What determines if a contract’s forum selection clause is permissive or mandatory?

Am. First Fed. Credit Union v. Soro (Nev. Supreme Ct. – Sep. 24, 2015)

The issue is whether a contract clause stating that the parties “submit themselves to the jurisdiction of” another state results in a mandatory forum selection clause requiring dismissal of a Nevada action.

In 2002, America First Federal Credit Union (the credit union) loaned $2 9 million, secured by real property in Mesquite, Nevada, to borrowers for the purchase of a liquor/mini- mart. The borrowers defaulted, and the credit union held a trustee’s sale, resulting in a deficiency on the loan balance of approximately $2.4 million. The Utah-based credit union sued the borrowers in Clark County to recover the deficiency.

The borrowers moved to dismiss the action under NRCP 12(b)(1), arguing that the credit union could not sue to recover the deficiency in Nevada and citing several clauses in the Commercial Promissory Note and Business Loan Agreement to support their argument. An Applicable Law clause in the loan agreement stated that “[t]his Agreement (and all loan documents in connection with this transaction) shall be governed by and construed in accordance with the laws of the State of Utah.” The loan agreement also contained the following: “Jurisdiction. The parties agree and submit themselves to the jurisdiction of the courts of the State of Utah with regard to the subject matter of this agreement.” A clause in the note stated: “If there is a lawsuit, Borrower(s) agrees to submit to the jurisdiction of the court in the county in which Lender is located.”

The district court agreed with the borrowers and granted the motion to dismiss. The district court found that the note and loan agreement contain language which clearly expressed the parties’ intent to submit litigation relating to the Agreement and the Note, to the jurisdiction of the State of Utah. The credit union appealed.

On appeal, the credit union argued that the district court erred in enforcing the clauses in question to preclude its complaint for a deficiency action. More specifically, the credit union argued that the jurisdiction clauses here were permissive, and while the complaint could have been brought in Utah, the clauses did not mandate that Utah was the exclusive forum. In response, the borrowers contended that whether a forum selection clause is mandatory or permissive is a matter of contract interpretation, and therefore, the clauses were ambiguous and must be construed against the credit union as the contract drafter.

The Supreme Court of Nevada noted that it has not yet distinguished between mandatory and permissive forum selection clauses. In Tuxedo International, Inc. v. Rosenberg, 127 Nev. 11, 251 P.3d 690 (2011), the court reversed a district court’s grant of a motion to dismiss based on the defendants’ argument that any litigation must be brought in Peru. There, the court remanded the case to the district court to determine which of three separate forum selection clauses potentially controlled the dispute. In analyzing the clauses, the court noted that one of the clauses contained both a consent to jurisdiction in Peru and a Peruvian choice-of-law provision. The Tuxedo court stated:

It can be argued, however, that there is no requirement contained in this clause that Peru is the exclusive forum for jurisdiction over any dispute between the parties. If it is determined that the parties did not intend for the clause to act as an exclusive forum selection clause, then arguably, there is no contractual bar to plaintiff bringing its tort claims in the Nevada district court.

The Tuxedo court also noted that another clause resembled a traditional exclusive forum selection clause, containing language that any action must be brought in a court in the Country of Peru. Thus, the Tuxedo court observed the distinctions between mandatory and permissive forum selection clauses, but the facts of the case did not provide an opportunity for the court to affirmatively adopt a rule.

The Court in the credit union’s case explained that other state courts have distinguished between mandatory and permissive forum selection clauses. For example, in Converting I Biophile Labs., Inc. v. Ludlow Composites Corp., 722 N.W.2d 633 (Wis. Ct. App. 2006), the Wisconsin Court of Appeals stated:

Clauses in which a party agrees to submit to jurisdiction are not necessarily mandatory. Such language means that the party agrees to be subject to that forum’s jurisdiction if sued there. It does not prevent the party from bringing suit in another forum. The language of a mandatory clause shows more than that jurisdiction is appropriate in a designated forum; it unequivocally mandates exclusive jurisdiction. Absent specific language of exclusion, an agreement conferring jurisdiction in one forum will not be interpreted as excluding jurisdiction elsewhere.

Similarly, federal circuit courts generally agree that where venue is specified in a forum selection clause with mandatory or obligatory language, the clause will be enforced; where only jurisdiction is specified in a forum selection clause, the clause will generally not be enforced unless there is some further language indicating the parties’ intent to make venue exclusive.

The Court agreed with the distinctions made by other state and federal courts regarding mandatory and permissive forum selection clauses described above. The Court noted that here, there were two jurisdictional clauses at issue. First, the loan agreement contained a clause entitled “Jurisdiction,” which provided that “The parties agree and submit themselves to the jurisdiction of the courts of the State of Utah with regard to the subject matter of this agreement.” The Court concluded that this language was permissive as there was no language within the clause containing words of exclusivity. Absent such language, the Court deemed the clause permissive.

Second, a clause in the note stated: “If there is a lawsuit, Borrower(s) agrees to submit to the jurisdiction of the court in the county in which Lender is located.” The Court determined that this language was also permissive as there was no language within the clause containing words of exclusivity. Thus, the Court determined the case may be heard in another appropriate venue besides the courts in Utah.

The Court also noted that without articulating why, the borrowers argued that the forum selection clauses were ambiguous and therefore must be construed against the credit union. The Court conlcuded that this argument was without merit as the clauses were clear and unambiguous and the Court need not interpret the contract any differently from the contract’s plain meaning. The Court explained that the clauses provided no words of exclusivity and to interpret the clauses as mandatory forum selection clauses would read language into the contract that was not there.

The Court found that in this case, none of the clauses contained exclusive language. Accordingly, all clauses were permissive forum selection clauses, and the district court erred when it found Utah was the sole forum for any controversy and dismissed the case for lack of subject matter jurisdiction. The Court therefore reversed the district court’s order dismissing the case and remanded the matter to the district court for further proceedings.