- The Importance Of Clarity In Drafting Choice Of Forum Clauses In International Commercial Contracts
- March 2, 2011 | Author: David W. Engstrom
- Law Firm: Thorp Reed & Armstrong, LLP - Philadelphia Office
A recent decision by the Court of Appeals for the Fourth Circuit highlights the importance of well-drafted choice of forum clauses in international commercial contracts. In Albemarle Corp. v. AstraZeneca UK Ltd.,[i] the Fourth Circuit addressed an ambiguous choice of forum clause that made an international agreement “subject to jurisdiction” in England.[ii] The Court held that this clause must be read as requiring exclusive jurisdiction in England since the agreement was “subject to English law” and there was no express language to the contrary. In so ruling, the Court noted that a different result would have happened (i.e., a permissive jurisdiction) if the agreement had been subject to U.S. federal law.
The Albemarle Case
AstraZeneca UK Ltd., based in the United Kingdom, contracted with Albemarle International Corp., a Virginia corporation, to buy a chemical used to manufacture an anesthetic. Albemarle manufactured the chemical in its plant in South Carolina. A dispute arose and Albemarle sued AstraZeneca in South Carolina court. AstraZeneca removed to federal court and moved to dismiss based on the choice of law and choice of forum clause in the contract which provided that the agreement was “subject to English law and the jurisdiction of the English High Court.”
The district court initially denied the motion to dismiss concluding that federal law applied to the construction of the forum selection clause and that under federal law the language of this forum selection clause was only permissive and not exclusive. Six months later, the district court granted AstraZeneca’s motion for reconsideration and then granted its motion to dismiss. The district court stated that its earlier ruling had not addressed AstraZeneca’s argument regarding the application of English law to the forum selection clause and concluded that under English law the forum selection clause is mandatory. Albemarle then appealed to the Fourth Circuit.
The Fourth Circuit’s Analysis
On Appeal, the Fourth Circuit affirmed the district court. The Court of Appeals began its analysis by noting that “when parties to a contract confer jurisdiction and venue on a particular court, . . . federal common law directs courts to favor enforcement of the agreement, so long as it is not unreasonable.”[iii] Under federal law, “an agreement conferring jurisdiction in one forum will not be interpreted as excluding jurisdiction elsewhere unless it contains specific language of exclusion.”[iv] The Court observed that the language of the forum selection clause in this case, “taken by itself and out of context, appears to make designation of the English court permissive.”[v]
Nevertheless, the Fourth Circuit concluded that there was more to this contract than just a choice of forum clause. The contract had a choice of law clause requiring English law, not American federal law, to be applied when construing the agreement. The Court held that applying English law to the choice of forum clause made a difference. “Under English law, when the parties designate the English High Court as an appropriate forum, the designation is mandatory and exclusive.”[vi]
Further, the Fourth Circuit rejected Albemarle’s argument that the forum selection clause was unreasonable because it violated a strong public policy of South Carolina, which enacted a statute that effectively made all forum selection clauses permissive. The Court held that any application of the South Carolina statute was preempted by federal law since federal law regulates the appropriate venue in federal court and applies to the extent a forum selection clause is invoked to change venue. Moreover, the Fourth Circuit observed that the Supreme Court of the United States in The Bremen v. Off-Shore Co. rejected the rationale that underlies statutes like South Carolina’s law as being based on a “provincial attitude regarding the fairness of other tribunals.”[vii] In rejecting Albemarle’s unreasonableness argument, the Fourth Circuit also found no evidence of a strong public policy of South Carolina overriding exclusive forum selection clauses.
Guidance from Albemarle on How to Effectively Exclude or Permit Jurisdiction Elsewhere
An important lesson from Albemarle is that parties negotiating international agreements need to be aware of the impact a choice of law clause can have on interpretation of the choice of forum clause. Because the agreement in Albemarle was subject to English law, the meaning of the choice of forum clause, which normally would have been interpreted as permissive under American federal law, was construed as mandatory because there was no explicit language limiting jurisdiction in England.
Another lesson from Albemarle is the significance of including specific language in the forum selection clause that expressly excludes (or permits) jurisdiction elsewhere.[viii] If this language had been included in the agreement in Albemarle, a dispute over construction of the clause could have been obviated. To avoid ambiguity, we recommend inserting language in the forum selection clause that expressly states that jurisdiction is “sole and exclusive” or “non-exclusive.”[ix] Such language ensures that the intent of the forum selection clause in the agreement is solidly established and not second guessed by a court when a dispute arises over its interpretation. Clarity in drafting choice of forum clauses comports with the policy for enforcing choice of forum clauses in international contracts, which is to give “effect to the legitimate expectations of the parties and eliminate uncertainty and unexpected inconvenience.”[x]
[i] Albemarle Corp. v. AstraZeneca UK Ltd., 628 F.3d 643 (4th Cir. 2010).
[ii] Id. at 645.
[iii] Id. at 649 (citing The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 10, 92 S. Ct. 1907 (1972)). “Under The Bremen, a forum selection clause may be found unreasonable if: (1) [its] formation was induced by fraud or overreaching; (2) the complaining party ‘will be for all practical purposes be deprived of his day in court’ because of the grave inconvenience or unfairness of the selected forum; (3) the fundamental unfairness of the chosen law may deprive the plaintiff of a remedy; or (4) [its] enforcement would contravene a strong public policy of the forum state.” Id. at 651 (citing Allen v. Lloyd’s of London, 94 F.3d 923, 928 (4th Cir. 1996) (summarizing The Bremen definition).)
[iv] Id. at 651. (emphasis original).
[vii] Id. at 652 (citing The Bremen, 407 U.S. at 12, 92 S. Ct. 1907).
[viii] Id. at 651.
[ix] See id. at 651, 653-54; see also Camsoft Data Sys., Inc. v. Southern Electronics Supply, Inc., C.A. No. 09-1047, 2010 WL 3199949, at *1 (M.D. La. Aug. 12, 2010) (forum selection clause is mandatory when clearly demonstrates intent to make particular jurisdiction exclusive and contains such terms as “shall have sole and exclusive jurisdiction”); Textron Fin. Corp. v. Ship and Sail, Inc., C.A. No. 09-617ML, 2010 WL 1912653, at *3 (D.R.I. May 11, 2010) (permissive forum selection clauses, often containing term “non-exclusive,” authorize jurisdiction and venue in designated forum, but do not prohibit litigation elsewhere); Western Refining Yorktown, Inc. v. BP Corp. North Am., Inc., 618 F. Supp. 2d 513, 523 (E.D. Va. 2009) (finding choice of forum clause permissive where it expressly stated that jurisdiction was “non-exclusive”).
[x] Albemarle, 628 F.3d at 654; see also The Bremen, 407 U.S. at 13-14, 92 S. Ct. 1907 (“The elimination of all such uncertainties by agreeing in advance on a forum acceptable to both parties is an indispensable element in international trade, commerce, and contracting.”).