The U.S. Court of Appeals for the First Circuit recently overturned a ruling that would have allowed a bankruptcy trustee to move an arbitration proceeding contrary to the forum selection clause in the  agreement in dispute.

A bankruptcy trustee stands in the debtor’s shoes and is not entitled to avoid the forum selected by the corporation on mere allegations of inconvenience, the court held in Mercurio v. Wright (In Re: Mercurio), No. 04-1832 (1st Cir. March 23, 2005).

The ruling is a strong affirmation of forum selection clauses in commercial contracts.

In Mercurio, the First Circuit found no evidence to support the conclusion that requiring the parties to arbitrate their dispute in Tennessee, as provided in the agreement, would deprive the trustee of his day in court. The heavy burden of proof required to set aside a forum selection clause on grounds of inconvenience demands more of a litigant that simply showing that another location would be more convenient, the court stated.

The case involved Wright Medical Technology, Inc., a Tennessee corporation that distributed medical supplies, and Ocean State Orthopedics, Inc., a Rhode Island corporation that entered into an agreement with Wright Medical to become the exclusive distributor of the latter’s products in Rhode Island. Gregory A. Mercurio, Jr., was the president of OSO and signed the agreement on its behalf.

In the year following the signing of the agreement, Wright Medical terminated the agreement and appointed another distributor in Rhode Island. Mercurio filed a voluntary petition for bankruptcy under Chapter 11, and five years after termination of the distributorship agreement, the bankruptcy trustee commenced an adversary proceeding against Wright Medical for breach of contract in bankruptcy court in Rhode Island.

Wright moved to compel arbitration in Tennessee. The bankruptcy court ordered arbitration but specified the proceeding should take place in Rhode Island. On appeal, the district court upheld the bankruptcy court.

On further appeal, the First Circuit noted “[t]he record is fairly sparse as to the reasoning of the bankruptcy court in bypassing the [a]greement’s unambiguous language.” The transcript of the proceedings indicates the judge felt sending the matter to Tennessee for arbitration, where none of the witnesses or evidence would be present, would mitigate resolution of the case.

“Although we cannot fault the judge’s laudable purpose, arbitration is a contractual matter in which, absent unusual circumstances not present in this case, the parties are entitled to the measure that they bargained for,” the First Circuit stated.

In reversing the district court, the appeals court concluded the trustee “failed to show that the enforcement of the forum selection clause is unreasonable under the circumstances.” The record did not contain evidence that extraordinary costs would be involved with litigating in Tennessee that were not foreseen by the contracting parties, the court noted.

To bypass forum selection clauses, parties must do more than show that litigating in another jurisdiction is inconvenient, the court stated.

“Were it otherwise, forum selection clauses would almost never be enforceable, for inconvenience to at least one of the parties is an almost foregone conclusion when dealing with a provision that requires litigating away from one’s home turf,” stated the court. “Yet, these clauses are standard fare in today’s multijurisdictional and international contractual relationships.

The decision reinforces the rule that contractual disputes must be litigated according to the terms of contractual forum selection clauses, even in instances in which such disputes arise in bankruptcy proceedings.