RULE: A contract clause between a prime contractor and a subcontractor dealing with the location of future lawsuits, a forum selection clause, must be carefully drafted so that it is enforced the way the parties had expected.

Almost all contracts between a prime government contractor and a subcontractor have a “forum selection” clause describing the location of the courthouse the parties want to use in case they need to sue each other in the future. These clauses are especially important because it’s rare that the prime and the sub are located in the same jurisdiction. So rather than fight first over where to sue each other, they agree in the subcontract that any lawsuits will be in a specific location.

You would think that a provision stating that “the parties agree that the courts of the state of Maryland shall have personal jurisdiction” over the case requires the parties to sue only in Maryland. That’s not true. As a recent decision of the U.S. Court of Appeals for the 4th Circuit made clear, federal courts will interpret this type of language as allowing a lawsuit in Maryland but not requiring the lawsuit to be in Maryland.

A company in Virginia had a contract with a company in the United Kingdom for buying an anesthetic drug. The agreement between the two parties had a forum selection clause that stated that the contract was “subject to” the jurisdiction of the English High Court. After the parties had a disagreement about how the contract should be carried out, the Virginia company sued the UK company in South Carolina Federal court. The judge, however, concluded that she did not have jurisdiction over the case because the forum selection clause showed that the parties had agreed that lawsuits should be filed only in England.

The Virginia company appealed the decision to the Court of Appeals, arguing that federal law interpreting forum selection clauses that seemed to be mandatory were instead merely permissive. In other words, a federal court would interpret a clause that “Maryland shall have personal jurisdiction” as simply meaning that the parties agreed that Maryland was one acceptable jurisdiction. According to federal law, if parties want to make a forum selection clause mandatory, the parties have to write the clause more carefully. Specifically, the parties have to make the forum selection clause clearly state that only the state of Maryland would have jurisdiction over the lawsuit.

The Court of Appeals disagreed and concluded that the case was properly one for the English court system. In reaching this conclusion, it first distinguished between a choice of law clause and a forum selection clause. “We begin by noting that when parties to a contract confer jurisdiction and venue in a particular court, as a general matter federal common law directs courts to favor enforcement of the agreement, so long as it is not unreasonable.”

But what did the particular agreement at issue here state? In answering that question, judges must be guided by two principles: that the particular language of a clause must be followed and, in interpreting these clauses, the issue is whether the clause “authorizes another forum as an alternative to the forum of the litigation or whether it makes the designated forum exclusive.”

The appeals court noted that precedent concluded that a clause providing that either party “shall be free” to use a particular court did not mandate that the parties use that particular court. Summing up the law, “an agreement confirming jurisdiction in one forum cannot be interpreted as excluding jurisdiction elsewhere unless it contains specific language of exclusion.” So for example, a forum selection clause stating “jurisdiction shall be in the state of Colorado” was mandatory; so was a statement that jurisdiction shall be “only” in a particular jurisdiction. Accordingly, unless the clause was “unreasonable,” the case had to be tried in England.

The court went on to discuss the policy behind this rule: “enforcement gives effect to the legitimate expectations of the parties and eliminates uncertainty and unexpected inconvenience.” It cited precedent that these provisions “specifying in advance the form in which dispute shall be litigated and law to be applied are therefore an almost indispensable precondition to achievement of the orderliness and predictability essential to any international business transaction.”

Albemarle Corp. v. Astrazeneca UK LTD, U.S. Court of Appeals for the Fourth Circuit, No. 10-1000, September 21, 2010.