Special Order Your Forum Selection Clause

The differing approaches to contract drafting have been likened to the contrasting jingles used by McDonalds and Burger King during the Burger Wars of the 1970s.[1]  McDonalds advertised that their Big Mac could always be counted upon to contain the exact same ingredients every time you ordered: “Two all-beef patties, special sauce, lettuce, cheese, pickles, onions, and a sesame seed bun.”  Burger King, on the other hand, assured its customers that they would customize your Whopper to contain whatever available ingredients you wanted: “Hold the pickles, hold the lettuce, special orders don’t upset us.  Any way you think is proper; have it your way.”  The benefit of the McDonalds approach to contract drafting, of course, is reliable consistency.  The problem with the McDonalds approach, on the other hand, is the possibility that there are missing or ineffective terms/ingredients contained in your comfortable form agreement that may not deliver the result you intend or need.  The benefit to the Burger King approach, in contrast, is a careful tailoring of your agreement to the specific deal and consistent updating of your forms to react to caselaw developments.  But recent scholarship suggests that there is not much evidence of deal lawyers following the Burger King approach, and lots of evidence of lawyers following the McDonalds approach, particularly in the area of boilerplate provisions.[2]

So persistent is the stickiness of favored contract templates that Professor Julian Nyarko concluded in a recent, heavily data-driven, and as yet unpublished article, Stickiness and Incomplete Contracts, that “whether or not a contract includes a forum selection clause is almost exclusively driven by the template that is used to supply the first draft.”[3]  Thus, despite the importance of contractually selecting a forum to govern all disputes arising from a contract,[4] many agreements do not just fail to properly word their forum selection clauses to cover all potential disputes (both in contract and in tort), but fail to include a forum selection clause at all (simply because no such clause appeared in the first draft). This is particularly surprising given that a forum selection clause can be outcome determinative in defending or prosecuting a claim under, arising from, or related to a contract governed by a selected state’s law.[5]

And a recent Delaware ruling on an anti-suit injunction attempting to prevent a suit being prosecuted in Texas illustrates the continued need for vigilance in the wording of forum of selection provisions (assuming one was included at all of course).  In Brown Robin Capital, LLC, et al. v. The Anschutz Corp., et al., C.A. No. 2019-0456-JRS, transcript (Del. Ch. Aug. 14, 2019; filed Sept. 4, 2019), the sell-side of a Delaware law governed business acquisition agreement sought an injunction to prevent the buy-side from pursuing a suit they had filed in Texas based on allegations that the sell-side had made fraudulent representations.  Vice Chancellor Slights noted that “[u]nder binding Delaware Supreme Court precedent, a party suffers irreparable harm when forced to litigate in a jurisdiction other than the one selected by a valid forum selection clause.”  But the issue was whether the particular forum selection clause in the parties’ business acquisition agreement mandated suit in Delaware for claims premised upon fraud.  The forum selection clause (which was combined with the choice of law clause) read as follows:

This Agreement, and the Transaction Documents, shall be exclusively construed and interpreted according to the Laws of the State of Delaware, without regard to its conflict of law provisions which would require the application of the Laws of a state other than Delaware, and each Party irrevocably consents to the exclusive personal jurisdiction and venue of the Chancery Court of the State of Delaware (or if such a court shall not have jurisdiction, any other state or federal court sitting in such State).

Because the choice of law component of this clause limited itself to the construction and interpretation of the agreement, and did not include broad language making the governing law apply to other matters “arising from,” “relating to,” or “in connection with,” the agreement, and because the choice of forum clause was part of that limited regime, Vice Chancellor Slights interpreted the choice of forum clause as only mandating a Delaware forum for claims directly related to the construction and interpretation of the agreement. The buy-side argued that its fraud claims did not involve the construction or interpretation of the agreement.  But despite having concluded that the forum selection clause was “narrow,” Vice Chancellor Slights nonetheless granted the injunction against the Texas suit because the fraud claims would require construction and interpretation of the agreement:

Parsing the language of the agreement to decide exactly what was represented, what was disclaimed, and how to apply Delaware law to the risk allocation portions of the agreement will, in all likelihood, require considerable contract construction.

In this instance, given the contract they entered into, the viability of the fraud claims will be inexorably linked to a construction of the contract that will be governed by Delaware law and the parties agreed to litigate those issues in Delaware.

But it took a lot of briefing and a substantial amount of analysis to reach this conclusion, all of which could have been avoided with the use of broad language, rather than the narrow language that it is often found in favored older templates (if a forum selection clause is found in some of these templates at all).[6]  And what if this issue had been argued in the Texas suit based on a motion to dismiss?  Would the outcome have been the same?  Reacquaint yourself with Professor John Coyle’s excellent forum selection drafting chart in his recent article, Interpreting Forum Selection Clauses.[7]  That chart was specifically designed to ensure that the selected forum clearly covers all the claims you want to cover and thereby avoid the kind of analysis and construction required by Vice Chancellor Slights.

There is no need to accept the standard fare served up by the other side in their first draft, even when it comes to so called boilerplate provisions.  Add the “proper topper;” some extra ketchup or a few more pickles perhaps, and get it right.  And if you run into the situation where there simply is no forum selection clause to add toppings to, forget Burger King or McDonalds; and instead adopt Wendy’s approach and demand to know “Where’s the Beef?!!!”

Endnotes    (↵ returns to text)
  1. See Glenn D. West & S. Scott Parel, Revisiting Material Adverse Change Clauses—Private Equity Buyers Should (But Mostly Can’t/Don’t) Special Order their Macs, Weil Private Equity Alert, July 2006, available here.
  2. See e.g., Stephen J. Choi, Robert E. Scott, and G. Mitu Gulati, Revising Boilerplate: A Comparison of Private and Public Company Transactions (unpublished October 21, 2019 draft), Columbia Law and Economics Working Paper No. 611, available here.
  3. Julian Nyarko, Stickiness and Incomplete Contracts (unpublished September 1, 2019 draft), available here.
  4. See Glenn West, Not So Funny Things That Can Happen on the Way to Your Contractually Selected Forum, Weil Insights, Weil’s Global Private Equity Watch, February 13, 2018, available here.
  5. See Glenn West, “Location, Location, Location”—The Three Things that Matter the Most in Real Estate May Also Matter the Most in Ensuring the Proper Application of All of Your Contractually Chosen Law, Weil Insights, Weil’s Global Private Equity Watch, August 14, 2019, available here.
  6. Vice Chancellor Slights considered what he termed a “broad forum selection clause” in a more recent decision decided just last week.  See PPL Corp. v. Riverstone Holdings LLC, C.A. No. 2018-0868-JRS, 2019 WL 5423306 ( Del. Ch. Oct. 23,2018).  Prior posts to Weil’s Private Equity blog have recommended broadening forum selection and choice of law clauses for some time.  See e.g., Glenn West, Making Sure Your “Choice-of-Law” Clause Chooses all of the Laws of the Chosen Jurisdiction, Weil Insights, Weil’s Global Private Equity Watch, September 5, 2017, available here.
  7. John F. Coyle, Interpreting Forum Selection Clauses, 104 Iowa L. Rev. 1791, 1851 (2019), an earlier draft of which was discussed in Glenn West, Not So Funny Things That Can Happen on the Way to Your Contractually Selected Forum, Weil Insights, Weil’s Global Private Equity Watch, February 13, 2018, available here.