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Court Upholds Forum Selection Clause Finding Enforcement Would Not Be Unconscionable

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  • Posted on: Dec 28 2018

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 Dept. 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.

[This Blog previously addressed the enforceability of forum selection clauses, here.]

On December 14, Justice Elizabeth H. Emerson of the Supreme Court, Suffolk County, Commercial Division, issued a decision concerning the enforceability of a forum selection clause. In Somerset Fine Home Bldg., Inc. v. Simplex Indus., Inc., 2018 N.Y. Slip Op. 51845(U) (here), the Court held that a forum selection clause was enforceable despite claims that it was unconscionable (i.e., it was unreasonable and unjust to enforce it) and deprived the moving party of its day in court.

Somerset Fine Home Building, Inc. v. Simplex Industries, Inc.

Somerset involved an agreement to purchase a modular home between Somerset Fine Home Building, Inc. (“Somerset”), a home builder with offices in Suffolk County, New York, and Simplex Industries, Inc. (“Simplex”), a manufacturer of modular homes located in Scranton, Pennsylvania. Pursuant to the sales agreement, Somerset agreed to purchase a modular home for $886,080.00. The home was delivered to a site in Bridgehampton, New York, where it was to be erected by the plaintiff for the homeowners, William and Kaitlyn Gambrill. The sales agreement provided, in pertinent part, 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.

Somerset commenced the action for breach of contract, breach of warranty, and fraud alleging, inter alia, that Simplex failed to deliver conforming, merchantable goods pursuant to the parties’ agreement. Simplex moved to dismiss the complaint pursuant to CPLR 3211(a)(2) arguing, among other things, that the court lacked subject matter jurisdiction over the action because the parties agreed to litigate their dispute in Pennsylvania. The Court granted the motion.

As an initial matter, the Court rejected the contention that it lacked subject matter jurisdiction over the action because of the forum selection clause. Slip op. at *2 (“It is axiomatic that a court cannot be divested of its subject matter jurisdiction by a contract. Thus, the forum-selection clause does not affect the jurisdiction of the court.”).

In Lischinskaya v. Carnival Corp., 56 A.D.3d 116 (2d Dept. 2008), relied upon by Justice Emerson, the Appellate Division, Second Department, explained the rationale behind the rule:

[W]e nevertheless conclude that the Supreme Court was incorrect in holding that enforcement of [the forum selection] clause deprived it of subject matter jurisdiction. A court lacks subject matter jurisdiction when it lacks the competence to adjudicate a particular kind of controversy in the first place.… Rather, the defendant’s argument here is that the jurisdiction of the court has been divested by a term of the contract between the parties. That argument has been rejected, for good reason, as “hardly more than a vestigial legal fiction.”

… It is axiomatic that a court cannot be divested of its subject matter jurisdiction by a contract. Thus, while the forum selection clause at issue here may be enforceable as a term of the contract between the parties, it does not affect the jurisdiction of the Supreme Court.

Id. at 122-23 (citations omitted).

Notably, the Second Department declined to follow two cases (see LSPA Enter., Inc. v Jani-King of N.Y., Inc., 31 A.D.3d 394 (2006), and Fleet Capital Leasing/Global Vendor Fin. V. Angiuli Motors, Inc., 15 A.D.3d 535 (2005)), in which the court affirmed dismissal of the actions for lack of subject matter jurisdiction due to the enforceability of a forum selection clause. Id. at 122 (“These two cases should no longer be followed in that regard.”).

Although the Court rejected dismissal on subject matter jurisdiction grounds under CPLR 3211(a)(2), it nonetheless held that dismissal may be appropriate under CPLR 3211(a)(1). Id. at 123. In light this holding, Justice Emerson “consider[ed] the defendant’s motion as having been made under CPLR 3211(a)(1).” Slip op. at *2.

Addressing the merits of the motion, Justice Emerson held that the clause was not unconscionable. The Court rejected the argument that the unequal bargaining power of the parties sufficed to invalidate the clause, especially since each side was represented by counsel and the clause was not the product of high-pressure tactics:

The forum-selection clause in this case is not hidden or tucked away within a complex document of inordinate length. It appears in the same size print as the rest of the agreement …, each page of which has been initialed by the plaintiff’s principal. The plaintiff does not contend that the defendant used high-pressure tactics to get it to sign the agreement. Rather, the plaintiff contends that it was in a weaker bargaining position than the defendant and that it had no choice. The fact that the parties do not possess equal bargaining power does not invalidate a contract as one of adhesion. Moreover, the parties acknowledged in the agreement that they had the opportunity to obtain the assistance of counsel in the negotiation, drafting, and execution of the agreement.

Slip op. at *3 (citations omitted).

The Court also rejected the contention that a distant venue and financial distress sufficed to invalidate the forum selection clause:

The plaintiff contends that it is a small company that cannot travel to Lackawanna County, Pennsylvania, to redress wrongs suffered in Suffolk County, New York. Simply claiming financial distress does not warrant setting aside a valid forum-selection clause. The plaintiff has offered no evidence that the cost of commencing an action in Pennsylvania would be so financially prohibitive that, for all practical purposes, it would be deprived of its day in court. Moreover, the fact that Pennsylvania is not the plaintiff’s home venue is not determinative. The plaintiff does not contend that Pennsylvania would treat it unfairly and deny it a chance to gain a remedy.

Id. at *3 (citations omitted).

Finally, the Court noted that since the transaction involved two commercial entities, unconscionability had “little applicability” to the enforceability of the clause. The reason, explained the Court, is because the concept of unconscionability is meant “to protect the commercially illiterate consumer beguiled into a grossly unfair bargain by a deceptive vendor or finance company,” not commercial entities involved in “an arm’s-length business agreement.” Id. (citations omitted).  

Takeaway

Somerset reinforces the principles above; namely, a forum selection clause is prima facie valid and enforceable unless shown by the resisting party to be unreasonable or unjust (i.e., unconscionable). Somerset could not overcome its burden of demonstrating that the forum selection clause should be set aside. Bell Constructors v. Evergree Caissons, 236 A.D.2d 859, 860 (4th Dept. 1997). This was especially so given the fact that the transaction at issue was negotiated and drafted by counsel at arm’s length on behalf of two commercial entities. Under those circumstances, “unconscionability ha[d] little applicability” to the enforceability of the forum selection clause.

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