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Business Owners Beware: Your Forum Selection Clause May Not Be Enforceable

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  • Posted on: Jan 17 2017

What is a forum selection clause?  Corporations and other business entities are all too familiar with them. In its simplest form, a forum selection clause is a provision in a contract that designates a specific location (or a particular court within a specific location) for litigation in the event of a dispute.

Forum selection clauses are common in commercial contracts because they “provide certainty and predictability in the resolution of disputes.” Boss v. American Express Fin. Advisors, Inc., 6 N.Y.3d 242, 247 (2006), quoting Brooke Group Ltd. v. JCH Syndicate, 87 N.Y.2d 530, 534 (1996). They come in two forms: mandatory and permissive. In the former, the parties are “required to bring any dispute to the designated forum,” while the latter “only confers jurisdiction in the designated forum, but does not deny plaintiff his choice of forum, if jurisdiction there is otherwise appropriate.” Phillips v. Audio Active Ltd., 494 F.3d 378, 383, 386 (2d Cir. 2007).

Under New York law, “parties to a contract may freely select a forum which will resolve any disputes over the interpretation or performance of the contract.” Brooke Group, 87 N.Y.2d at 534. Such clauses “are prima facie valid” and “are not to be set aside unless a party demonstrates that the enforcement of such would be unreasonable and unjust or that the 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.” Sterling Nat. Bank as Assignee of Norvergence, Inc. v. Eastern Shipping Worldwide, Inc., 35 A.D.3d 222 (1st Dep’t 2006) (citations and quotations omitted).

In Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas, 134 S.Ct. 568, 583 (2013), the United States Supreme Court provided the contractual basis for the enforcement of forum selection clauses:

When parties have contracted in advance to litigate disputes in a particular forum, courts should not unnecessarily disrupt the parties’ settled expectations. A forum-selection clause, after all, may have figured centrally in the parties’ negotiations and may have affected how they set monetary and other contractual terms; it may, in fact, have been a critical factor in their agreement to do business together in the first place. In all but the most unusual cases, therefore, ‘the interest of justice’ is served by holding parties to their bargain.

Prospect Funding Holdings L.L.C v. Maslowski:

Last week, the Appellate Division, First Department, issued a decision concerning the enforceability of a forum selection clause. In Prospect Funding Holdings L.L.C v. Maslowski, 2017 NY Slip Op. 00253 (1st Dep’t Jan. 12, 2017), the Court held that a forum selection clause should not have been enforced because it was unreasonable and unjust to do so.

Facts and Proceedings in The Motion Court:

The defendant, Pamela Maslowski (“Maslowski”), was involved in an automobile accident that left her with brain trauma and facial lacerations. The accident occurred in Minnesota, where Maslowski was a long-time resident. Maslowski brought a personal injury lawsuit in Minnesota against the tortfeasors responsible for the accident.

In need of money, and unable to await the completion of her lawsuit, Maslowski entered into a sale and repurchase agreement with the plaintiff, Prospect Funding Holdings L.L.C. (“Holdings”). Holdings is a limited liability company established under the laws of New York, but maintains its principal place of business in Minnesota.

Pursuant to the agreement, Holdings advanced a small amount of money to Maslowski. Notably, the agreement had a mandatory forum selection clause that provided:

The parties irrevocably agree that all actions or proceedings in any way, manner or respect, arising out of or related to this agreement shall be litigated only in courts having situs in New York County, New York, each party consents and submits to personal jurisdiction in the state of New York and waives any right such party may have to transfer venue of any such action or proceeding.

Maslowski eventually filed an action in Minnesota challenging the validity of the agreement. The courts in Minnesota determined that the agreement (which charged her a fee of 19%, and required that she pay an interest rate at 60% per annum) was void as against public policy. Shortly thereafter, Holdings filed the action in New York alleging, among other things, that Maslowski breached the agreement.

Maslowski moved to dismiss the complaint on forum non-conveniens grounds. The motion court denied Maslowski’s motion.  Maslowski appealed.

The First Department’s Ruling:

The Court reversed, holding that enforcement of the forum selection clause was unreasonable and not in the interests of justice because Maslowski had no contacts with New York:

The New York action should have been dismissed pursuant to CPLR 327(a). “[I]n the interest of substantial justice,” the parties’ dispute should be heard in Minnesota (CPLR 327[a]; Islamic Republic of Iran v Pahlavi, 62 NY2d 474, 478-479 [1984], cert denied 469 US 1108 [1985]). Ms. Maslowski demonstrated that the choice of forum provision in the parties’ agreement is unreasonable and should not be enforced (see Brooke Group v JCH Syndicate 488 , 87 NY2d 530, 534 [1996]). Every aspect of the transaction at issue occurred in Minnesota, the parties, documents, and witnesses are located in Minnesota, and defending this action in New York would be a substantial hardship to Ms. Maslowski.

Takeaway:

Prospect Funding teaches that forum-selection clauses are not automatically enforceable. They can be found to be unenforceable when: it is unreasonable or unjust to do so; it is against public policy; or it is the result of fraud or overreaching. In addition, a forum selection clause can be set aside when a party can demonstrate “that a trial in the selected forum would be so gravely difficult that the challenging party would, for all practical purposes, be deprived of its day in court.” Chiarizia v. Xtreme Rydz Custom Cycles, 43 A.D.3d 1353, 1354 (4th Dep’t 2007). Finally, and perhaps more significant in today’s world of e-commerce, a forum selection clause can be invalidated when its existence was not reasonably communicated to the plaintiff – that is, it was unreasonably masked from the view of the prospective purchaser. Jerez v. JD Closeouts, LLC, 36 Misc. 3d 161, 170 (Nassau Dist. Ct. 2012).

The lesson of Prospect Funding therefore is that forum selection clauses, while prima facie valid, are not iron-clad, and can be found unenforceable if a litigant is not careful.

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