Insights

Many contracts contain provisions that establish venue – a place (forum) where a lawsuit by either party must be brought if there is a dispute in connection with the contract. Many states prohibit “forum selection clauses” in consumer credit contracts, presumably because those clauses could benefit an out-of-state creditor to the detriment of the consumer, but this prohibition does not necessarily extend to all contracts in which a consumer is a party.

If these clauses are not outright prohibited, can they be enforced if one party breaches the clause by bringing suit in a forum other than the one set forth in the contract? In one recent case, a settlement agreement entered into by consumers and the holder of their retail installment contract contained a forum selection clause, and the court found that the clause was enforceable by the creditor.

Charles and Helen Madsen paid in full their installment loan contract with RBS Citizens, N.A., which was secured by their Chevrolet Cavalier. RBS mailed them a $370 check representing an alleged overpayment. After the Madsens deposited the check, RBS contacted them, seeking the amount of the check, plus interest and fees, claiming that the check had been issued in error. The Madsens also learned that their credit had been negatively impacted.

The Madsens sued RBS and later entered into a settlement agreement with RBS in which the Madsens accepted $7,500 to settle their claims arising from RBS’s attempts to recover the erroneous payment. The settlement agreement stated that the agreement was governed by Rhode Island law and that any dispute relating to the agreement “shall be resolved” by a court in Providence, Rhode Island.

The Madsens sued RBS in the U.S. District Court for the District of Connecticut for breach of the settlement agreement after they learned that RBS continued to negatively report the incident to credit reporting agencies. RBS moved to dismiss the complaint or, alternatively, to transfer the case to the District of Rhode Island.

The court dismissed the complaint without prejudice, concluding that venue in Connecticut was improper. The court found that the forum selection clause was enforceable where the clause was reasonably communicated to the Madsens, the clause’s language was mandatory, the claims in the instant case were covered by the agreement, and enforcement of the clause would not be unreasonable or unjust.

So, check with your attorney to see whether a forum selection clause might be proper in some of your contracts to keep you from having to defend a suit in an inconvenient forum.

Madsen v. RBS Citizens, N.A., 2013 U.S. Dist. LEXIS 74890 (D. Conn. May 29, 2013).

Shelley B. Fowler is a Managing Editor of CARLAW, HouseLaw, PrivacyLaw, and Spot Delivery. Shelley can be reached at 410-865-5406 or by e-mail at rfowler@hudco.com.