Corporate By-Laws & the Forum Selection Clause

Published Categorized as Choosing the Right Business Entity Tagged
corporate bylaws choice of forum language

It is important for shareholders to carefully review and understand the terms of their corporate By-laws, including any forum selection clauses that may be included in the corporate By-laws.

These clauses can have significant implications in the event of a dispute, as they determine where any legal proceedings will take place. A broadly worded forum selection clause can provide some protection against nuisance litigation.

The recent Logicorp Mex. SA de CV v. Andrade, No. 13-21-00243-CV (Tex. App. Dec. 1, 2022) provides an example of how a party can include a broad forum selection clause in their corporate By-laws prior to selling an interest in the corporation to a third party to help to ensure that disputes are resolved in a jurisdiction that is convenient for the original shareholder.

Facts & Procedural History

This case involves a lawsuit filed in the U.S. The lawsuit was between a U.S. freight hauling company and its affiliates based in Mexico. The U.S. freight hauling company alleged fraud, breach of contract, and other allegations.

The U.S. freight hauling company was a 50% shareholder in the Mexican affiliate. The U.S. freight hauling company had signed off on and agreed to the By-laws for the Mexican affiliate corporation that was drafted years before they purchased their shares.

The founding shareholder of the Mexican affiliate, who was the party being sued, argued that the claims against him should be dismissed based on a forum selection clause in the Mexican affiliate’s By-laws, which stated that any disputes between the Mexican affiliate and its shareholders should be decided in the courts of Monterrey, Nuevo Leon, Mexico according to Mexican law.

The trial court agreed with the shareholder and dismissed the court case. This appeal followed.

About Forum Selection Clauses

A forum selection clause is a provision in a contract that specifies which court or jurisdiction will be responsible for resolving any disputes that may arise under the contract.

These clauses are often included in contracts and, as in this case, corporate By-laws, to ensure that any legal disputes will be resolved in a specific location that is convenient for the parties involved. They can be useful in avoiding the need for parties to litigate in multiple jurisdictions, and can help to streamline the legal process.

Forum selection clauses are generally enforceable, unless it can be shown that enforcing the clause would be unreasonable or unfair. Under Texas law, a forum selection clause must be enforced by the courts unless the party opposing enforcement of the clause shows clear evidence that (1) enforcement would be unreasonable or unjust, (2) the clause is invalid for reasons of fraud or overreaching, (3) enforcement would contravene a strong public policy of the forum where the suit was brought, or (4) the selected forum would be seriously inconvenient for trial.

The Broadly-Worded Forum Selection Clause

In this case, the U.S. freight company argued that the agreement in the By-laws did not apply as the claims did not involve the agreement. Specifically, it argued that its claims were wholly unrelated to the by-laws. Its “pivotal claim” was that the shareholder had “committed fraud independent of his position as a shareholder” and therefore, the forum selection clause contained in the By-laws does not apply. The court did not agree. The language in the By-laws was sufficiently broad and not limited to claims arising out of the By-laws.

Waiving the Forum Selection Clause

The U.S. freight company also argued that the shareholder waived his right to enforce the forum selection clause by participating in litigation in Texas for the following reasons: (1) he indicated he would make an affirmative claim for attorney’s fees; (2) he sought a defensive summary judgment on claims; (3) he waited fifteen months after filing his answer before moving to dismiss; (4) he did not move to dismiss until five months before the second trial setting; and (5) through his attorneys claimed they were not aware of the forum selection clause until 2020, he knew or should have known of it because he was a signatory to the by-laws. Texas law recognizes waiver as a defense.

Generally, “waiver” consists of the intentional relinquishment of a known right or intentional conduct inconsistent with claiming that right. In the context of forum selection clauses specifically, the Texas Supreme Court has held that waiver may occur if a party substantially invokes the judicial process” in a non-selected forum to the other party’s detriment or prejudice.

The appeals court agreed with the U.S. freight company that the shareholder invoked the judicial process in Texas and, given the delay, it did so to the other party’s detriment. As such, the appeals court reversed the trial court’s order.

The Takeaway

In general, courts will uphold forum selection clauses as long as they are reasonable and the parties to the contract or agreement have agreed to them voluntarily. However, a party may waive the defense of a forum selection clause if they do not raise it timely or otherwise fail to assert it in a timely manner. In such cases, the clause may not be upheld and the dispute may be resolved in a different forum.

It is important for individuals who have joint ownership of a corporation to review their By-laws and other legal documents to ensure that any forum selection clauses are sufficiently broad and clearly written. This can help to ensure that these clauses will be upheld by the courts in the event of a dispute.

Those forming a new corporation can also address this in drafting the original By-laws for the corporation.