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Enforcing Outbound Forum Selection Clauses in U.S. State Court
Written by John Coyle, the Reef C. Ivey II Distinguished Professor of Law, Associate Professor of Law at the University of North Carolina School of Law, and Katherine C. Richardson, Law Clerk, U.S. Court of Appeals for the Sixth Circuit, 2020-21 Term
European legal scholars have long bemoaned the difficulty in identifying “black letter rules” when it comes to U.S. private international law. One area where this law is famously opaque relates to state enforcement of “outbound” forum selection clauses. Outbound clauses—which are known as derogation clauses in the rest of the world—state that a dispute must be heard by a court other than the one where the suit was brought. State courts in the United States generally refused to enforce these provisions prior to 1972. After the U.S. Supreme Court rendered its seminal decision in The Bremen, however, attitudes began to change. Today, it is generally acknowledged that state courts are far more likely to enforce outbound forum selection clauses than they were fifty years ago. To date, however, nobody has attempted to determine empirically the extent to which state court practice has shifted since the early 1970s. Our new paper seeks to accomplish this goal.
State Practice by the Numbers
We reviewed every published and unpublished state court decision addressing the enforceability of outbound forum selection clauses decided after 1972. Our analysis of these decisions revealed the following:
- State courts in the United States enforce outbound forum selection clauses approximately 77% of the time when one party challenges the enforceability of the clause.
- The enforcement rate is remarkably consistent across large states in the United States. In California, the enforcement rate was 80%. In Texas, it was 79%. In New York, it was 79%. In Florida, it was 78%. In Ohio, it was 78%. In Illinois, it was 74%.
We are currently gathering data about federal court practice. Our preliminary results suggest that the enforcement rate is at least as high, if not higher, when the enforceability of an outbound clause is challenged in federal court.
In addition to looking at enforcement rates, we also examined the rationales proffered by state courts in cases when they declined to enforce outbound clauses. Knowing how often state courts enforce these clauses, and more importantly, why they do not enforce them, offers valuable insights for contract drafters, judges, and scholars. We found that when a state court refuses to enforce an outbound clause, it is almost always because the clause is contrary to public policy (8% of all cases) or unreasonable (12% of all cases). What does it mean, however, for a clause to be contrary to public policy? And what are the situations when a clause will be deemed unreasonable? The cases in our data set shed light on both of these questions.
Public Policy
With respect to public policy, state courts most frequently refuse to enforce an outbound clause because there is a state statute directing them to ignore it. Forty-nine states have enacted states declaring outbound clauses unenforceable in consumer leases. Twenty-eight states have enacted statutes announcing a similar rule with respect to clauses in construction contracts. All told, we identified more than 175 state statutes directing courts to refuse to enforce outbound clauses across a wide range of agreement types. Our paper includes a detailed chart that shows which statutes are in force in which states.
U.S. courts also sometimes refuse to enforce a clause on public policy grounds by citing an “anti-waiver” statute. Anti-waiver statutes provide that certain rights conferred by state law are non-waivable. When a state court is presented with a contract that contains an outbound forum selection clause, and when the forum court concludes that the courts in the chosen jurisdiction are unlikely to give effect to non-waivable rights conferred by the forum state, the forum court may refuse to enforce the forum selection clause on public policy grounds. On this account, the enforcement of the clause is contrary to the public policy of the forum not because the legislature has specifically directed the courts to ignore it. Instead, these clauses go unenforced because their enforcement would result in the waiver of non-waivable rights.
Reasonableness
The most common basis cited by state courts in refusing to enforce an outbound forum selection clause is a lack of reasonableness. The most common reason why state courts strike down clauses on reasonableness grounds is that the clause would result in duplicative litigation. Courts are reluctant to enforce the clause—and send litigation elsewhere—if it means the plaintiff would have to litigate the same set of facts in two different fora.
Second, many state courts refuse to uphold forum selection clauses if it means the plaintiff cannot secure effective relief in the chosen forum. Typical examples of this type of concern include procedural or jurisdictional problems in the chosen forum, claims that are so small as to make it uneconomical for a plaintiff to pay the costs to travel to pursue them, and fora that constitute a “serious inconvenience” to the plaintiff. We should note here that most state courts do not refuse to enforce clauses because it would be expensive for the plaintiff to maintain the lawsuit in another state. However, when the plaintiff presents an extremely small claim or an extreme expense to litigate, some courts will take pity the plaintiff and refuse to enforce the outbound clause.
In several other categories of cases, state courts refuse to uphold outbound clauses when (1) the plaintiff has no notice of the clause, or (2) the chosen forum bears no reasonable relationship to the parties. The notice issue arises most frequently in cases of form passage tickets, mostly for cruise lines, and in online “clickwrap” agreements. Some courts have been reluctant to hold plaintiffs responsible for forum selection clauses in these two scenarios when the defendant did not reasonably communicate the clause to the plaintiff. In addition, some courts refuse to uphold outbound clauses against unsophisticated parties where the clause is buried in fine print amid other legal jargon. We note, however, that simply because a forum selection clause is contained in a contract of adhesion does not make it unreasonable. This scenario was obviated by the Supreme Court’s ruling in Carnival Cruise Lines, Inc. v. Shute, where the Court upheld a forum selection clause on the back of a preprinted cruise ticket. Finally, the typical contract defenses, such as fraud, unconscionability, and problems with formation, all apply to forum selection clauses as well, with some variation among the states.
Equality of the parties in investment arbitration – public international law aspects
Written by Silja Vöneky, University of Freiburg
Note: This blogpost is part of a series on „Corporate social responsibility and international law“ that presents the main findings of the contributions published in August Reinisch, Stephan Hobe, Eva-Maria Kieninger & Anne Peters (eds), Unternehmensverantwortung und Internationales Recht, C.F. Müller, 2020.
I. Introduction
1. The question of the status of transnational corporations in investment arbitration is of central importance for the division of spheres of responsibility, for the pursuit and enforcement of values, and thus for the bases of legitimation of the international legal order today.
2. The promotion of foreign direct investments and the deepening of economic cooperation between States to promote economic development with the common welfare objective of increasing the prosperity of the peoples of the contracting States parties has been the legitimating basis of the ICSID Convention, which is central to investment protection under international law, and of the bilateral investment protection agreements.
3. Investment protection law, as part of public international law – from its basis and purpose – should not be understood as a departure from a state-centered international order.
4. From the point of view of international law, the following questions have to be answered: What are the implications for the investment protection regime and investment arbitration as its core
a) if the triad justifying economic globalization (foreign private investment – promotion of economic development – promotion of prosperity) loses its persuasiveness as a paradigm for its justification in a normative sense, and
b) if a discourse of delegitimization prevails that accuses profit-oriented transnational corporations in their role as investors of irresponsible conduct, which is incompatible with the public welfare, and States of enabling this conduct to the detriment of their own population by means of international treaties establishing investment arbitration?
5. The aim to align investment treaties with the principle of sustainable development can be seen by the reforms initiated by States, groups of States, and the United Nations Conference on Trade and Development; besides, this aim should have an impact on already existing investment treaties and investment arbitration as far as it is coherent with international law.
II. Transnational corporations as equal parties under international law within the framework of investment arbitration
6. A necessary condition for the equality of the host State and an investing foreign corporation as parties is that both by consent agree to arbitration in respect of a legal dispute directly related to an investment, i.e. that the State, which is a contracting party to the ICSID Convention and a subject of international law, besides ratifying the convention additionally gives its written consent (Art. 25 (1), Art. 36 (2) ICSID Convention), which has a threefold function (legitimating element, transformative element and constitutive element).
7. For various reasons, the procedural equality of the host State and the transnational corporations within the framework of a concrete arbitration procedure is justified and thus legitimate with regard to the international legal order as a whole. In particular, it complies with the principle of fair trial and the rule of law as enshrined in international law.
8. The principle of the equality of the parties does not preclude that transnational corporations are given preferential access to arbitration on the basis of international treaties and that arbitration is open only to transnational corporations.
9. The principle of the equality of the parties is inter alia observed during the composition of an arbitral tribunal if the judges are appointed by both parties in the same manner and each judge fulfils criteria which plausibly ensure impartiality. However, the appointment by the parties is not a necessary condition for the equality of the parties.
10. Questions about how to implement the principle of the equality of the parties arise in the arbitral proceedings themselves, in particular with regard to the possibility that several investors seek to bring their claims against the same host State, with regard to the admissibility of a counterclaim by the host State, with regard to the admissibility of “amicus curiae briefs” (third person submissions), with regard to the so-called equality of arms, and with regard to the problem of safeguarding confidentiality interests (in particular State secrecy).
11. Questions of the applicable law within the scope of the merits, such as the possibility of the host State to invoke justifications under international law (e.g. necessity) and the principles of interpretation of the investment protection agreements, are not considered to be questions of the principle of the equality of the parties.
III. (Un)justified unequal treatment to the detriment of transnational corporations as parties with regard to corruption problems
12. The decisions of arbitral tribunals, which deny their jurisdiction or the admissibility of the investor claim if the defendant host State asserts corruption, are convincing (only) with regard to limited types of cases.
13. The lack of jurisdiction of the tribunal or the inadmissibility of the investor’s claim does not seem to be justified even if the transnational corporation’s act of corruption made the investment possible in the first place: The contrary reasoning in investment arbitration decisions, based inter alia on the wording of bilateral investment treaties, the scope of the host State’s consent and/or a violation of fundamental general principles (such as, inter alia, the so-called “clean hands” principle, the “international public policy” or “transnational public policy”, or the principle that no one shall profit from his/her own wrong) is not convincing for various reasons .
14. The same is true even more – in accordance with recent investment arbitration decisions – if the foreign investor acted corruptly after the investment had already been initiated in the host State.
15. Instead, corruption should be taken into account in the decision on the merits of a case in accordance with the objectives and principles of the international legal order in such a way that central values of investment protection are not disproportionately undermined, but nevertheless relevant disadvantages arise for transnational corporations if they engage in acts of corruption abroad for or during investments. This can be achieved if the amount of investors compensation is reduced for example by a multiple of the sum of the corruption.
16. When considering acts of corruption in the merits of a case, the arbitral tribunal should therefore consider the distribution of responsibility, the pursuit and enforcement of global values, and the bases of legitimacy of the current international legal order, also taking into account the state’s anti-corruption obligations, in particular as enshrined in anti-corruption conventions and human rights treaties.
IV. Concluding remarks
17. The procedural equality of host States and transnational corporations within the framework of an investment arbitration procedure has no implications on the status of transnational corporations in the international legal order as a whole; other views, which argue that transnational corporations are (full or partial) subjects of international law in a normative sense, exceed the – de lege lata – narrowly limited equality.
18. The risks associated with a normative enhancement of transnational corporations in the international legal order present another argument against the view that corporations are (full or partial) subjects of international law. These risks are hinted at in the delegitimization discourse, which grants profit-oriented companies less influence in the international legal order of the 21st century.
19. Even without the status as subjects of international law, transnational corporations can be bound by norms of international law (international law in the narrow sense and so-called soft law). The UN Guiding Principles for the Business and Human Rights are, inter alia, of particular relevance.
20. If – with good reasons – foreign direct investments by transnational corporations continue to be promoted via international law as a means of increasing prosperity in the participating States for the benefit of the respective population, the public-good orientation of international investment arbitration tribunals should be further developed, on the one hand, by reforming the constitutional aspects of the arbitral procedure, and, on the other hand, by further focusing their jurisprudence on public-good aspects including the proportionate protection of responsible investments.
Full (German) version: Silja Vöneky, Die Stellung von Unternehmen in der Investitionsschiedsgerichtsbarkeit unter besonderer Berücksichtigung von Korruptionsproblemen – Unternehmen als völkerrechtlich gleichberechtigte Verfahrensparteien?, in: August Reinisch, Stephan Hobe, Eva-Maria Kieninger & Anne Peters (eds), Unternehmensverantwortung und Internationales Recht, C.F. Müller, 2020, pp. 339 et seq.
Equality of the parties in investment arbitration – private international law aspects
Written by Stefan Huber, University of Tübingen
Note: This blogpost is part of a series on „Corporate social responsibility and international law“ that presents the main findings of the contributions published in August Reinisch, Stephan Hobe, Eva-Maria Kieninger & Anne Peters (eds), Unternehmensverantwortung und Internationales Recht, C.F. Müller, 2020.
1. In investor-state arbitration, one has to distinguish between arbitral proceedings which are initiated on the basis of a contract concluded between the investor and the host state, on the one hand, and arbitral proceedings which are initiated on the basis of a bilateral investment treaty, on the other hand. In the latter case, there is no arbitration agreement in the traditional sense. This entails a unilateral right of the investor to initiate arbitral proceedings. Granting the host state the right to bring a counterclaim might compensate this asymmetry up to a certain degree.
2. Whether the host state has the right to bring a counterclaim, depends on the dispute settlement mechanism provided for in the bilateral investment treaty. For future investment treaties, it is recommended to grant the host state such a right. When the investor introduces arbitral proceedings on the basis of such a treaty, the investor usually declares his consent with the entire dispute settlement clause. If, at this moment, the investor expressly excludes the right of the host state to bring a counterclaim which is provided for in the bilateral investment treaty, there is no correspondence between the declaration of the host state and the declaration of the investor to submit the dispute to arbitration. Consequently, if the host state refuses to participate in the arbitral proceedings on such a basis, the arbitral tribunal does not have jurisdiction to decide the case.
3. The subject matter of treaty-based investor-state arbitration generally concerns regulatory measures of the host state. This makes a considerable difference in comparison to commercial arbitration, which focuses on the interests of private actors. This difference entails different procedural principles, primarily as far as questions of confidentiality and transparency are concerned.
4. There are, however, procedural principles of particular importance, which reflect the cornerstones in a system based on the rule of law in its substantive sense and require, as such, observance in all types of proceedings independently of the subject matter. The principle of equality of arms is one of these principles. Tribunals shall ensure that both parties are in an equal position to present their case. If there is a systemic superiority of one group of parties, tribunals have to be particularly vigilant and, if necessary, to intervene proactively in order to compensate factual inequality.
5. The principle of equal treatment of the parties is not only to be respected within one and the same proceeding. Treating two types of party – states on the one hand and investors on the other – differently in general, i.e. not just in a specific proceeding, would likewise amount to a violation of this principle. If certain questions concerning the burden and standard of proof arise in one procedural situation typically in the interest of the host state and in another procedural situation typically in the interest of the investor, the tribunals should deal with those questions in the same manner.
6. Investments which are in conformity with the law as far as their object is concerned, but which are corruption-tainted due to corruption that took place when the investment was made lead to discussions about the content of international public policy. Against this background, there would appear to be a practice for tribunals to deny jurisdiction or admissibility of the arbitral proceedings in cases concerning corruption-tainted investments. Actually, this leads to a denial of justice. International public policy, however, does not require such an approach. A comparison with the treatment of corruption cases in commercial arbitration shows this very clearly. The circumstances of the individual cases are too manifold; a one-fits-all solution construed at the level of jurisdiction or admissibility is not convincing. The arbitral tribunals should rather undertake a comprehensive analysis on the basis of the applicable substantive rules of law in order to take into account the particular circumstances of each individual case. State interests can be properly respected via mandatory rules and international public policy.
Full (German) version: Stefan Huber, Die Stellung von Unternehmen in der Investitionsschiedsgerichtsbarkeit (unter besonderer Berücksichtigung von Korruptionsproblemen) – Unternehmen als gleichberechtigte Verfahrensparteien?, in: August Reinisch, Stephan Hobe, Eva-Maria Kieninger & Anne Peters (eds), Unternehmensverantwortung und Internationales Recht, C.F. Müller, 2020, pp. 303 et seq.
News
HCCH Monthly Update: May 2023
Conventions & Instruments
On 12 May 2023, Canada deposited its instrument of accession to the 1961 Apostille Convention. This accession marked a historical milestone: the 1000th treaty action relating to an HCCH Convention or Protocol. The 1961 Apostille Convention, which now has 125 Contracting Parties, will enter into force for Canada on 11 January 2024. More information is available here.
On 16 May 2023, North Macedonia signed the 2019 Judgments Convention. The Convention, which currently has 28 Contracting Parties, will enter into force in September 2023, and for North Macedonia only after the deposit of an instrument of ratification (pursuant to Art. 28(2) of the Convention). More information is available here.
On 16 May 2023, Singapore deposited its instrument of accession to the 1965 Service Convention. The Convention, which now has 81 Contracting Parties, will enter into force for Singapore on 1 December 2023 subject to the Article 28 procedure. More information is available here.
Last minute registration welcome: “The HCCH 2019 Judgments Convention: Cornerstones – Prospects – Outlook”, 9 and 10 June 2023, University of Bonn
Just a quick note to assure you that last minute registration is welcome. All information is available here.
Friendly reminder: Lecture on Private International Law and Voices of Children, organized in cooperation with ConflictofLaws.net
This is a friendly reminder to our co-organised event on next Thursday, free admissions can be registered here.
Online event
When making decisions, adults should think about how their decisions will affect children. Recent years have witnessed, in private international law cases and legislation, the protection of children is increasingly mingled with gender, indigenous issues, refugees, violence, war, surrogacy technology, etc. This is evidenced by the US Supreme Court 2022 judgment Golan v. Saada, the Australian case Secretary, Department of Communities & Justice v Bamfield, the 2023 German Constitutional Court decision, the Chinese Civil Code, the Australia Family Law (Child Abduction Convention) Amendment (Family Violence) Regulations 2022, and developments at the Hague Conference on Private International Law (HCCH Children Conventions) and the United Nations (Convention on the Rights of the Child and its additional Protocols).
On this International Children’s Day, let us join this CAPLUS webinar in cooperation with conflictoflaws.net and American Society of International Law Private International Law Interest Group to hear voices of children in private international law.