[Updated 6 September 2022 to reflects the recommendation in Jurisdiction Provisions, Part 1: Stop Using Consent-to-Jurisdiction Provisions! (24 Aug. 2019).]
Jurisdiction provisions (also known as forum-selection provisions) are a fruitful source of dispute. Check out this May 2011 post, as well as this post and this post on AdamsDrafting. [And the more recent posts include Part 2, Part 3, and Part 4.]
Now, thanks to Chris Fulmer, a solo practitioner based in Raleigh, North Carolina, I learned about the glamorously named case of Roth v. Penguin Toilets, LLC, a case decided by a North Carolina trial court. (Go here for a copy of the court’s order.)
Roth had been an employee and member of Penguin Toilets. In its order, the court considered Penguin Toilets’ motion that Roth’s complaint be dismissed because his claims were subject to a forum-selection provision that required that any litigation be conducted in Wayne County, Michigan. Here’s the provision at issue (emphasis added):
This Operating Agreement is being executed and delivered in the State of Michigan and shall be governed by, construed, and enforced in accordance with the laws of the State of Michigan. Any dispute or other legal action concerning this Agreement, including any arbitration or litigation proceedings shall be conducted in Wayne County, Michigan unless the Arbitrators identify a more suitable and agreeable venue and the Members consent to the jurisdiction and venue of any State or Federal Court located therein.
The court held that this provision didn’t apply to Roth’s employment by Penguin Toilets, but went on to hold as follows:
Even if this Court found the Original O.A.M. and/or Current Operating Agreement’s forum selection clause was integrated into the Employment Agreement, Plaintiff would still be able to bring this action in North Carolina because the forum selection clause is not mandatory. …
Here, the forum selection clause provides that “[a]ny dispute or other legal action concerning this Agreement, including any arbitration or litigation proceedings shall be conducted in Wayne County, Michigan unless the Arbitrators identify a more suitable and agreeable venue and the Members consent to the Jurisdiction and venue of any State or Federal Court located therein.” (Current Operating Agreement A-24.) While the word “shall” indicates that the proceedings are to be conducted in Wayne County, Michigan, it does not say that this is the only venue where proceedings may be conducted. North Carolina courts have found that mandatory selection clauses include words “such as ‘exclusive’ or ‘sole’ or ‘only’ which indicate[] that the contracting parties intended to make jurisdiction exclusive.”
It’s hard to imagine that the drafter had anything other than exclusive jurisdiction in mind by specifying that any litigation “shall be conducted in Wayne County, Michigan.” In particular, specifying as an alternative jurisdiction any venue selected by the arbitrators that the parties agree on would be pointless if Michigan jurisdiction were nonexclusive. (For my analysis of a very similar provision, see this January 2008 post on AdamsDrafting and MSCD 2.93.)
But I’m not about to start gnashing my teeth and moaning about how the court frustrated the parties’ intent. That’s because the drafter was asking for trouble by using suboptimal wording.
Let’s look at this from a categories-of-contract-language perspective. Using passive-voice language of obligation doesn’t make much sense, because it suggests that bringing suit anywhere other than Michigan would constitute a breach of contract, with the remedy being some sort of breach-of-contract claim.
Instead, it’s more logical to address jurisdiction by means of language of discretion. If jurisdiction is exclusive, specify that discretion is limited by saying that suit may be brought only in the specified jurisdiction. And I’d reinforce that by having the parties consent to the exclusive jurisdiction of the specified courts.
Here’s a variant of the kind of language I now (in 2022) use:
If either party brings against the other party any proceeding arising out of this agreement or arising out of disclosure or use of Confidential Information, that party may bring that proceeding only in the United States District Court for the Eastern District of Pennsylvania or, only if there is no federal subject matter jurisdiction, in any state court of Pennsylvania sitting in Philadelphia.
If jurisdiction were nonexclusive, you could probably get away with omitting “only” from the above provision, but adding “nonexclusive” might help avoid confusion.
Adam,
I think your language for the Forum Selection clause
is optimal. However, although I am also careful of leaving no doubt that jurisdiction
is exclusive (if that is the intention) when drafting Forum Selection clauses, I do so because courts take decisions like Roth v. Penguin Toilets, LLC and not because of any logical
reason.
Let me explain myself:
The counsel that drafted the contract being analyzed included
that “…any dispute…shall be conducted in…Wayne County, Michigan”. The Court
argues that while the “shall” indicates the proceedings are to be conducted in Wayne County, Michigan, the provision does
not say that Wayne County, Michigan is the only place where they may be
conducted.
That does not seem a solid argument to me. If that
would be a solid argument, then if a provision would state that “…Seller shall
deliver the furniture in New York City …”, but later the Seller delivers the
furniture in Washington DC, the Seller could argue that the provision states
that the furniture was to be delivered in New York City, but that the provision
did not state that New York City was the only place where it could be
delivered.
Or, for instance, if a provision states that “Customer
shall pay provider within thirty days from invoice receipt”, then the Customer
could pay two-hundred days after invoice receipt and argue that, while the
provision states that invoices are to
be paid within thirty days from receipt, it does not state that invoices cannot
be paid within two-hundred days.
Dangerous reasoning. Fortunately Courts do not use the
reasoning they apply for Forum Clauses across the board. The weakness in the
Court´s argument is to think that when someone uses “shall” in a Forum
Selection Clause, he or she is not excluding all the other universe of
scenarios. What the Court is ultimately not recognizing is that “shall” is
mandatory language and not merely a permission to do something.
I am not sure what you think about my opinion and
would like to know your thoughts. Regards,
Guzman,
Montevideo, Uruguay.