CORPORATE TRANSACTIONS & COMPLIANCE BLOG

Consenting to Jurisdiction: Forum Selection Clauses and the “Minimum Contacts” Requirement

By: Rafael Pereira, COGENCY GLOBAL INC. on Mon, Apr 14, 2014

This blog post is the first of a series which will explore the reasoning behind some of today’s most common choice of law and forum selection options in international contracts and the role of a process agent in those transactions.

Process AgentWhen signing a contract, the parties promise each other that they will fulfill their respective obligations as described in the written agreement, with hopes that each will do so. In the event that doesn’t happen, legal recourse is usually available. More often than not, however, the question where to sue matters just as much as whether or not to sue. This is because not all judicial systems are organized in the same manner. Due to historic, cultural and economic reasons, some jurisdictions have developed a more extensive library of precedents on certain topics than other jurisdictions. As a result, a certain court’s expertise in one given area of law may provide comfort to someone seeking their day in court.

Where to Sue: The “Minimum Contacts” Requirement

For parties to an international commercial or financial contract, the choice of New York or the United Kingdom as the governing law and jurisdiction appears to make sense in view of the sophisticated and well-developed bodies of contract, commercial and business law established by their courts. As it turns out, however, a plaintiff cannot indiscriminately choose where he will file the lawsuit. He or she is, in fact, bound by some restrictions which, in the United States, arise out of the defendant's Fourteenth Amendment federal constitutional right to due process. Generally speaking, the court may not exercise jurisdiction over a defendant unless he or she has "minimum contacts" with the state in which the court sits (i.e., the forum state).

Satisfying the “Minimum Contacts” Requirement by Consent 

When a party to a contract decides to sue in New York, they are automatically and ultimately agreeing to be bound by that court’s decisions in the lawsuit, so the “minimum contacts” requirement is satisfied by tacit consent. While this is true for the plaintiff, the same does not necessarily apply to the defendant who, after all, is being brought to court involuntarily. If the defendant is domiciled in New York, they clearly have enough ties with the state of New York. The same is true for companies which are conducting regular business in New York. New York’s long-arm statute stretches the definition of “who has minimum ties with the state”, to include, for example, persons  who are not domiciled or doing regular business in New York, but who sign a contract to supply goods in New York, or to a person who “owns, uses or possesses any real property situated within the state”. When none of the situations foreseen in the long-arm statute apply, however, the only way a court can entertain jurisdiction over a person is by consent.

Forum Selection Clauses and the Importance of the Role of a Process Agent

In international contracts, the consent to be sued in a certain jurisdiction is usually memorialized in a “forum selection” clause. Since, in many cases, the party to a contract consenting to be subject, for example, to New York jurisdiction does not have a physical presence in the state, it is common practice for the counterparty to require the appointment of an agent who will be able to effectively receive and forward service of process should there ever be a lawsuit arising out of that transaction. Although almost any person can serve as an agent for this purpose, most parties, especially within the context of large cross-border financial transactions, prefer to work with a professional agent for service of process (also referred to as a “process agent” or “contract agent”).

For more information on the role of a process agent, check out our blog post “Top 5 Criteria for Selecting a Process Agent” or download our white paper, Appointing a Process Agent in Cross-Border Transactions.”

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Topics: Process Agent