© 2014 smith moore leatherwood llp. all rights reserved. helpful hints for drafting forum selection...

© 2014 Smith Moore Leatherwood LLP. ALL RIGHTS RESERVED.

Helpful Hints for Drafting Forum Selection Clauses and Integration

Clauses to Avoid Litigation Heartache

Presented to the Charlotte Chapter of the Association of Corporate Counsel

Panelists: Ginger Daly, Rob Marcus, Rob KidwellModerated by: Fred Wood

101 North Tryon Street | Charlotte, N.C. 28246T: 704.384.2600 | E: [email protected]


Introduction

• Oftentimes, business clients are focused on the business terms of commercial contracts and overlook the “boilerplate” provisions of the contract, such as forum selection clauses and integration clauses.

• However, these provisions are necessary, important, and require careful consideration from counsel and clients alike.


• Forum selection clauses, contract language which specifies in advance the jurisdiction in which future disputes are to be litigated.

• Forum selection clauses, if prepared properly, eliminate uncertainty and ensure a convenient forum to resolve your disputes.


• Ensuring that your carefully negotiated commercial contract is shielded from attack, by way of a carefully constructed “integration” or “merger” clause, from the “fraud in the inducement” exception to the parol evidence rule, is worthy of careful consideration and drafting strategy.


The Forum Selection Clause

• Though historically looked upon with disfavor, in 1972 the U.S. Supreme Court decided M/S Bremen v. Zapata Offshore Co., setting forth what has become the standard for enforcing forum selection clauses.

• Now, in most jurisdictions, forum selection clauses are “prima facie valid.”

• Modern courts are reluctant to disturb them.


• Forum selection clauses determine more than just where contract disputes will be litigated.

• Because the procedural rules of the forum apply, the choice of forum can have significant impact on leverage, strategy and expense.

• Thus, thoughtful and deliberate forum selection is an essential aspect of contract negotiation and drafting.


Consider this Scenario

• You are a N.C. business • Just negotiated an important agreement to supply

component parts to an end use in California.• The economic terms are favorable to you• There is no forum selection clause in the supply

agreement• The post-closing “warm and fuzzies” have gone• A dispute arises• You try to negotiate away the dispute• Your customer sues you preemptively to secure

home court advantage• Imagine that the customer is from a foreign country


What are the Consequences?

• By failing to include a forum selection clause, you have practically guaranteed that you will have to deal with the litigation elsewhere.

• You have also unwittingly encouraged your customer to file suit even while negotiations are pending.

• Had you included a forum selection clause, there would be no need for either party to “race to the courthouse.”


Benefits of Forum Selection Clauses

• Forum selection clauses provide certainty

• There should not be any protracted procedural battle over where the merits of the dispute will be decided

• Forum selection clauses should make parties less likely to file preemptive lawsuits for the sake of gaining home court advantage

• The likelihood of negotiations being successful is increased


• Litigation costs should be reduced by not having to litigate in a far away, inconvenient forum

• Disruption to your management team should be lessened

• Assuming you chose well, your dispute should be decided by a sophisticated judge with a decent jury pool.


N.C.G.S. § 22B-3

• North Carolina is an outlier when it comes to contracts with forum selection provisions. N.C.G.S. § 22B-3 provides:

• Except as otherwise provided in this section, any provision in an contract entered into in North Carolina that requires this prosecution of any action or the arbitration of any dispute that arises from the contract to be instituted or heard in another state is against public policy and is void and unenforceable. This prohibition shall not apply to non-consumer loan transactions or to any action or arbitration of a dispute that is commenced in another state pursuant to a forum selection provision with the consent of all parties to the contract at the time the dispute arises.


Considerations When Drafting the Clause

• Make it Mandatory• Scope of the Forum Selection Clause• Make Sure it is Enforceable• State versus Federal Court• Make Sure the selected Forum has Personal

Jurisdiction• Choice of Law versus Choice of Forum• Multiple Agreements


• While there may not be a perfect forum to litigate every dispute, there is no question that the wrong decision every time is to ignore the forum selection clause!


How a Good Integration Clause Can Help

• An “integration” or “merger” clause is a contractual provision that attempts to limit the entire contract to the written document.

• In essence, they attempt to disclaim reliance on any prior representations.

• So, as long as you have an integration clause, you are protected from collateral attacks on the agreement, right?


• Not so fast! Generally the parol evidence rule will prohibit courts from considering extrinsic evidence for the purpose of varying, contradicting or adding to the terms of a written agreement.

• However, an exception to the parol evidence rule applies in the case of fraud in the inducement – where one party claims to have been “induced” by fraudulent representations to enter into a contract, even in the face of an integration agreement.


• To the consternation of those wishing to rely on an integration clause, a majority of our courts, when there is an allegation of fraud in the inducement, will allow extrinsic evidence of the alleged fraud rather than strictly enforcing the integration clause.


What Can You Do?

• Though the majority of our Courts do apply the fraud in the inducement exception to the parol evidence rule, all is not lost.

• Careful drafting can increase the odds that the Court may not choose to apply the exception, or make it such that someone relying on the exception is simply not believable.


• Consider drafting Waiver of Reliance Provisions• Draft a complete integration clause• Indicate that both parties participated in the

drafting, review, or creation of the agreement.• Indicate that the agreement is the sole expression

of the parties’ intent.• Draft that each party has had the opportunity to

read and review the agreement before signing it and in doing so, did not rely on any representations of the other party or, in the alternative, that any failure to review the agreement before signing it precludes any claim that it does not represent the true agreement of the parties.


Conclusion

• In order to avoid litigation heartache, or at least to minimize it, you should carefully consider the forum selection clause and the integration clause when drafting commercial contracts.

• Paying them short shrift may reduce the short term cost, but in the event of litigation, it may ultimately cost you a client.

© 2014 smith moore leatherwood llp. all rights reserved. helpful hints for drafting forum selection...

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