Boy invites Girl on a date for Valentine’s Day. They agree to meet at a restaurant near Boy’s home (rude, but ok). Girl wakes up on Valentine’s Day and cancels the date once she realizes she has to travel a longer distance than she expected. Boy is left wondering what happened because they had agreed on the restaurant in advance. Girl spends Valentine’s Day with her girlfriends. While breaking the location of a date leads to little (if any) repercussions for Girl in this situation, the same cannot be said for parties to a commercial contract.

Recently, Suffolk County Commercial Division Justice Emerson weighed in on the proper procedure for making a motion to dismiss based on a forum-selection clause as well as what type of harm a party needed to show in order to invalidate such a clause.

It is important to remember that a court cannot be divested of its subject matter jurisdiction by a contract and so a forum-selection clause does not affect the jurisdiction of Court. See Lischinskaya v. Carnival Corp.The proper procedure for dismissing an action based on a forum-selection clause is CPLR 3211(a)(1) using the contractual forum-selection clause as documentary evidence for a proper basis for dismissal. In this case, the Court sua sponte converted the motion from a CPLR 3211(a)(2) motion to a CPLR 3211(a)(1) motion. However, you might not be so lucky next time.

In Somerset Fine Home Building, Inc. v. Simplex Industries, Inc., Plaintiff, a home builder, contracted with Defendant for the purchase of a modular home. The sales agreement provided that any disputes arising thereunder would be determined by the law of the Commonwealth of Pennsylvania and that the exclusive forum for any action to enforce the agreement would be the Court of Common Pleas of Lackawanna County, Pennsylvania. Plaintiff commenced an action for, inter alia, breach of contract and the failure to deliver conforming merchantable goods in New York Supreme Court, Suffolk County. Defendant moved to dismiss this action based on the forum-selection clause arguing that the parties agreed to litigate their dispute in Pennsylvania.

In opposition, Plaintiff gave a laundry list of weak arguments as to why the forum-selection clause should be dismissed.

Plaintiff first argued that the agreement is unconscionable. However, a determination of unconscionability generally requires some showing of an absence of meaningful choice on the part of one of the parties, together with contract terms that are unreasonably favorable to the other party. See Gillman v. Chase Manhattan Bank. Here, the forum-selection cause was not hidden or tucked away within a complex document of inordinate length, it appeared in the same size print as the rest of the agreement, each page was initialed by the plaintiff’s principal and there was no allegations that Defendant used high-pressure tactics to get it to sign the agreement. See Brower v. Gateway 2000.

Plaintiff next argued that it was in a weaker bargaining position than the Defendant and that it had no choice other than to agree to the forum-selection clause as it was. However, the record showed that the parties acknowledged in the agreement that they had the opportunity to confer with their separate counsel in the negotiation, drafting and execution of the agreement. Id.

As a last ditch effort, Plaintiff argued that it would incur financial distress in travelling to Pennsylvania from Suffolk County, NY to pursue this action against Defendant. However, the Court noted that the Plaintiff did not support its argument with evidence showing that the cost of commencing an action in Pennsylvania would be so financially prohibitive that it would be deprived of its day in court. See Horton v. Concerns of Police Survivors, Inc. Plaintiff also did not show any evidence that Pennsylvania would treat it unfairly and deny it a chance to gain a remedy. Id.

Ultimately, these arguments were not good enough to prevent the dismissal of the action. The Court found that Plaintiff was unable to make a “strong showing” that “enforcement would be unreasonable and unjust, that enforcement would contravene public policy, or that the forum-selection clause is invalid because of fraud or overreaching such that a trial in the contractual forum would be so gravely difficult and inconvenient that the challenging party would, for all practical purposes, be deprived of his or her day in court.” See D.O.T. Tiedown & Lifting Equip. v. Wright; Koko Contr. v. Continental Envtl. Asbestos Removal Corp.; Bell Constructors v. Evergreen Caissons.

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INADMISSIBLE

Most litigators are familiar with the requirement that a summary motion be supported with “evidentiary proof in admissible form” establishing the merits of a cause of action or defense.  Nevertheless, many practitioners make the common mistake of submitting evidence in support of a summary judgment motion that would not be admissible at trial, resulting in swift denial of the motion.  In fact, the Appellate Division, Second Department recently reversed a decision by the Nassau County Commercial Division (Bucaria, J.), which granted summary judgment to the moving party, even though the evidence submitted in support of the motion was not in admissible form.

The plaintiff in GMP Fur Trade Fin., LLC v Brenner, 2019 NY Slip Op 00858 (2d Dept Feb. 6, 2019) commenced an action against defendant Dean Brenner (“Brenner”) and others seeking to recover damages for breach of fiduciary duty, breach of contract, conversion and fraud.  The plaintiff moved for summary judgment on the issue of liability as against Brenner, alleging that he had misappropriated funds and goods in connection with his servicing of four finance agreements plaintiff had entered into with certain non-parties.  Justice Bucaria granted plaintiff’s motion for summary judgment on the issue of liability on the breach of fiduciary duty claim.  The plaintiff thereafter moved for summary judgment on the issue of damages.  Again, Justice Bucaria granted the plaintiff’s motion and entered judgment against Brenner in the amount of $1,755,630.79.  Brenner appealed.

The Second Department reversed, finding that the evidence upon which plaintiff primarily relied was not in “admissible form.”  The Court stated:

“Here, in moving for summary judgment on the issue of liability insofar as asserted against Brenner, the plaintiff relied primarily on an affidavit of its managing member, in which the managing member stated that he was told by certain nonparties that Brenner had misappropriated funds and goods.  This hearsay evidence was insufficient to satisfy the plaintiff’s burden of establishing its prima facie entitlement to judgment as a matter of law on the breach of fiduciary duty cause of action insofar as asserted against Brenner.”

The Court also concluded that the plaintiff could not cure this defect by submitting unauthenticated, and therefore inadmissible, bank records for the first time on reply.   It is abundantly clear, then, from the Second Department’s decision in GMP Fur Trade that inadmissible hearsay does not have any probative value when submitted in support of a motion for summary judgment, and should not be considered.

However, the rigidity of this rule should be contrasted with the principle that, under certain circumstances, a party opposing summary judgment may rely on evidence that is not in admissible form, but only if the opposing party provides a reasonable excuse for its failure to submit evidence in admissible form (see e.g. Zuckerman v City of New York, 49 NY2d 557 [1980] [“The rule with respect to defeating a motion for summary judgment, however, is more flexible, for the opposing party, as contrasted with the movant, may be permitted to demonstrate an acceptable excuse for his failure to meet the strict requirement of tender in admissible form”]).  Indeed, a party opposing a motion for summary judgment may rely on hearsay, as long as it is not the only piece of evidence relied on by that party (Sumitomo Mitsui Banking Corp. v Credit Suisse, 89 AD3d 561 [1st Dept 2011]).

Takeaway:  The Second Department’s point was made clear in GMP Fur Trade, but it is worth repeating: counsel for the moving party should review each piece of evidence submitted in support of its summary judgment motion and ensure that it is admissible.  Indeed, affidavits must be signed and properly notarized, deposition transcripts must be certified by a court reporter and signed by the deponent, a proper foundation must be laid for each record relied upon in the motion, especially business and medical records, and importantly, hearsay statements must be qualified for the court’s consideration under one of the many hearsay exceptions.  By contrast, the “admissible form” requirement is more flexible with respect to an opposing party’s evidence, allowing an opposing party to rely on hearsay (as long as it is not the only piece of evidence relied upon by the opposing party), or other inadmissible evidence (if the opposing party offers a reasonable excuse for its failure to submit evidence in admissible form).

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In our last “Check the Rules” post back in December, we noted the recent additions to the Manhattan Commercial Division bench, Justices Andrew Borrok and Joel M. Cohen, and promised to report back in early 2019 on any notable practice rules in their respective Parts.

My colleague Viktoriya Liberchuk’s perceptive post last week on the recent trend in the Commercial Division (and beyond) to formally encourage in-court “at bats” for young lawyers cited two specific rules from the newly-published “Practices and Procedures” for both Justice Borrok and Justice Cohen, both of whom encourage and even incentivize the “less senior attorney” or the “lawyer out of law school for five years or less” to argue motions before them.

In addition to advocating for the development of junior associates, Justice Borrok’s individual practice rules also suggest that he’s an advocate for the use of technology in the practice of law, or at least in his Part.  In his one and only published decision in 2019 thus far, Ostro v Ostro, Justice Borrok twice ordered the parties to comply with the court’s e-filing procedures, which is the subject of an entire section of his practice rules entitled “Electronic Filing.”

Justice Borrok has a handful of other techie practice rules worthy of note:

Be sure to “bookmark” your briefs and “hyperlink” your references to case law, etc.  Justice Borrok requires strict adherence to the requirement in Commercial Division Rule 6 that all briefs “shall include bookmarks providing a listing of the document’s contents and facilitating easy navigation by the reader within the document.”  He also “strongly encourages” the use of hyperlinks within documents submitted to the court.

Make sure you’re registered for “eTrack.”  As noted in Justice Borrok’s practice rules, as well as in the New York State Unified Court System’s description of the service, “eTrack is a case tracking service which enables you to track active Civil Supreme Court cases from all 62 counties of New York State.”  Justice Borrok requires that “parties and/or their counsel” litigating in his Part be registered for eTrack.

Check in at the “kiosk” outside the courtroom before appearing for a conference.  There’s a kiosk located near the courtroom entrance of Part 53.  Counsel are required to check in by entering the index number of their case, select and print the appropriate conference form(s), and fill them out before entering the courtroom.  By the way, be sure to set specific discovery dates in your proposed conference orders.  Open-ended “within 45 days”-type deadlines won’t cut it.

Submit your trial documents on a “flash drive.”  If you’re headed to trial before Justice Borrok, be sure to submit all your trial documents — including marked pleadings, prior decisions, notices to admit, deposition transcripts, and the like — “via flash drive prior to the hearings or start of trial.”

Be sure to check back with us in the coming months for notable decisions coming out of the newly-constituted Parts 3 and 53 in the Manhattan Commercial Division.

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Are “consequential damages” available on contract claim against an insurer in an action brought by an insured for breach of a commercial liability policy? In D.K. Prop., Inc. v. National Union Fire Ins.,  a recent case out of the First Department, the answer is a resounding “yes”.  There, the complaint alleged two causes of action, namely, breach of contract for failure to pay for covered losses and branch of the implied covenant of good faith and fair dealing.  Plaintiff sought consequential damages on both claims, and attorney’s fees as to the “bad faith” claim.

The insurer argued that consequential damages were unavailable in a breach of contract claim against a carrier when the policy itself covers only “direct and physical loss” to the building.   Indeed, as the complaint outlines, the insured is claiming damages for the carrier’s “unreasonable” and “burdensome” informational requests during the investigatory period which extended over a three-year period.  Engineering costs, ,water abatement equipment because of delays in repairs, monitoring equipment  and interim repairs were only a few of the “types” of damages alleged.

On a pre-answer motion to dismiss, the defendant insurer sought dismissal of the claim for consequential damages on the ground they did not state a claim, namely, that the pleading did not provide a detailed factual showing of why the damages, which do not flow directly from the breach, are recoverable.  The motion court, the Hon. Robert Reed agreed, and dismissed the claim for consequential damages.  On appeal, the First Department in an unanimous decision, reversed the dismissal and reinstated the claim for consequential damages, holding such claims are not subject to any degree of heightened pleading.  The foreseeability of such damages is not for a motion to dismiss, but rather proof at trial.  The court made clear that an insured has a claim against a carrier for consequential damages when a carrier doesn’t provide coverage “if such damages (“risks”) were foreseen or should have been foreseen when the contract was made.”

In one line, the court also rejected the insurer’s argument that a breach of contract claim and “bad faith” claim were duplicative:  such claims can coexist, so long as the claims allege different conduct which they did here.

The Takeaway:  “consequential” damages need not be particularized in your pleading in connection with contractual based claims (breach of contract or implied covenant).  Don’t worry, neither CPLR 3015 (pleading particularity with respect to specific matters) nor 3016 (pleading particularity in specific actions) apply.    A detailed pleading nevertheless should be alleged setting forth at least the types of damages sought that flow from the claimed breach.

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As a junior associate you’re typically asked to do research and draft motion papers, but you also yearn for the opportunity to argue your motion before the Court. But junior associates are usually not afforded such opportunities. Or are they? In recent years, New York judges have been making a real commitment to the development of junior associates by encouraging firms to permit junior associates to argue motions and question witnesses.

Commercial Division Justices, including Justice Saliann Scarpulla and recently appointed Justices Andrew Borrok and Joel M. Cohen have made the training of less-seasoned attorneys a priority by encouraging firms to permit junior attorneys to argue motions. For instance, Justice Scarpulla includes the following in her part rules:

To create opportunities for attorneys knowledgeable with the subject matter of the action, and who historically have been underrepresented in the Commercial Division, courtroom participation of such attorneys is strongly encouraged. This could be achieved, for example, by having a less senior attorney, who prepared the brief on the motion, argue the motion before Justice Scarpulla.

Justice Cohen not only supported this agenda but gave it some teeth by incentivizing firms to send junior associates to argue motions by including the following language in his part rules:

Requests for oral argument are more likely to be granted if counsel identifies a lawyer out of law school for five years or less who will argue the motion and references this rule in the request.

Justice Cohen’s Part Rules suggest that oral arguments on motions that would otherwise be decided on submission will be entertained if firms permit junior associates to argue the motions. And so, next time you have a motion pending before Justice Cohen and are seeking oral argument, send the junior associate.

New York Commercial Divisions are not the only courts encouraging the participation of junior associates. The Eastern District of New York Bankruptcy Court initiated a policy in May of 2018 that encourages junior lawyers familiar with the matter under consideration to argue before the Court. The EDNY Bankruptcy Court even went so far as to permit more than one lawyer to argue for a party in an effort to create an opportunity for a more junior lawyer while simultaneously ensuring that client interests are protected by the more senior attorney.

Some federal courts sitting in New York have similarly been encouraging firms to allow junior associates to argue motions they helped prepare and question witnesses with whom they met. For example, Judge Jack B. Weinstein’s Part Rules encourage junior attorneys with little to no experience arguing before a court to “speak by the presiding judge and the law firms involved in the case.” Recognizing that the ultimate decision as to who will speak in Court lies with the lawyer in charge of the case and not the court, Judge Weinstein’s rules nevertheless indicate that his Court is willing to permit a number of lawyers to argue for one party in order to create an opportunity for a less seasoned attorney’s participation.

This movement, which is not new, is being adopted in various forms by certain judges across the country and followed closely,  see “Judicial Orders Providing/Encouraging Opportunities for Junior Lawyers.” (collecting and summarizing orders and rules of judges adopting some form of rule encouraging junior lawyer participation in trials and arguments).

Takeaway:Courts are increasingly sensitive to the issue and firms must become familiar with and aware of the individual practices (and even preferences) of the judges before whom they appear. In addition, this may also require some educating of clients to manage client expectations.

 

Your client who was just subpoenaed to provide documents in an arbitration, advises you, but with confidence says “But we did not agree to arbitrate, so I can ignore this, right?” After some discussion, your client agrees it’s in her best interest to comply with the subpoena, but only after you promise she will not be forced to arbitrate. How can you be sure your client will not be brought into the arbitration?  A recent decision by the Honorable Barry Ostrager highlights some ways in which a non-signatory can be dragged into an arbitration they never even envisioned

In IQVIA RDS Inc. v. Eisai Co. Ltd, IQVIA, a subcontractor, was forced to seek a stay of arbitration after Eisai, the client, sought to join IQVIA as a party to its ongoing arbitration against PharmaBio, the contractor.  The only problem was that the subcontractor never agreed to an arbitration provision.

If the subcontractor did not agree to arbitrate this dispute, how could it be forced into an ongoing arbitration?

The Direct Benefits Theory

The client argued that the subcontractor was prohibited from avoiding arbitration under a theory known as direct benefits estoppel.  This is an exception to the general rule against binding non-signatories to arbitration.  Under this theory, a non-signatory may be compelled to arbitrate where it “knowingly exploits the benefits of an agreement containing an arbitration clause and receives benefits flowing directly from the agreement” (Notably Federal Courts have applied a similar theory, see Ouadani v. TF Final Mile LLC, 876 F.3d 31, 33 (1st Cir. 2017).  The court found that the subcontractor did not receive direct benefits from agreement between the contractor and the client because their agreement conferred no direct benefits on the subcontractor.  Rather, the agreement allowed the contractor the option to select a subcontractor of its choosing.  Simply because the contractor hired and paid the subcontractor did not make the subcontractor a direct beneficiary of the contract compelling it to arbitrate. Thus, the court allowed the subcontractor to seek a stay of arbitration.

Prior participation in the Arbitration

Another way a non-signatory could be forced to arbitrate its dispute is if it already “participated” in the ongoing arbitration.  Section 7503 (b) of the CPLR states that a party may not seek a stay if it already participated in the arbitration.   A party participates in arbitration by, among other things, appearing in the dispute, selecting the arbitrators, or scheduling the hearing.  The subcontractor’s participation in the ongoing arbitration was limited to complying with subpoena demands.  This, as the court found, is not participating in the arbitration for purposes of Section 7503 (b).  Thus, subcontractor was permitted to seek, and was granted, a stay of arbitration.

The lesson here is that even if your client did not agree to an arbitration provision, it still could be forced into arbitration.  You and your client should be wary of these pitfalls, and seek to avoid these mistakes, if you do not wish to arbitrate your disputes.

 

Hogan

To welcome the New Year, we venture outside this blog’s traditional realm of commercial division practice and procedure to reflect on the nature of “intent” at the intersection of professional wrestling and insurer coverage liability. No, this is not a surrealist poem, but a recent decision by Justice Peter Sherwood of the Commercial Division for New York County arising from the 2015 publication of scandalous material featuring professional wrestler Terry Bollea (aka Hulk Hogan).

In May of 2016, Bollea filed an action in Pinellas County, Florida (Case No. 16-002861-CI), against Don Buchwald & Assocs. (DBA), Bollea’s former talent agency, and Tony Burton, Bollea’s agent at DBA, among others. In that action, Bollea asserted claims for, among other things, invasion of privacy and intentional infliction of emotional distress, arising from Burton’s alleged role in delivering scandalous footage to the now-defunct website Gawker. A year later, in May of 2017, Bollea filed an amended complaint against DBA for “negligent retention,” alleging that DBA acted negligently by employing Burton when DBA “knew or should have known” that Burton was “predisposed to committing wrongs.”

DBA subsequently sought to have its commercial liability insurer, American Zurich Insurance Company (AZIC), and umbrella liability insurer, Zurich American Insurance Company (ZAIC), provide a defense to DBA and Burton in the Florida action pursuant to certain Primary Policies and Umbrella Policies. These policies provide coverage for “bodily injury” caused by an “occurrence” that takes place during the policy period.

AZIC and ZAIC disclaimed coverage, arguing, among other things, that certain of the claims were ineligible for coverage, and that all of DBA’s and Burton’s actions were allegedly intentional and therefore not caused by an “occurrence,” as defined in the policies. The insurers subsequently filed an action in New York Supreme Court, New York County, Commercial Division, seeking a declaration that, among other things, they have no duty to defend DBA and Burton.

On summary judgment, Justice Sherwood offered a thorough and expansive discussion of the insurers’ obligation to defend the claims against DBA and Burton. First, the “duty to defend” is broader than the “duty to indemnify,” and arises where there is a “reasonable possibility of coverage” (Rhodes v Liberty Mut. Ins. Co., 67 AD3d 881, 882 [2d Dept 2009]). Moreover, “[i]f any of the claims against an insured arguably arise from covered events, the insurer is required to defend the entire action” (Town of Massena v Healthcare Underwriters Mut. Ins. Co., 98 NY2d 435, 443-444 [2002]).

The insurers’ argument that the policies did not cover claims for intentional torts was also rejected, because from the perspective of an insured employer, its employees’ intentional torts would be “unexpected, unusual and unforeseen.” “In that context, New York courts assess whether the insured intended to cause harmful consequences, not whether the insured, as a general matter, intended to act.” Furthermore, even intentional torts might give rise to coverage for “accidental” conduct, “where the plaintiff in the underlying action can succeed on his or her intentional tort claim without actually proving intentional or knowing conduct – i.e., where something less than actual intent suffices to establish liability.”

Applying this principals, the court held that the Florida action gave rise to a duty to defend because, from DBA’s standpoint, Burton’s acts in allegedly aiding and abetting the publication of scandalous footage were unexpected. Moreover, under Florida law, a claim for intentional infliction of emotional distress can be sustained by showing “reckless disregard,” without proving deliberate or intentional harm.

Defendants facing liability for intentional conduct should thus bear in mind that an “intentional” tort can still be “accidental” within the meaning of commercial liability policies, so long as the actor did not intend to achieve the specific harmful results (see Messersmith v American Fid. Co., 232 NY 161, 165-166 [1921]).

A preliminary injunction is one of the available provisional remedies, namely, equitable relief entered by a court prior to a final determination of the merits. The relief usually orders a party to restrain from a course of conduct or compels a party to continue with a course of conduct until the action has been decided. Preliminary injunctions differ from temporary restraining orders in that TROs are usually granted pending a hearing for a preliminary injunction where a court determines that “immediate and irreparable injury, loss or damage will result unless the defendant is restrained before the hearing can be held.” See CPLR § 6301.

The standard that a party seeking a preliminary injunction must satisfy to obtain such “extraordinary” relief is the well-settled three-prong test: (1) a probability of success on the merits, (2) danger of irreparable injury in the absence of an injunction and (3) a balance of equities in its favor. See Nobu Next Door, LLC v. Fine Arts Hous., Inc., 4 N.Y.3d 839, 840 (2005).

Injunctive relief is not designed to determine the merits of the action, rather its function is to preserve the status quo pending the outcome of an action. For this reason, preliminary injunctions can be used as a significant weapon in commercial and business litigation. Nevertheless, it is important to understand when this remedy is available and when it is not.

Establishing the second prong of the test often proves to be the most difficult since the vast majority of commercial and business litigation cases seek monetary damages—something that can be remedied at the disposition of a litigation and therefore not worthy of the extraordinary remedy of injunctive relief. By definition, the concept of irreparable injury seeks relief for a type of harm for which there is no adequate remedy at law (e.g., no monetary damages).

New York County Commercial Division Judge Sherwood recently denied an application for a preliminary injunction for two reasons: the plaintiff sought a remedy which would alter, not maintain, the status quo and because plaintiff could not show irreparable harm.

In that case, the plaintiff sought to have the Court compel the defendant to deliver shares in defendant’s company to plaintiff based on the terms of a purchase and sale agreement between the parties. However, defendant argued that the transfer of shares would be in violation of various SEC rules preventing the plaintiff from acquiring further shares of defendant’s common stocks. Ultimately, Sherwood decided that compelling the defendant to transfer the shares would alter the status quo because it would be giving plaintiff its ultimate relief it sought by allowing it to bypass a potentially illegal transfer of shares. See Crede CG III, Ltd. v. Tanzanian Royalty Exploration Corp., 2018 NY Slip Op 32918 (New York County, 2018).  This type of relief, also known as a “mandatory” injunction, is granted only upon a much higher burden. See Lehey v. Goldburt, 90 A.D.3d 410, 411 (1st Dep’t 2011).

Next the plaintiff argued that it would be irreparably harmed if its application for a preliminary injunction was not granted because the defendant was “on the verge of insolvency” threatening plaintiff’s ability to collect on a potential judgment issued at the conclusion of the case. Here, defendant was a publicly traded company created to help fund some of its gold and precious metal mining projects in Tanzania. At the time of the application it had current assets of $1.3 million and debts of over $10 million along with $50 million in assets located in Tanzania where the law of that country does not currently recognize United States judgments.

Judge Sherwood reaffirmed the principle that the relief of a preliminary injunction is not available in an action seeking solely money damages. He reasoned that plaintiff’s damages consisted of the value of publicly traded stock of defendant’s company which could easily and readily be calculated. Sherwood reasoned that the fact that defendant might not have any assets left by the end of the litigation was not enough to award a preliminary injunction because an “unsecured creditor has no cognizable interest in a debtor’s property until the creditor obtained a judgement.” He went on to say that a creditor therefore “has no equitable prejudgment remedy that will interfere with the debtor’s use of its property—even if the defendant threatens to strip itself of assets.”

In conclusion, commercial litigators must remember that the extraordinary remedy of a preliminary injunction, can be used as a weapon, but such relief is only available to maintain the status quo and where irreparable harm exists.

map

Forum-selection clauses were once widely disfavored by many courts on the theory that such provisions operated to improperly divest the court of jurisdiction.  But now, it is well-recognized that parties to a contract may freely select a forum of their choosing to resolve a dispute arising from that contract.  In fact, forum-selection clauses are now prima facie valid unless the party seeking to avoid the enforcement of a forum-selection clause makes a “strong showing” that it should be set aside. But what does that mean?

A party challenging a forum-selection clause must show:

  • Enforcement of the clause would be unreasonable and unjust, or in contravention of public policy;
  • The clause is invalid because of fraud or overreaching; or
  • A trial in the contractual forum would be so gravely difficult and inconvenient that the challenging party would, for all practical purposes, be deprived of its day in court.

This is a significantly high burden to meet.  Indeed, a recent decision by Justice Emerson in Somerset Fine Home Bldg., Inc. v Simplex Indus., Inc., 2018 NY Slip Op 51845 (U) (Sup Ct, Suffolk County Dec. 14, 2018) serves as a reminder that simply claiming “unequal bargaining power” in drafting the contract, or the “financial distress” of traveling to another state may be insufficient to set aside a valid forum-selection clause.

The plaintiff in Somerset was a home builder located in Suffolk County, New York, and the defendant was a manufacturer of modular homes located in Scranton, Pennsylvania.  In May 2017, the parties entered into a sales agreement (the “Agreement”) whereby the plaintiff agreed to purchase a modular home from the defendant. The Agreement contained a forum-selection clause providing that any dispute related to the Agreement would be determined by the laws of the Commonwealth of Pennsylvania and that the exclusive forum would be the Court of Common Pleas of Lackawanna County, Pennsylvania.  Ultimately, the plaintiff sued the defendant in Suffolk County, New York for, among other things, breach of the Agreement.  The defendant moved to dismiss arguing that the parties expressly agreed to litigate their dispute in Pennsylvania.

Justice Emerson rejected plaintiff’s argument that the Agreement and forum-selection clause were “unconscionable,” noting that, as an initial matter, the forum-selection clause was “not hidden or tucked away within a complex document of inordinate length.”  Rather, the clause appeared in the same size and print as the rest of the agreement, each page of which was initialed by plaintiff’s principal.

The Court also rejected plaintiff’s argument that “it was in a weaker bargaining position than defendant” and that it “had no choice” but to enter into the Agreement, explaining that a forum-selection clause will not be invalidated merely because the parties do not possess equal bargaining power.  Importantly, the Agreement at issue in Somerset, like many agreements, clearly stated that each party had “the opportunity to obtain the assistance of counsel in the negotiation, drafting and execution of the agreement.”

Finally, plaintiff’s argument that it was a “small company” that could not travel to Pennsylvania was equally unavailing, as Justice Emerson explained that “simply claiming financial distress does not warrant setting aside a valid forum-selection clause.”  The plaintiff in Somerset did not demonstrate that commencing an action in Pennsylvania would be so financially prohibitive that it would be deprived of its day in court, or that the Pennsylvania court would treat it unfairly.

And so, because the forum-selection clause in Somerset was the product of an arm’s-length business agreement between sophisticated commercial entities, and was neither outrageous nor oppressive so as to warrant a finding of unconscionability, the court dismissed the case.

Somerset reaffirms the principle that a forum-selection clause is prima facie valid and will not be set aside unless the challenging party makes a “strong showing” that the clause is unreasonable, unjust or invalid because of fraud.  An example of a forum-selection clause set aside on the grounds of fraud is found in People v Northern Leasing Sys., Inc., 60 Misc 3d 867 [Sup Ct, NY County Nov. 17, 2017].  There, the forum-selection clause was held to be invalid where the various lease agreements at issue, among other things, were materially and fraudulently altered after execution, contained forged signatures, and were otherwise “permeated with fraud”.

And, when would trial in another forum be “so gravely difficult and inconvenient that the challenging party would, for all practical purposes, be deprived of his or her day in court”?  Well, some courts have vitiated forum-selection clauses when enforcement would essentially extinguish an otherwise reasonable claim, such as where the costs and inconvenience of forcing a party to litigate a case in a foreign state would effectively end the case before it began (seeYoshida v PC Tech USA, 22 AD3d 373 [1st Dept 2005] [forum-selection clause invalid where forum selected was Tokyo, Japan, with a totally foreign language and vastly different laws, so as to effectively “deprive plaintiff of his day in court”]; Northern Leasing Systems, Inc. v French, 48 Misc 3d 43 [1st Dept 2015] [forum in New York gravely inconvenient where parties’ agreement, businesses, and equipment were all located in California, and where defendant, an 86-year-old man, was a resident of California]).

One Final Note: Contracting parties may also expressly consent to the specific designation of the Commercial Division as the exclusive forum in New York states.  This may be beneficial for more sophisticated contracting parties who wish to streamline the process of having their contractual dispute heard in the Commercial Division rather than in New York state courts generally, as the Commercial Division judges are generally well-versed in commercial law.   In fact, the Commercial Division Rules even supply a “sample choice of forum clause” at Appendix C for practitioners to borrow.

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As readers of this blog have come to appreciate, we here at New York Commercial DCheck the Rulesivision Practice tend to report on — among other things Commercial Division — the procedural particularities of litigating commercial matters before the various judges that have been assigned to the Commercial Division over the years.  Such particularities may arise from, say, a new or amended Commercial Division Rule, or from a new or amended Individual Practice or Part Rule.

For example, we repeatedly have reported on the particularities of the individual-practice rules of Manhattan Commercial Division Justice Eileen Bransten, who, along with her colleague Justice Charles E. Ramos (also no stranger to this blog), will be retiring this month and will be succeeded next year by incoming Justices Joel M. Cohen and Andrew S. Borrok.  In case you missed it, the New York Law Journal announced the appointments of Justices Cohen and Borrok to the Commercial Division just before Thanksgiving.

Speaking of procedural particularities and new Commercial Division judges, perhaps most particular of all are the Practices for Part 54 overseen by New York County’s most recent addition to the Commercial Division, Justice Jennifer G. Schecter, who was appointed in April 2018 and took over the docket of recently-retired Manhattan Commercial Division Justice Shirley Werner Kornreich.

Justice Schecter’s Part Rules are numerous and specific — 58 if you’re counting (not including subparts) — and cover everything from file to trial.  Her rules seemingly anticipate anything that can arise during the course of a complex commercial litigation in a way that only someone who spent more than a decade as Principal Law Secretary to former Chief Judge Judith Kaye of the New York Court of Appeals and the aforementioned Justice Bransten can appreciate.

To be sure, there is much to consider in Justice Schecter’s rules, but here are 10 or so important reminders for practitioners litigating in her Part:

Rule 21 — Don’t ask your assistant or paralegal to call the court to confirm scheduling, etc.  “The court will only take calls from the parties’ attorneys of record.”

Rule 27 — Don’t dump documents on your adversary after hours.  “[W]hen a discovery deadline is set forth in a court order, that deadline is 5:00 pm, New York time.”

Rule 31 — Don’t withhold documents on the basis of privilege without serving a privilege log along with your production.  “Failure to serve a privilege log with the party’s production will, absent good cause, be deemed a waiver of the party’s objection on the ground of privilege.”

Rule 33 — Don’t send a colleague to a status conference without full knowledge of the case.  “Attorneys appearing for conferences must be fully familiar with the case [and] should be prepared to discuss the merits of their case at all conferences.”

Rule 34 — Bring everything with you to compliance conferences if you want the court to rule on a discovery dispute.  “Any party that wants to resolve a dispute about the sufficiency of a discovery response during a conference shall bring whatever will be needed to obtain a ruling, including copies of the disputed demands and responses.”

Rule 39 — Adhere to new Commercial Division Rule 17 concerning word limits and swear to it.  “Every brief, memorandum, affirmation, and affidavit shall include . . . a certification by the counsel who has filed the document describing the number of words in the document.”

Rules 40-41 — Don’t file an attorney “brief-irmation” or a party “brief-adavit” in support of a motion.  “Argument must be confined to the brief,” which “must accompany every motion.”

Rules 45 and 52 — Include complete copies of all contracts filed as exhibits to your motion papers.  “Excerpts of contracts may not be filed.”

Rule 54 — Agree with your adversary on a joint Rule 19-a statement of material facts or don’t bother.  “If the parties cannot agree on a joint statement, a Rule 19-a statement of facts is not permitted.”

Rule 55 — Obtain and file your oral-argument transcripts if you want a decision on your motion.  “Motions will not be marked fully submitted and the court will not issue a decision until the transcript is e-filed and the Part Clerk receives a hard copy of the transcript with the e-filing confirmation receipt.”

Be sure to check in early next year for future posts on the individual practices of incoming Manhattan Commercial Division Justices Cohen and Borrok.  In the meantime, a happy holiday season to all our readers!

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