Diamond Post

 Business & Commercial Newsletter

So You Want to Go to Hawaii to Litigate Your Claim?

As business professionals, you understand that when you enter into a binding contract with another party, the terms of that contract define the respective expectations of the parties and the "rules" governing the transaction, whether it is a service agreement, requirements contract, purchase order or the like.  Since it is now as easy to purchase products from across the country while sitting at your computer, as it is to drive to a neighborhood supplier and negotiate a purchase in person, commercial contracts for the provision of goods or services across state lines often include a clause that dictates where litigation may be filed in the event of a breach.  This is known as a venue or forum selection clause.  There is often much give and take involved in reaching these agreements, and both sides presumably agree and expect that everyone will abide by the terms that are negotiated.  After all, the terms of the agreement, including the venue or forum selection clause, are often a factor in determining the value of the contract and the resulting price of the goods or services exchanged.

If one party does not abide by the terms of the agreement, absent some illegality of the terms themselves, one would assume that the law would assist the non-breaching party in recovering the benefit of his bargain.  When it comes to the often negotiated venue or forum selection clause, however, that is not necessarily the case here in South Carolina.  For example, assume that Company A, who makes widgets in Greenville, South Carolina, enters into a contract to sell its widgets to Company B, a toy manufacturer in California.  In negotiating the terms of the agreement, the parties agree that all legal proceedings arising out of or relating to the purchase order must be initiated exclusively in California, where Company B is headquartered.  Based on complaints about the quality and timely delivery of the widgets, Company B contests that full payment is owed to Company A.  Company A, who maintains that full payment is owed, files a lawsuit against Company B, but instead of filing that lawsuit in California as required under the purchase order, it files suit in the South Carolina Court of Common Pleas.  Surprisingly, under South Carolina law, the Court is likely to allow the suit to go forward here, notwithstanding any objection by Company B that the contractual forum selection clause gives rise to a motion to dismiss for lack of proper venue under Rule 12(b)(3) of the South Carolina Rules of Civil Procedure.

In 1990, the South Carolina Legislature adopted legislation which provides that "[n]otwithstanding a provision in a contract requiring a cause of action arising under it to be brought in a location other than as provided in this title and the South Carolina Rules of Civil Procedure for a similar cause of action, the cause of action alternatively may be brought in the manner provided in this title and the South Carolina Rules of Civil Procedure for such causes of action."  S.C. Code Ann. Section 15-7-120.  A plaintiff such as Company A may argue that even though the contract provides that venue lies exclusively in a state other than South Carolina, this statute makes the forum selection clause permissive only, and that venue is appropriate in South Carolina as an alternative to the venue agreed upon in the contract.  Based on the clear language of the statute and the historically broad interpretation of it, the Court would likely agree.  See Johnson v. Paraplane, 319 S.C. 316, 468 S.E.2d 620 (1996).

In theory, this result may be avoided if the purchase order also includes a choice of law provision stipulating that the terms of the contract and any resulting disputes shall be governed by the laws of another state.  Generally, "parties may substitute the laws of another place and country than that where the contract is entered into, both in relation to the legality and extent of the original obligation and in relation to the respective rights of the parties for a breach or violation of its terms..."  Equitable Bldg. & Loan Ass'n v. Corley, 72 S.C. 404, 52 S.E. 48, 48-49 (1905).  In such cases, the Court should look to the law of the designated state to determine the applicability and enforceability of the forum selection clause.  However, exceptions to this general rule apply, including where the subject of the contract is considered contrary to local policy.  Id.  The question is whether Section 15-7-120 evidences an established local policy against the enforcement of forum selection clauses.  

Because there is no controlling state court authority holding that Section 15-7-120 compels a finding that forum selection clauses are void and against public policy, it is unclear how a South Carolina state court would rule on a motion to dismiss for lack of venue pursuant to a forum selection clause where there is also a valid choice of law provision requiring application of another state's law.  The next time you are buying or selling widgets out of state, you should carefully consider the significance of the venue selection clause.  If you would prefer to litigate here in South Carolina, then Section 15-7-120 is a valuable tool for combating enforcement of an otherwise valid venue selection clause requiring litigation out of state, especially where the law of South Carolina governs.  If, however, you find yourself in Company B's position and seek to enforce a venue selection clause that requires litigation in a state other than South Carolina, you should also include a choice of law provision that requires application of the laws of another state - one that will avoid application of Section 15-7-120 and require enforcement of the venue selection clause.  In addition, if the case is removable to federal court, you should consider filing a timely notice of removal because, as evidenced by the cases cited above, we believe federal courts are more likely to conclude that South Carolina does not have an established policy against enforcing forum selection clauses than a state court considering this same question.
 
If you would like to discuss the content of this newsletter further with GWB attorneys, please contact Howard Boyd at hboyd@gwblawfirm.com or Nicole Buntin at nbuntin@gwblawfirm.com.