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When Is A Forum Selection Clause Mandatory?

by Joshua Hiller on 12/19/11

     A nearly universal feature of most commercial contracts is a forum selection clause.  If drafted correctly, this will allow one to preselect the jurisdiction for a future lawsuit that may occur.  In some cases, a particular forum may be desired because of an advantageous legal standard.  In most cases, the drafter wants any dispute to occur on its “home turf.”  This saves on costs, and can obviate a need to obtain different counsel licensed or working elsewhere.  A recent decision from the North Carolina Business Court, however, highlights the crucial importance of choosing particular language to better ensure enforceability later.  

     In North Carolina, a court will enforce a forum selection clause only if it is mandatory as to where the case must be filed.  Roth v. Penguin Toilets, LLC involved a forum selection clause that indeed appears fairly mandatory on its face, and likely will to many readers.  The defendant Penguin Toilets based its motion to dismiss on the following language in the company's LLC operating agreement:

Any dispute or other legal action concerning this Agreement, including any arbitration or litigation proceedings shall be conducted in Wayne County, Michigan.

     Penguin Toilet apparently chose Wayne County, Michigan as its forum of choice because its company headquarters was situated there.  Penguin Toilet likely assumed that using “shall” would be sufficient enough to render the clause enforceable, and mandatory.  Judge Murphy of the North Carolina Business Court did not agree, and denied Penguin Toilet’s motion to dismiss.

     Penguin Toilet’s former President, who claimed the terms of his employment agreement were breached upon his termination from the company, filed the lawsuit.  Although there was no forum selection clause in the employment agreement, Penguin Toilet argued that the LLC’s operating agreement was incorporated into the employment agreement, thereby triggering the forum selection clause.

     Judge Murphy did not agree.  He found that the former president’s suit concerned his rights under the employment agreement, not his rights as a member of the LLC.  Therefore, Judge Murphy held that the forum selection clause did not become incorporated into the employment agreement at issue in the case. 

     Judge Murphy also ruled that the forum selection clause within the LLC operating agreement was unenforceable, so that even if it was incorporated into the employment agreement, it would not require a dismissal of the case.  A North Carolina court will dismiss a case based on a forum selection clause only if the clause is mandatory on its face as to where the case must be filed.  Mark Group Int’l, Inc. v. Still, 151 N.C. App. 565, 566 S.E.2d 160 (2002).  According to Judge Murphy, Penguin Toilet’s forum selection clause stating, “any arbitration or litigation proceedings shall be conducted in Wayne County, Michigan,” was not “mandatory.” 

     Citing Mark Group, Judge Murphy noted that the North Carolina Court of Appeals has made clear that to be mandatory, a clause must use terms such as “exclusive,” “sole,” or “only.”  The word “shall” is not enough.  Moreover, the Committee on Rules of Practice and Procedure drafting revised Rules of Federal Evidence recently explained, “‘shall’ is no longer generally used in spoken or clearly written English.  The restyled rules replace ‘shall’ with ‘must,’ ‘may,’ or ‘should,’ depending on which one the context and established interpretation make correct in each rule.”

     This decision should signal a warning for the use of "shall" in other contexts.  I have certainly seen it used in many other clauses in which the intent was to make some performance or obligation mandatory.  Although this case concerned a forum selection clause, we should be careful with the use of "shall."  We may find that it will not have as strong of a meaning as we once thought.

     On a final note, for contracts entered into in North Carolina, Judge Murphy’s decision and lesson may be academic for clauses seeking litigation outside of the state.  For a contract entered into in North Carolina, N.C. Gen. Stat. §22B-3 applies.  Under this provision of the law, a forum selection clause is against public policy—and unenforceable—if it requires litigation outside of North Carolina and it’s “in a contract entered into in North Carolina.” 

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