A Delaware Forum Selection Clause Can Help Delaware Businesses Manage Litigation Risk

By Bradley W. Voss

An installment in the series “Why Delaware: Spotlight on Corporate Law in the First State.” Authors include Delaware corporate attorneys and judges. Special thanks to The Delaware Court of Chancery Rules Committee and to the Articles Subcommittee for their contributions. 

Delaware recognizes the value of honoring the choice of forum selected by sophisticated contracting parties.  Relying in part on U.S. Supreme Court authority, the Delaware Supreme Court has written that:

“Uncertainty and possibly great inconvenience to both parties could arise if litigation could be maintained in any jurisdiction. 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.”  Nat’l Indus. Grp. (Holding) v. Carlyle Inv. Mgmt. L.L.C., No. 596,2012 (Del. May 29, 2013) (citing M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972)).

Thus, when not unreasonable, unjust, or prohibited by other law, a forum selection clause that dispels any confusion about where suits must be brought and defended can help a Delaware entity manage its litigation risk.

Parties often select Delaware as the venue to resolve their dispute.  Some of the common arguments in favor of selecting Delaware courts include the following:

• Efficiency. In the Delaware Court of Chancery, cases are decided by specialist judges, not juries, often utilizing expedited or summary procedures.  The Delaware Superior Court, which is consistently ranked highly for fairness and efficiency, has a Complex Commercial Litigation Division which focuses on high-stakes commercial suits for money damages.
• Flexibility. The Delaware Court of Chancery has described Delaware’s commercial law as “more contractarian” than that of other states and has refrained from adopting a “one size fits all” approach to litigation management.
• Finality. Judgments of the Court of Chancery and Superior Court are subject to direct appeal to the Delaware Supreme Court, not to an intermediate court.  Further, litigating in Delaware may be more desirable than arbitration, which often entails collateral litigation(s) over the scope or propriety of the arbitration itself, and the validity of the award after the arbitration has been completed.

The contract at issue in National Industries Group (Holding) v. Carlyle Investment Management LLC, noted above, contained a mandatory forum selection clause providing, among other things, that the “courts of the State of Delaware shall have exclusive jurisdiction” over any action with respect to the relevant agreement, that the counterparty “irrevocably waives, to the fullest extent permitted by law, any objection . . . to the jurisdiction of, any and each of such courts,” and that the counterparty “submits to such jurisdiction.”  The Delaware Supreme Court enforced the forum selection clause and ruled that the clause conferred personal jurisdiction over the counterparty who agreed to it freely and knowingly, notwithstanding the counterparty’s foreign domicile and the possibility that the determinative legal issue would be governed by foreign law. According to the Court, a forum selection clause is presumptively valid and may be enforced through an injunction—a power belonging to the Court of Chancery and traceable to 15^th century England.

A forum selection clause may be used to help manage litigation risk, not only in the context of an arms-length contract between sophisticated parties, but also between a Delaware corporation and its dispersed shareholders.  Where the corporation’s certificate of incorporation grants the board of directors authority to adopt bylaws, the Court of Chancery ruled that the board has power under the Delaware General Corporation Law to adopt a bylaw requiring litigation concerning the corporation’s internal affairs to be conducted exclusively in Delaware courts, even in the absence of a shareholder vote to approve it. Boilermakers Local 154 Ret. Fund v. Chevron Corp., C.A. Nos. 7220-CS and 7238-CS (Del. Ch. June 25, 2013).  Although the Delaware Supreme Court has not ruled on that question, and a shareholder may successfully challenge the application of such a clause in some situations, a strong argument for enforcement exists, especially where the forum selection bylaw has been approved by shareholders, or where the clause is embodied in the company’s certificate of incorporation.

There is express authority in the Delaware Statutory Trust Act for trustees and beneficial owners of a statutory trust to agree to an exclusive Delaware forum selection clause.  With respect to alternative entities, Delaware’s statutory policy is to give maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements and limited partnerships.

One of the primary benefits of selecting Delaware as your company’s charter state is the potential for dispute resolution in Delaware’s courts.  A well-drafted Delaware forum selection clause can help minimize the chance that your company will be deprived of that benefit.  This is an evolving area of law, and detailed legal analysis is imperative.  Parties should consult with their Delaware counsel about their specific circumstances and goals with respect to these issues or any legal or business undertaking.

Bradley W. Voss is a partner at Pepper Hamilton LLP in Wilmington, Delaware.  This publication may contain attorney advertising, should not be construed as legal advice or opinion, and is not intended to create or constitute a lawyer-client relationship.