So, you wake up one morning at the Holiday Inn in Tippecanoe, Texas, and head to the courthouse. You are confident. You know you did this deal by the book, your documents were impeccable, your case at trial went seamlessly and you were superb on the witness stand. You arrive in time to hear the foreman of the jury intone, "We find in favor of plaintiff, the Tippecanoe Company, in the amount of $10 million in actual damages, and punitive damages of . . . "

What did you do wrong?

Your mistake was made not in the course of the transaction at issue, but with the drafting of the original financing agreement, guarantee or other controlling loan document. Specifically, no one included a clause requiring that all lawsuits be brought in a place other than the plaintiff’s back yard.

Hometown verdicts are, unfortunately, a way of life in United States courts. Absent a properly drafted agreement, a company like GE can be sued virtually any place a plaintiff chooses. Local juries in many jurisdictions—Texas and Mississippi being two examples (but not the only two)—are notorious for awarding huge verdicts against big out-of-town companies, even when the facts do not support those verdicts. To be sure, many times such verdicts can be reversed on appeal, but prevention is better than the best appeal. One readily available but too infrequently utilized preventative tool is the forum selection clause.

This is a provision that can be included in any commercial contract (usually next to the provisions that address applicable law and waiver of trial by jury), which reads, in substance:

Any claim arising out of or relating to this agreement, the alleged breach hereof, or the relationship created hereby, shall be brought solely and exclusively in a court of competent jurisdiction in [e.g.], the City, County and State of New York, and each party consents to the jurisdiction of such court and waives any claim as to improper or inconvenient venue therein.

This simple clause (or perhaps a slightly embellished version) can save you years of grief and millions of dollars in damages.

Why are forum selection clauses not utilized as frequently as they should be?

Some parties feel that including such a provision reflects an unreasonable exercise of superior bargaining power that is unfair to the contract partner. But defining the forum before the fact—where your contract partner has the ability to negotiate for better terms or walk away—is less unreasonable than allowing the contract partner to decide after a dispute has arisen the forum that’s most favorable to its cause.

Courts view forum selection clauses with favor because they bring stability and predictability to litigation. Indeed, courts have routinely enforced forum selection clauses even in sensitive areas such as civil rights, and some states have even adopted statutes specifically making such agreements enforceable. Thus, there is no shame—and a great deal of legal and commercial sense—in making full use of them.

Why are forum selection clauses important?

Simple. No matter how well written your loan documents, no matter the protections they purport to provide, in the end they are only as good as the willingness of a court to enforce them. Just because words appear in a document is no guarantee that a court will do so.

For example, GE’s standard loan agreements might provide for New York law to govern any dispute and for a waiver of trial by jury. Under New York law, such waivers in the commercial context are routinely enforced. So, you can be sure that wherever you are sued, the finder of fact will be a judge and not a local jury, right?

Not necessarily. There are some states, Georgia, for example, where such contractual waivers are per se illegal, and even though the contract calls for application of New York law, a Georgia judge may refuse to enforce the waiver because it violates local "public policy" or a state Constitutional right. Moreover, if you wind up before a jury, the choice of law provision in the agreement will give you scant protection—juries deal with facts and not issues of law. Judges in some smaller localities are inclined to submit cases to juries, rather than resolving them on summary judgment, as judges in larger jurisdictions are more likely to do. The latter tend to enforce commercial contracts as a matter of law rather than requiring a trial.

You may ask why wouldn’t a Georgia judge do the same thing with a choice of forum provision that he does with the provision on jury trial waiver—that that is, simply refuse to enforce it as violative of local policy, and keep the case in Georgia?

The answer is that a Georgia judge could very well do that—but if GE has written its forum selection provision correctly, GE would not make its application to enforce that provision to the Georgia judge in the first place. Rather, upon being sued in Georgia, GE would apply to the court in the contractually designated forum for an injunction prohibiting the plaintiff from proceeding with the suit in Georgia, and requiring it to litigate, if at all, in the contractually selected forum. This is one of the rare instances when a court will enjoin a law suit in another state.

If the parties are concerned about perceived fairness, the contractually selected forum need not be either party’s hometown. So long as it is a major jurisdiction with well developed law in the commercial context, GE’s chances of getting a fair trial—and a favorable outcome—are greatly increased.