Forum Selection Clauses—procedural Tools or Contractual Obligations? Conceptualization and Remedies in American and German Law
| Publication year | 2021 |
Forum Selection Clauses—Procedural Tools or Contractual Obligations? Conceptualization and Remedies in American and German Law
Peter Hay
Abstract
German and American law differ methodologically in treating exclusive forum selection clauses. German law permits parties, subject to limitations, to derogate the jurisdiction of courts and, in the interest of predictability, to select a specific court for any future disputes. The German Supreme Court emphasized in 2019 that, as a contract provision, the clause also gives rise to damages in case of breach. American law historically does not permit parties to "oust" the jurisdiction a court has by law. But the parties' wishes may be given effect by granting a party's motion to dismiss for forum non conveniens (FNC) when sued in a different court in breach of the agreement. FNC dismissals are granted upon a "weighing of interests" and in the court's discretion. The clause, even when otherwise valid, is therefore not the kind of binding obligation, enforced by contract remedies, as in German law. The case law does not give effect to its "dual nature," as characterized by the German Supreme Court. The latter's decision correctly awarded attorneys' fees for expenses incurred by the plaintiff when the defendant had sued (and lost) in the United States in breach of a forum selection clause, especially since German jurisdiction and German law had been stipulated. Application of the "American Rule" of costs most probably would not have shifted fees to the losing party had American law been applied, although the rule is far less stringent today than often assumed.
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Forum selection clauses in contractual transactions are used to provide convenience, at least for one party, and predictability for both, in the case that the transaction results in a dispute that cannot be resolved amicably.1 The parties agree on a particular court (which may or may not have had jurisdiction in the absence of such an agreement) and, in the case of exclusive clauses,2 thereby mean to exclude ("derogate") all other courts that otherwise might have had jurisdiction.3 Such clauses may also have negative aspects or effects. They may burden a weaker party; they may also affect the substantive law that the chosen court will apply, depriving a party of protections provided by its home law. In some respects, resort to choice-of-court clauses parallels today's increasing resort to private arbitration clauses, as both mean to cut off other avenues for dispute resolution.4
When a dispute arises, the aggrieved party may wish to sue in a court other than the one for which the contract provides for any number of reasons. Examples include: the preferred court is the party's home court; evidence can be more easily obtained in the present location than in the other; the chosen court is in a foreign country and litigation there involves linguistic problems and associated costs; and the chosen court follows disadvantageous procedural rules or would not apply the local forum's favorable law. What is the effect of the forum selection clause? Does it merely serve to give jurisdiction to the chosen court if the aggrieved party elects to use it and sues there? Can the defendant
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insist on it and prevent the plaintiff from litigating in a different court, even though that court would ordinarily have jurisdiction, absent the forum selection clause? What, in other words, is the nature of a choice-of-court clause? Is it a procedural arrangement that a (not chosen) court may adopt? Is it a binding contractual obligation? Or is it "either-or," depending on how the court feels about it?5
What difference does it make which of these it is? As part of procedural law, the forum court will decide—often within its discretion, such as in application of forum non conveniens principles—whether to honor a choice-of-court clause in favor of another court.6 In a diversity case in federal court, it is then a further question whether federal or state procedural law supplies the answer.7 If the issue is one of substantive contract law, the court's role is different; it will review the clause like any other contract term for a possible violation of some legal prohibition or regulation (i.e., a mandatory rule of law of the forum), for imposing an unreasonable burden on a weaker party as an adhesion provision, for not having been part of the bargain (for instance, as part of a battle of the forms), and the like.8 Also—as will be discussed—remedies might differ: dismissal on procedural grounds in one case, application of contract law remedies in the other.9
American decisions, regardless of how they came out, have paid little or no attention to these questions of methodology.10 A recent decision of the German supreme Court involving United states and German parties expressly addressed these questions.11 It may serve as the basis for reflections on the questions raised above.
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A. The Procedural Background
A German company and an American company had a long business relationship, based on a basic 2005 agreement which provided both for German law and that "Bonn [Germany] shall be the place of jurisdiction[.]"12 The American company, dissatisfied with the German company's response to some of its complaints about the latter's performance, brought suit in federal court in Virginia.13 The German company moved, inter alia, for dismissal for forum non conveniens on the basis of the choice-of-court clause, citing previous language to this effect used by the court.14 The District Court so held in this case that the action must be dismissed pursuant to the doctrine of forum non conveniens, as Bonn, Germany was the proper forum for the dispute.15
Suit in Bonn, Germany, followed, where the German defendant then filed a counterclaim: it sought damages in the form of reimbursement for all expenses incurred in the United States (attorneys' fees and court costs) as a result of plaintiff's suit there in violation of the choice-of-court clause.16 Important to note in this context is that under German law the loser generally pays the expenses of both parties (including attorneys' fees),17 while—with exceptions—
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each party pays its own expenses, except "taxable costs," in American litigation.18 As a result, the German party—the winner in the American suit—thus paid expenses that a winner would not have had to pay in Germany. The court of first instance, dismissed the American company's claim and held for the German company's counterclaim.19 The appellate court reversed the decision on the counterclaim, but the Supreme Court reversed in turn, reinstated the trial court's decision and remanded to the appellate court for a detailed calculation of the damages to which the German party is entitled.20
B. The Decision: The "Dual Nature" of a Forum Selection Clause Supports Contract Law Remedies
Does a forum selection clause have a direct effect on a court's jurisdiction? Its conferral of personal jurisdiction on the chosen court of course does, even if that court would not otherwise have it.21 By choosing that court, the parties have
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submitted to the jurisdiction in advance.22 If the parties wish that its jurisdiction be exclusive, so that no other court has or can exercise otherwise valid jurisdiction, the matter becomes more difficult. It is this "taking away" (derogation) that is the critical point: it is the "ouster" to which derogated American courts objected in the past, as discussed below in Part II. Under German and European Union law, a forum selection clause must first be valid as a matter of contract law; legal systems do impose restrictions and limits on what parties may provide in such an agreement and under what conditions.23 But, if the clause is valid as a matter of contract law, then it does take away the jurisdiction of the derogated court. This effect is provided by German and European Union procedural law as a matter of law24 and not because the
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derogated court agrees to defer to the prorogated court, as under American law, as discussed below in Part II. In the instant case, the parties had also chosen German law; under it, the Bonn court had jurisdiction and the American court, where the American party had sued, therefore did not.25 The latter point, of course was no longer relevant since the American court had already dismissed the case.26 However, if the court hypothetically had not dismissed and instead ruled in favor of the American party, the court's judgment would not had been entitled to recognition in Germany because it would have been rendered by a court which lacked jurisdiction.27
But a forum selection clause is also something else. It has a "dual nature," as the German Supreme Court put it.28 As part of the parties' agreement it represents a contractual obligation, a contract duty the same as any other part of the parties' bargain. In special situations, a party can be forced to perform its obligation (i.e., specific performance),29 while money damages are the usual
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remedy to compensate a party for losses and damages suffered by the other party's breach of its obligation.30 A breach occurs, as in the instant case, when a party sues in the derogated court. This would be the case even when, as in this case, that court honors the stipulation and does not take the case: attorneys' fees and possibly other costs will still have been incurred. Under German law, stipulated to be applicable, the breaching party incurs liability for damages for such losses.31
In this case, the procedural aspect of the forum selection clause was moot because the American court had honored the clause and...
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