Commercial contracts commonly contain a “forum selection clause” - a clause that designates the state in which the parties will litigate or arbitrate any disputes that may arise between them. Once a dispute arises, however, the designated forum is often viewed suspiciously as an attempt to gain “home court” advantage. This is usually because the designated forum was probably not specifically negotiated and almost always coincides with the contract drafter’s residence. In such situations, the out-of-town party may contest whether the forum selection clause is valid and enforceable.
Forum selection clauses have historically been disfavored by American courts. Today, however, they are presumed valid and enforceable when made at arm’s length by sophisticated business entities, absent a compelling reason for a court to disregard them. Courts will scrutinize forum selection clauses for “fundamental fairness,” and will refuse to enforce them if they are unreasonable or unjust. Such clauses will be deemed unenforceable if enforcement would be contrary to a strong public policy of the forum in which the suit is brought. Public policy may be established by either a statute or by judicial decision.
Both North Carolina and South Carolina have statutes that provide that despite a contract provision requiring a claim to be brought in a sister state, the claim may be brought in the manner provided by those states’ statutes and rules of civil procedure.
North Carolina General Statute § 22B-3 makes certain forum selection clauses selecting a jurisdiction other than North Carolina unenforceable. This statute applies to any contract entered into on or after October 1, 1993. Hence, a lawsuit may be filed in North Carolina even though the contract requires that it be brought in another state when:
1. The contract is “entered into in North Carolina.” A contract is entered into in the state where the last act for finalizing the contract occurred. This is usually the state where the last signature is obtained.
2. The contract is something other than a “non-consumer loan transaction.” Forum selection clauses for commercial loans are enforceable. The Court of Appeals has defined a non-consumer loan as, “one that is not extended to a natural person and not used for family, household, personal, or agricultural purposes.”
3. The parties do not consent to litigation or arbitration in the selected state at the time the dispute arises.
There are a few exceptions to these rules. For example, if parties to a contract agree that a given jurisdiction’s substantive law will govern the interpretation of the contract, then a North Carolina court may look to that state’s law in determining whether to enforce the forum selection clause.
South Carolina Code § 15-7-120 authorizes any action to be brought in South Carolina, regardless of a forum selection clause, so long as the action could otherwise have been brought in South Carolina. For example, South Carolina’s Court of Appeals upheld a broad application of the statute by permitting a party to bring suit in South Carolina, even though the contract required all litigation to be brought in New Jersey.
In sum, although forum selection clauses are generally enforceable as between sophisticated commercial entities, North Carolina and South Carolina law disfavor blind adherence to such clauses where to do so would be fundamentally unfair, such as in consumer loans. Consumers and businesses should take note of forum selection clauses when entering into a contract. Where possible, they shall negotiate a fair and convenient forum to minimize litigation expenses after a dispute arises.
The Commercial Litigation attorneys in Parker Poe’s Commercial Contracts Practice Group regularly advise and assist businesses in litigating matters related to business contracts.
Fred Lowrance (704) 335-9012 fredlowrance@parkerpoe.com
Mike Adams (704) 335-9062 mikeadams@parkerpoe.com
Ron Tryon (803) 253-8911 rontryon@parkerpoe.com
Russell Killen (919) 890-4151 russellkillen@parkerpoe.com
Mike Malloy (704) 335-9850 mikemalloy@parkerpoe.com
Brent Boyd (803) 253-8918 brentboyd@parkerpoe.com
Jami Jackson (704) 335-9008 jamijackson@parkerpoe.com
Shiva Vafai (803) 253-8923 shivavafai@parkerpoe.com
Carrie S. Fisher (704) 335-9536 carriefisher@parkerpoe.com