forum selection clause

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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The Second Department recently handed down a harsh reminder of the importance of obtaining an executed broker’s agreement.  Oral agreements for broker fees are apt to run afoul of the statute of frauds, and personal jurisdiction cannot be conferred by the mere insertion of a forum selection clause in the brokered sale agreement.

In Ausch v Sutton, the plaintiff alleged he was owed a broker’s fee pursuant to an oral agreement with the defendants for arranging the sale of the first defendant’s (Defendant 1) interest in a company to Defendant 2. Defendant 3 co-owned the company with Defendant 1 and resided outside New York. Aside from the purchase agreement, which contained a forum selection clause designating New York for the resolution of any disputes arising from the purchase agreement, Defendant 3 had no contacts with New York.

Defendant 3’s motion to dismiss pursuant to CPLR 3211(a)(8) was denied by the Kings County Supreme Court (Knipel, J.) on the ground that the forum selection clause in the purchase agreement conferred jurisdiction over all disputes arising from the purchase agreement, which included alleged oral agreements for related broker fees. But the Appellate Division reversed, citing Magdalena v Lins,  which held that a forum selection clause among defendants was insufficient to confer personal jurisdiction in a suit brought by the plaintiff, where the plaintiff was neither a party to the agreement containing the forum selection clause nor a third party beneficiary. In essence, the Appellate Division distinguished between the purchase agreement and the alleged oral agreement for a broker’s commission–the forum selection clause in the former was insufficient to confer personal jurisdiction with respect to the latter.

If the lack of personal jurisdiction over Defendant 3 were not enough, then the statute of frauds ultimately would have proved fatal to the plaintiff’s causes of action against all three defendants. General Obligations Law § 5-701[a][10] states that an agreement to pay a commission for arranging a sale transaction is void unless in writing. As held by the Court of Appeals, a claim for unjust enrichment or quasi-contract in connection with a brokered transaction cannot be used to get around the statute of frauds (see Snyder v Bronfman).

The bottom line for brokers of sale transactions is that they cannot rely on protections contained within the sale documents unless they are parties to those documents. To ensure that the dispute will be heard in New York and not dismissed out of hand under the statute of frauds, a broker would be well advised to obtain a signed agreement declaring the terms of her commission before engaging in any work to consummate a potential business opportunity.

New Rules Shutterstock_317335106One aspect of the Commercial Division that makes it a highly desirable forum for litigators and litigants alike is its focus on the efficient administration of justice. The Commercial Division Advisory Council (the “Advisory Council”), established by New York’s Chief Judge to make recommendations to improve and enhance the Commercial Division, recently proposed three amendments to the Rules of the Commercial Division that would each further this objective.

Standard Alternative Forum Selection Clauses

In light of concerns that were raised after the Chief Administrative Judge issued an Administrative Order, dated March 6, 2017, adopting the Advisory Committee’s September 2016 proposal to add a sample forum selection clause designating the Commercial Division as the chosen forum, the Advisory Committee recently issued a revised proposal. The concerns centered on the potential for the original sample forum selection clause to limit commercial litigants’ access to the New York federal courts. The new proposal addresses this by including two sample forum selection clauses: one designates the Commercial Division exclusively as the chosen forum, while the other provides that the parties agree to submit to the exclusive jurisdiction of either the Commercial Division or the New York federal courts.

 Further Support For Commercial Division Justices to Impose Sanctions

Referencing the finding of the Chief Judge’s Task Force on Commercial Litigation in the 21st Century that sanctions are often underutilized in Commercial Division Cases, the Advisory Council proposed an amendment to the Commercial Division Rules intended to provide additional support for Commercial Division judges to impose sanctions. The proposed amendment, which identifies “the need to conserve client resources, to promote efficient resolution of matters, and to increase respect for the integrity of the judicial process” expressly authorizes Commercial Division judges to “impose sanctions . . . against parties (or counsel) who fail to comply with case management deadlines and other discovery orders.”

Attorney Certifications Regarding ADR

Finally, the Advisory Council has also proposed a new rule aimed at increasing ADR utilization in the Commercial Division. The proposed rule would require attorneys to certify at the preliminary conference, and at each compliance or status conference, that they have discussed ADR options with their client(s) and to state whether their client(s) is willing pursue mediation during the litigation.  If the parties are both willing to mediate their dispute, they would be required to jointly propose a date by which they will select a mediator, but does not require that they set a deadline for the mediation to begin.