Interpreting Foreign Forum Selection Clauses
April 27, 2022
What law should a court use to interpret a forum selection clause selecting the courts of a foreign country when the contract also contains a choice-of-law clause selecting the law of that same country? A pair of federal court decisions—one from Illinois, and one from California—recently addressed this question. Neither of these decisions is likely to be excerpted in law school casebooks. The Illinois decision is conceptually sound but riddled with errors. The California decision is even more problematic.
The Illinois Case
In NC Capital LLC v. Metabolomic Technologies, Inc, a U.S. firm (NC Capital) asserted tort and statutory claims against a Canadian healthcare company (Metabolomic) in federal court in Illinois. The litigants had previously entered into an investment agreement that contained a choice-of-law clause selecting the laws of Alberta, Canada. The forum selection clause in that same agreement read as follows:
The parties irrevocably attorn to the exclusive jurisdiction of the courts of the Province of Alberta.
The question before the court was whether this clause swept broadly enough to encompass the non-contract claims asserted by the plaintiff against the defendant. To answer this question, the court first had to determine whether it should apply the law of Alberta or the law of the United States to interpret the forum selection clause.
The correct approach is to apply the law of Alberta. The parties had, after all, made clear in their choice-of-law clause that the contract was to be interpreted in accordance with the law of Alberta. Since the parties always have the power to select the law to govern the interpretation of their agreement, the existence of the choice-of-law clause should have resolved the issue. Nevertheless, the district court devoted several paragraphs in its opinion explaining how the issue would have been resolved under federal common law. This analysis was wholly unnecessary, as the agreement clearly stated that it was to be governed by the law of Alberta. It is also problematic because there is no general federal common law of contracts, an issue discussed at length below.
The district court then set about interpreting the clause with an eye to the law of Alberta. The court correctly looked to prior cases from Canada to answer this question. Unfortunately, the court repeatedly referenced cases that were either irrelevant or non-binding. It first discussed a Canadian Supreme Court case (Douez v. Facebook) that does not address the question whether a forum selection clause covers non-contractual claims. It then devoted several paragraphs to a discussion of a case from Saskatchewan. The problem, of course, is that the choice-of-law clause did not select the law of Saskatchewan to govern the agreement. It selected the law of Alberta.
At no point does the district court reference the seminal decision from the courts of Alberta that addresses the relevant issue. (I found this case after five minutes of research on LexisNexis.) The 2017 case is Meta4Hand Inc v Research in Motion Ltd. The key passage is here:
[I]f a contract is governed by a forum selection clause, then related [non-contract] claims are presumptively included in the ambit of the forum selection clause unless express language to the contrary is included, or if it would be unreasonable to interpret the clause to cover related claims.
This passage decisively resolves the issue in favor of the Canadian defendant. Under the law of Alberta, an exclusive forum selection clause should generally be construed to cover non-contract claims so long as they are related to the contract. Since the claims at issue in this case were related to the agreement, they are covered by the clause. The case should have been dismissed on the basis of the Alberta forum selection clause.
To be fair, this is the conclusion that the federal district court in Illinois ultimately reached. The problem is that the court made this decision by looking to federal common law and the law of Saskatchewan. If either of these other two bodies of law had adopted interpretive rules for forum selection clauses that were different than those followed in Alberta, the case could have gone sideways very quickly.
The California Case
In Earthmade Products, LLC v. Botanicals Internacional S.A. de C.V., a U.S. buyer (Earthmade) contracted to purchase 4.9 million bottles of hand sanitizer from a Mexican seller (Botanicals). Their agreement contained a Mexican choice-of-law clause and a Mexican forum selection clause:
For the interpretation and performance of this contract, as well as for anything not expressly stipulated herein, ‘The Parties’ will resolve it by mutual agreement, and in the event of disputes that are not resolved by ‘The Parties,’ they submit to the competence and jurisdiction of the laws and courts of the ordinary jurisdiction of the State of Mexico, expressly waiving any other venue that may correspond to them due to their present and future domiciles, also waiving the international protection that they may be entitled to under the International Treaties to which their countries of origin are parties (emphasis added).
When the U.S. buyer brought several non-contract claims relating to the contract in federal court in California, the Mexican seller sought to have the case dismissed on the basis of the forum selection clause. The interpretive issue, again, was whether the clause was broad enough to encompass non-contract claims. To resolve this interpretive issue, the court first had to determine, again, whether it should apply the law of the foreign country named in the choice of law clause or the law of the United States.
The correct approach here is to apply the law of Mexico, per the choice-of-law clause. This is not what the district court did. Instead, it looked to U.S. cases and U.S. law to determine the meaning of the forum selection clause. Remarkably, the decision does not contain a single reference to Mexican law. This approach does violence to basic principles of contract interpretation. The parties had made clear in their choice-of-law clause that the contract was to be interpreted in accordance with the law of Mexico. The court ignored this directive.
The district court’s analysis is also troubling because the court applied federal common law to determine the scope of the clause. There is no justification for this approach because there is no general federal common law of contracts. While the Supreme Court has held that the enforceability of forum selection clauses may be governed by federal law, it has never held that the interpretation of these clauses is similarly governed by federal law. The contracting parties always have the ability to revise their forum selection clauses to make their meaning clear. When they fail to do so, the courts should look to state law—not federal law—to determine the meaning of the clause just as they would with any other contract provision. There is, in short, no uniquely federal interest here that would justify the creation of a federal common law of contract interpretation for forum selection clauses.
The analysis by the district court is thus imperialistic across two dimensions. First, it promotes U.S. law at the expense of Mexican law. Second, it promotes federal law at the expense of state law. To be sure, there is precedent from the Ninth Circuit stating that the federal courts should apply federal law to interpret forum selection clauses. In none of those cases, however, did the contract at issue contain a choice-of-law clause. A different district court in the Ninth Circuit recently concluded that it was appropriate to apply the law of the jurisdiction named in the choice-of-law clause to interpret a forum selection clause. This prior case law cannot, therefore, explain the refusal on the part of this district court to look to the law of Mexico to determine the scope of a forum selection clause selecting the courts of Mexico, per the Mexican choice-of-law clause in the agreement.
When a contract contains a foreign choice-of-law clause and a foreign forum selection clause, U.S. courts should look to law of the jurisdiction named in the former to ascertain the scope of the latter. The language used in forum selection clauses varies from country to country. The interpretive rules used to determine the scope of ambiguous forum selection clauses likewise vary from country to country. To apply U.S. interpretive rules to determine the meaning of a clause drafted with an eye to foreign law is to run the risk of misinterpreting the clause.