Guest Post by Tanya Monestier on Damages for Breach of a Forum Selection Clause

Damages for Breach of a Forum Selection Clause

Tanya Monestier

Let’s say you and your counterparty agree to litigate all your disputes in New York (and only New York).  Instead of following through with that promise, your counterparty sues you in California.  What are your legal remedies?  At this point, you might be thinking “Wait, I thought this was a contracts blog!  This looks like it belongs on a civil procedure blog.”  Bear with me … I promise I’m posting in the right place.  Back to my hypo.  Normally, you would go to California and seek to have the action dismissed or transferred, depending on whether you are in federal or state court.  The net effect of either of these remedies is to force the action into the contractually-designated forum, New York. 

But what of the expenses incurred in having the action dismissed or transferred?  These expenses—in the form of attorneys’ fees—are not inconsequential.  They often amount to tens or hundreds of thousands of dollars.  Are these recoverable?  Probably not.  Attorneys fees and expenses associated with effecting a dismissal or transfer are not normally awarded to a party seeking to uphold a forum selection clause.  The reason is twofold.  First, the innocent party has already been made whole when a court dismisses or transfers an action.  And second, awarding attorneys’ fees would run afoul of the American Rule, which holds that each side pays their own attorneys’ fees.  My recent article, Damages for Breach of a Forum Selection Clause, published in the American Business Law Journal, challenges this common wisdom.  It argues that courts can and should award damages in the form of attorneys’ fees when a party breaches a forum selection clause, and that such an award does not violate the American Rule.

The main reason courts give for refusing to award damages in the form of attorneys’ fees is that an award of damages would essentially amount to double recovery.  Courts posit that when they transfer or dismiss an action on the basis of a forum selection clause, the innocent party has gotten what he wanted: to sue and be sued in the chosen forum.  Essentially, courts view a dismissal or transfer as a form of specific performance.  And normally, when you get specific performance, you don’t also get damages.

This logic is flawed.  Enforcing a forum selection clause is not specific performance because it focuses on the wrong promise. It looks like specific performance because the net effect is similar. Enforcement through a transfer or dismissal essentially obligates a party to sue in the contractually chosen forum. Accordingly, it looks like the breaching party is specifically performing the contract. Not so.  The essence of a forum selection clause is not simply that the parties sue in the designated forum, but that they not sue in other forums. In this sense, it is a restrictive covenant, akin to a covenant not to compete or a covenant to maintain confidentiality. Once a party has sued in another forum, he has breached the restrictive covenant and the breach cannot be undone. Specific performance would be impossible in this scenario because nothing is left to specifically perform. The fact that a breaching party is indirectly forced into the chosen forum after the fact does not mean that he has specifically performed. Specific performance would be not suing in contravention of the clause in the first place.  As such, there is nothing incompatible about ordering a transfer or dismissal and awarding damages for the aggrieved party.

In fact, if courts do not award damages to the innocent party, they are allowing breaching parties to breach with impunity.  Consider the issue from the perspective of the would-be breaching party. He knows that the contract provides, “all disputes shall be litigated exclusively in New York.” Nonetheless, for strategic reasons, he decides to sue in California instead. After lengthy litigation in California, the breaching party is “sent” to New York to litigate, as per his original promise. From the point of view of the breaching party, there is no downside to suing in the wrong forum. Best case scenario, California retains jurisdiction.   Worst case scenario, he is sent to New York to do what he promised to do in the first place—litigate in New York. When the worst case scenario is simply being held to the terms of your bargain, there is no real disincentive to breach. 

Well, what about the American Rule?  Isn’t that a barrier to recovery of attorneys’ fees?  No.  The American Rule prohibits an award of damages to the prevailing party because it was the prevailing party.  The American Rule does not speak to whether attorneys’ fees can be awarded as a measure of direct damages flowing from the original breach.  The confusion here stems from the failure of courts to appreciate the distinction between direct and consequential damages.  Normally, attorneys’ fees are not awarded because they constitute consequential damages.  They are damages incurred with the innocent party securing other damages.  For instance, in a Sales contract, an innocent buyer may seek cover damages, but may not seek the attorneys’ fees incurred in collecting those cover damages.  The forum selection clause context is different.  The attorneys’ fees here are not consequential damages (i.e., damages associated with recovering other damages).  Rather, they are direct damages—i.e. damages that flow directly from the breach.  In the words of one court, “… the fees [defendant] incurred in defending itself in [the non-chosen forum] were not ‘incident’ to the substantive litigation in which [defendant] was involved; they were a loss—the primary loss—occasioned directly by [plaintiff]’s breach of the clause.”  Versatile Housewares & Gardening Sys., Inc. v. Thill Logistics, Inc., 819 F. Supp. 2d 230, 244 (S.D.N.Y. 2011). Accordingly, because damages for breach of a forum selection clause are direct (and not consequential) damages, they are not within the American Rule proscription.

There is a lot of other “fun” stuff in the article—including discussions of consumer contracts, international authority, and contractual fee-shifting provisions.  But, for those who don’t have the time or inclination to do a deep dive on the issues, at least you’ve now read the cheat-sheet version of the article.