Are you undermining your own contract?

Why where you sign can matter as much as what you sign.

Let’s say you thought out all the details of your contract. You’ve laid out the price, the specifications, and you’ve even thought ahead for those “what if” moments that could arise in the future: What if the business relationship goes sour and we need to go to court? Where should we file our lawsuit?

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The solution to this ambiguity, of course, is a Forum Selection clause. The forum selection clause allows both parties to choose the site of any future legal fights. Just like we know Super Bowl XLVII will be played in New Orleans in February 2013, the forum selection clause can let the parties know exactly where their legal battle will have to be fought.

For example: George’s company, the Georgia Sweet Tea Brewing Company is located in Atlanta, GA. His contracts contain a forum selection clause that says: “Any action or proceeding by either of the parties to enforce this Agreement shall be brought only in a state or federal court located in the state of Georgia, city of Atlanta.” Recently George traveled to Charlotte, North Carolina to meet with Barbie, owner of Barbie’s NC-Style Barbecue. Over a lunch of pulled pork sandwiches and hushpuppies, Barbie and George signed a contract whereby Barbie agreed to exclusively serve Georgia Sweet Tea Brewing Company beverages in her restaurant.

Five months later, George encountered refrigeration problems at the Georgia Sweet Tea Brewing Company and was unable to fulfill Barbie’s beverage supply orders, causing her to lose significant profits. Barbie stomped down the street and filed a lawsuit against George in the Mecklenburg County Courthouse in Charlotte, NC. George looked at his contract and said, “Barbie, you have to come sue me in Atlanta! You can’t make me travel back up there to fight about this!”

What Result? Even though George’s contract lists “Atlanta, GA” as the “only” forum for their disputes, George will likely lose this point and will have to fight Barbie in Charlotte.

Why? As a general rule, North Carolina will recognize the parties’ selected forum. However, there is a significant exception to this rule – especially when the contract itself was entered into in the State of North Carolina. N.C. Gen. Stat. § 22B-3 states, in pertinent part, “…any provision in a contract entered into in North Carolina that requires the prosecution of any action or the arbitration of any dispute that arises from the contract to be instituted or heard in another state is against public policy and is void and unenforceable.” (emphasis added)

This means when you enter into a contract in North Carolina, even though the contract has a forum selection clause that requires you to fight somewhere other than North Carolina, that forum selection clause is void and unenforceable.

In our example above, when George and Barbie signed their contract in Charlotte, it was “entered into in North Carolina.” Under N.C.G.S. §22B-3, the courts of North Carolina cannot be prevented from hearing this lawsuit. Barbie could gain a competitive advantage over George here: he has to travel away from home, which may cost him more time and money than if he were able to fight in Atlanta. George may also need to hire a NC-based attorney to defend him, instead of his local lawyer in Georgia.

Best regards
und viele Grüße aus Charlotte
Reinhard von Hennigs