Forum selection clauses have traditionally played a significant role in structuring cross-border commercial relationships. Many organisations have favoured specifying New York courts as the exclusive forum for dispute resolution, valuing the legal expertise and consistency that such courts provide. This preference has only grown following recent clarification from the U.S. Securities and Exchange Commission (“SEC”), which confirmed in a policy statement that mandatory issuer-investor arbitration provisions will not affect its determination of registration statement effectiveness. This development is poised to influence the future direction of investor litigation.
A recent decision by the U.S. Court of Appeals for the Second Circuit demonstrates that contractual autonomy in arbitration has defined legal boundaries. In the case of Molecular Dynamics, Ltd. v Spectrum Dynamics Medical Ltd., No. 24‑2209‑cv, 2025 WL 4234567 (2d Cir. July 2, 2025) the court determined that U.S. federal courts do not have subject-matter jurisdiction to vacate arbitral awards issued outside the United States, even if the parties have agreed that New York courts shall have exclusive authority over all arbitration matters. The judgment reinforces the principle established under the New York Convention: only the courts at the seat of arbitration are empowered to annul an award.
Contractual Freedom Expands Within Statutory Limits
The SEC’s policy shift represents a significant expansion of what companies can accomplish through arbitration clauses. For the first time, U.S. regulators have confirmed that mandatory arbitration of shareholder claims is compatible with federal securities laws, allowing issuers to include such provisions in their governing documents without risking access to capital markets.
However, the Second Circuit’s decision in Molecular Dynamics illustrates the other side of the equation. While companies may now direct shareholder disputes into arbitration, they cannot, by contractual drafting alone, give U.S. courts jurisdiction to review foreign-seated awards. Under the Federal Arbitration Act, U.S. courts can recognise and enforce foreign arbitral awards but may not set them aside. The New York Convention distinguishes between primary jurisdiction, held by the courts of the arbitral seat, and secondary jurisdiction, exercised by courts elsewhere, which may only enforce or decline enforcement on limited grounds. No forum clause, regardless of how broadly drafted, can change this allocation of authority.
Strategic Implications for Cross-Border Businesses
Together, the SEC’s policy shift and the Second Circuit’s ruling have significant consequences for companies managing international disputes.
First, the SEC’s stance offers listed companies greater flexibility in addressing shareholder litigation risk. Mandatory arbitration clauses, previously seen as impractical in public markets, may become more common, subject to state corporate law.
Second, the Second Circuit’s decision in Molecular Dynamics highlights the importance of selecting the arbitral seat. Parties choosing a foreign seat must accept that challenges to the award are restricted to that jurisdiction; attempts to vacate foreign awards in U.S. courts will likely be dismissed early.
Finally, the ruling reinforces the pro-enforcement disposition of the New York Convention. By preventing collateral attacks in U.S. courts, it enhances the finality of foreign awards and reduces opportunities for tactical litigation.
Arbitration Operates Within Two Frameworks
The SEC’s recent policy shift broadens the contractual autonomy available to listed companies. Nevertheless, the Second Circuit’s decision in Molecular Dynamics emphasises that international arbitration is still governed by a treaty-based legal framework that cannot be circumvented by contractual provisions alone.
For organisations engaged in cross-border transactions, the implication is clear: the choice of arbitral seat remains decisive, and no forum clause can shift the power to set aside an award away from the courts of that jurisdiction.
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