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When are forum selection clauses unconscionable for international parties?

On Behalf of | Sep 27, 2021 | Commercial litigation, Domestic And International Business Litigation, International Commercial Litigation |

Forum selection clauses are extremely common in business transactions and contracts. Whether the parties’ domiciles are in the same country, or whether they’re making a cross-border deal, they can save lots of time, money and effort deciding beforehand where they will settle any dispute that arises between them.

But there are times when courts decide that they cannot enforce a forum selection clause because it is unconscionable – in other words, that it is unreasonable, overly burdensome or coercive to one party over the other. What factors increase the likelihood that a court will find a forum selection clause unconscionable?

Unconscionability is relative

Among the many factors courts look at when deciding whether a clause is unconscionable is the burden that enforcement of that clause would place on all parties involved. If your company is small or mid-sized, then a forum selection clause binding you to arbitration or litigation in a distant state or country can be much more burdensome and difficult than it would be on a larger company.

How burdensome the enforcement of a clause may be isn’t the only element in play. A well-known and often referred-to Supreme Court case, Carnival Cruise Lines vs. Shute, set a precedent for factors that courts should consider when deciding whether to enforce or invalidate a forum selection clause.

Essentially, courts will look to a variety of factors, including the relative bargaining power of each side. If one side had little to no choice in the terms of the contract, then the court is likely to be more lenient with regards to forum selection clauses that specifically inconvenience that party.

This precedent also applies in an international context, although obviously only American courts follow the precedent of the United States Supreme Court. If a party brings a case before an American court regarding a forum selection clause that requires one party to litigate a dispute in a distant country, courts will apply the same principles when deciding whether it is unconscionable or not.

This will often depend upon the sophistication of the parties. For example, a large corporation will likely have the resources to send representatives to any country in the world to litigate a case. A smaller company might not have these means – especially if the case is complex and takes a long time to resolve, thus requiring their representatives to stay for an extended period abroad.

Whether you seek to enforce a forum selection clause against a foreign entity, or you are the one being compelled by such a clause, it’s good to know the types of things that could lead a court to invalidate the clause on grounds of unconscionability, so that you can prepare for all eventualities.