted forum-selection clause, simple steps should be taken to maximize the possibility of their applicability and enforceability.
John S. Polzer is a partner and Christopher A. Brown is an associate in the Commercial Litigation Practice Group of Cantey Hanger LLP. www.canteyhanger.com.
This article is for information purposes only and is not intended to be legal advice or substitute for consulting an attorney. We recommend that you discuss your particular situation with your attorney when you need legal advice.