Most forum selection clauses refer specifically to the courts of a particular jurisdiction. Floating forum selection clauses are different. A floating clause does not reference any court by name. Instead, it ties the choice of forum to a mutable fact that can change after the contract is made. The possibility that the identity of the chosen forum can change between the time of signing and the time of litigation explains why these provisions are described as “floating.”
This post first explains why a company might choose to write a floating forum selection clause into its contracts. It then examines when U.S. courts will and will not enforce three different types of floating clauses. The post concludes by encouraging U.S. judges take a step back, consider floating clauses holistically, and articulate a set of global principles for determining when they should be given effect.
There are at least three reasons why a company might decide to write a floating forum selection clause into an agreement.
First, a floating clause may provide the company with an edge in future litigation. It is generally considered advantageous for a company to litigate in its home jurisdiction. A floating clause helps to ensure that a company will retain this advantage even if it moves its headquarters to another state. Consider the aerospace company Boeing. It was originally headquartered in Washington. It moved its headquarters to Illinois in 2001. It then moved its headquarters again to Virginia in 2022. If Boeing had written a forum selection clause into its agreements selecting the jurisdiction where its principal place of business was located, its home court advantage would have shifted seamlessly from Washington to Illinois to Virginia following each of its moves without any need to revise its prior agreements.
Second, a floating clause may facilitate the creation of a market for contracts. Consider a scenario where an Ohio lessor enters into a lease agreement with a Pennsylvania lessee. The lessor want to assign its right to receive payments under lease to an Illinois company. The Illinois company is more likely to take on the lease if it contains a forum selection clause that allows it to sue the Pennsylvania company in Illinois. In recognition of this fact, the Ohio company may write a forum selection clause into the agreement whereby the lessee consents to personal jurisdiction in the courts of the home jurisdiction of any future assignee. If the contract is assigned, the identity of the chosen jurisdiction will change.
Third, a floating clause may help foreign companies attract U.S. business. It is increasingly difficult to obtain personal jurisdiction over foreign companies in the United States. This state of affairs may lead U.S. companies to prefer domestic counterparties for certain types of transactions. To counteract this preference, a foreign company might agree to submit to the jurisdiction of any court of competent jurisdiction within the United States, thereby giving the U.S. company the ability to obtain personal jurisdiction over that company in the state of its choice. This is perhaps the purest form of floating clause. The identity of the chosen forum will remain undetermined until the moment the plaintiff files suit.
The U.S. Supreme Court has never had occasion to decide a case involving a floating forum selection clause. The Court has, however, long recognized that ordinary, non-floating clauses are useful to the extent that they provide vital certainty to commercial transactions by “dispelling any confusion about where suits arising from the contract must be brought and defended.” It is not altogether clear that floating clauses advance this purpose. Instead of identifying a court by name, the floating clause ties the choice of court to a mutable fact that is, by definition, subject to change. If the identity of the forum can change between the time when the contract is signed and the time of litigation, this creates uncertainty as to where litigation shall occur. This uncertainty may, in turn, undermine the benefits that flow from enforcing the forum selection clause in the first place.
Most U.S. courts evaluate whether a floating clause is enforceable by asking whether that clause is “reasonable.” Inevitably, the reasonableness inquiry turns on the precise facts presented. Over the years, however, U.S. courts have developed a number of rules of thumb to guide their analysis. The discussion below explores these rules in the context of three species of floating clauses: (1) principal place of business, (2) assignment, and (3) unilateral or service of suit clauses.
Principal Place of Business
When a floating clause ties the forum to the location of the principal place of business of one contracting party, and when that location changes between the time of signing and the time of litigation, the courts have generally held that the clause is enforceable The hassle of relocating one’s corporate headquarters to a different state is significant enough that the risk of strategic behavior with respect to the clause is low. Accordingly, these clauses are usually deemed reasonable and given effect.
The floating clauses that have generated the most controversy are ones that tie the choice of forum to the home jurisdiction of a contract assignee. In these cases, the identity of the chosen forum can change, not as a result of any corporate relocation, but rather as a result of the contract being assigned to a different person post-signing. Since it is much easier to assign a contract to another person than it is to relocate one’s principal place of business, these provisions create considerably more uncertainty that the clauses discussed above. They also create more opportunities for strategic behavior.
Floating clauses involving assignment have attracted a great deal of attention due to the activities of a company, NorVergence, that engaged in extensive fraud in leasing telecommunications equipment to thousands of small businesses. After each lease agreement was executed, NorVergence would assign it – and the associated payment stream – to one of many financial institutions scattered across the United States. When the equipment stopped working, and the small business stopped making payments on the lease, the institution to whom the lease had been assigned would bring a lawsuit in the institution’s home jurisdiction to collect the remaining payments. The financial institution relied on forum selection clauses in the original leases choosing courts in the assignee’s home state to obtain personal jurisdiction over the defaulting lessees. As a result, hundreds of businesses were sued in distant states for failing to make lease payments on equipment that was nonfunctional.
The enforceability of these floating clauses was challenged in proceedings across the United States. A majority of courts concluded that the clauses were enforceable. These courts reasoned that while there was copious evidence that NorVergence had engaged in fraud in making the leases, there was no evidence that the company’s fraud was specifically directed at the forum selection clause. They also noted the importance of enforcing contracts as written, pointed out that the parties challenging the clauses were businesses rather than individuals, and observed that enforcing these clauses served to facilitate a market for contracts.
A minority of courts held that these clauses were not enforceable. Some of these courts took the position that the fraud committed by NorVergence was so pervasive that the entire agreement – including the forum selection clause – was unenforceable. Other courts pointed out that NorVergence had never disclosed to its counterparties its intent to immediately assign the lease and that these counterparties had no way to determine where they were submitting to jurisdiction at the time of signing. Other courts concluded that the lack of certainty as to the identity of the chosen forum foreclosed any possibility of enforcement.
Unilateral / Service of Suit
Some floating clauses stipulate that litigation shall occur in any court unilaterally chosen by one contracting party after the dispute arises. As one court put it: “These clauses do not tie the selection of a forum to any mutable and identifiable fact, only to the whim of the defendants’ choice.” These clauses are typically not enforced by U.S. courts because they provide no certainty as to the identity of the forum. Unilateral clauses are seen as particularly unfair when applied to individuals and small businesses. There is, however, one type of unilateral clause that is routinely enforced — the service of suit clause
A service of suit clause is a contractual provision whereby one party – typically an insurance company – agrees to submit to personal jurisdiction in any state in the United States where the counterparty – the insured – wishes to sue it. Foreign insurance companies routinely write these provisions into contracts with their U.S. customers because, absent the clause, it is unclear whether they would be subject to jurisdiction in the United States. The purpose of the clause is to attract business from U.S. businesses by reassuring them that they will be able to sue the foreign insurer in the United States in the event of a dispute.
Service of suit clauses are routinely given effect notwithstanding the fact that they do not name a particular forum. There are two reasons why. First, the parties to these transactions are typically large, sophisticated policyholders and insurance companies who understand exactly what they’re getting into. Second, the contracting party who will be most disadvantaged by the clause – the foreign insurer – is the one drafting the agreement. This is not a situation where the drafter is forcing its counterparty to accept a provision that benefits the drafter at the counterparty’s expense. On these facts, most U.S. courts have held that a foreign insurer is subject to personal jurisdiction in the U.S. state where the insured initiates the lawsuit.
The practice of U.S. courts when it comes to floating forum selection clauses is far from uniform. Review of the relevant cases suggests that these courts have yet to settle on a coherent set of principles to address the issues presented by these clauses. It is not clear, for example, why unilateral clauses are generally verboten while assignment clauses are generally enforced. The defendant is, after all, just as much in the dark about the identity of the forum in the first case as the second. The special treatment given to service of suit clauses, while understandable in context, also sits uneasily with the notion that these clauses should only be enforced when they provide certainty as to the chosen forum ex ante. As floating forum selection clauses proliferate, it is possible that future decisions will develop an enforcement framework that is more intellectually coherent. Until that day arrives, however, drafters and litigants must navigate around the patchwork of rulings discussed above.
This post comes to us from Professor John F. Coyle at the University of North Carolina School of Law. It was first published on March 13, 2023, on the Transnational Litigation Blog.