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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In a recent decision, Justice Scarpulla of the New York County Commercial Division declined to exercise personal jurisdiction over several Japanese entities, and even imposed sanctions on the plaintiff for attempting to relitigate its already-decided claims in New York.

Defendant ANA Aircraft Technics, Co., Ltd. (“ANA Technics”) maintained a fleet of airplanes owned and operated by its parent, All Nippon Airways, Co., Ltd. (“ANA”).  In early 2003, ANA Technics entered into a Memorandum of Understanding (“MOU”) with plaintiff Kyowa Seni, Co., Ltd. (“Kyowa”), pursuant to which Kyowa agreed, among other things, to manufacture seat covers for ANA Technics.

After Kyowa began manufacturing the seat covers, ANA Technics allegedly directed Kyowa to: (1) affix TSO C127a labels onto the seat covers, demonstrating that the seat covers had been flammability tested in accordance with U.S. Federal Aviation Administration (“FAA”) regulations, and (2) execute certificates affirming the seat covers had been flammability tested.

Kyowa alleged it initially executed the certificates because it believed the required testing was performed, but subsequently requested confirmation that ANA Technics had conducted all of the necessary fire tests and possessed the certifications necessary to obtain the FAA labels. When ANA Technics failed to respond to Kyowa’s requests, Kyowa informed ANA Technics that it would not execute any additional certificates until it received confirmation that the testing was performed.

On October 1, 2004, ANA Technics terminated the MOU, claiming that Kyowa’s work was “substandard.” Kyowa brought an action in Japan (the “Japanese Action”) alleging, among other things, that ANA Technics terminated the MOU to conceal the unlawful TSO C127a labeling. Ultimately, the Japanese Action was dismissed, and that dismissal was upheld on appeal.

Kyowa then brought an action against ANA Technics and other related entities (collectively, the “ANA Companies”) in New York Supreme Court for fraud based on the same acts and transactions set forth in the Japanese Action. The ANA Companies moved to dismiss arguing, among other things, lack of personal jurisdiction. The ANA Companies also moved for sanctions against Kyowa on the ground that Kyowa’s lawsuit was an attempt to relitigate the same claims which were dismissed in the Japanese Action.

First, Justice Scarpulla rejected Kyowa’s argument that the ANA Companies were subject to general jurisdiction merely because the defendant companies were registered in New York and appointed the Secretary of State as their agent for service of process. According to the Court, the ANA Companies’ “simple registration in New York is an insufficient ground for this Court to exercise general jurisdiction over them.” Moreover, the fact that the ANA Companies, which are all incorporated and headquartered in Japan, derive some revenue from their New York flight operations “is plainly insufficient to render the ANA Companies ‘essentially at home’ in New York”.

Second, the Court declined to exercise specific jurisdiction over the ANA Companies under either CPLR §§ 302(a)(1) (transaction of business) or 302(a)(2) (tortious acts committed within the state). Specifically, the Court held there was no “articulable nexus” or “substantial relationship” between New York and Kyowa’s claims arising out of ANA Technics’ termination of the MOU.  And, the Court noted that Kyowa failed to allege any tortious act that the ANA Companies committed in New York. Indeed, the MOU was executed in Japan, any alleged misrepresentations occurred in Japan, the seat covers were manufactured in Japan, and any alleged harm to Kyowa occurred in Japan.

Last, the Court agreed that sanctions were warranted under 22 NYCRR § 130-1.1 because the “action is meritless and without a good faith basis.” According to the Court, “there is simply no basis for a New York court to assert jurisdiction over a dispute between Japanese entities, a dispute which has no specific connection to New York or its citizens.” Importantly, the Court noted that Kyowa’s claims were already fully litigated and disposed of in the Japanese Action.

As demonstrated in Kyowa Seni, Justices in the Commercial Division have very little patience for litigants who assert frivolous arguments and attempt to relitigate previously decided claims.  While the result in this case may seem harsh to some, a full reading of the Court’s decision reveals that Justice Scarpulla gave plaintiff the opportunity to withdraw its action and avoid sanctions.  Despite fair warning, Plaintiff declined to do so.