Forum Selection Applies To Dispute Even As to Non-Signatories Under the “Close Relationship” DoctrinePrint Article
- Posted on: Dec 15 2021
By: Jeffrey M. Haber
A forum selection clause is contractual provision that sets forth the location designated by the parties for dispute resolution. Such clauses can be found in virtually every type of contract, e.g., employment agreements, commercial contracts, and purchase and sale agreements. Parties require forum selection clauses to reduce litigation expenses, avoid adverse laws, and mitigate the risks associated with unknown judges and/or juries.
Under New York law, “a contractual forum selection clause is documentary evidence that may provide a proper basis for dismissal pursuant to CPLR 321l (a)(l).”1 It is “prima facie valid and enforceable” unless the challenging party can show the forum selection clause “to be unreasonable, unjust, in contravention of public policy, invalid due to fraud or overreaching,” or “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.”2
Forum selection clauses can be mandatory or permissive. The former requires the dispute to be litigated only in the designated venue, while the latter permits litigation in a particular venue but does not prohibit it in another jurisdiction.3
In interpreting forum selection clauses, courts apply the principles of contract construction.
In Westaub II LLC v. Westermann, 2021 N.Y. Slip Op. 06976 (1st Dept. Dec. 14, 2021) (here), the Appellate Division, First Department affirmed the dismissal of an action on the grounds that the forum selection clause in the parties’ agreement governed the dispute.
[Ed. Note: The discussion of the facts in Westaub derives from the decision of the motion court (i.e., the transcript of the hearing on the motion), and the briefs on appeal.]
Westaub involved a joint venture between two French citizens – Francis Staub, a well-known manufacturer of cookware, and Antoine Westermann, a three-star Michelin chef who developed a poultry restaurant in Paris called Le Coq Rico. Staub (through his wholly owned company, CSI Finances SAS (“CSI Finances”)) and Westermann (for himself and his wholly owned company Envol SARL) (“Envol”)) entered into an agreement in 2014 (the “2014 Agreement”), which they amended in 2015 (the “2015 Amendment”) (together, the “Amended Contract”), for the development of additional Le Coq Rico locations outside of France, including one in New York City.
Pursuant to their agreement, the parties created two wholly owned U.S. subsidiaries: Westaub, Inc. and Westaub II LLC. The Amended Contract governed the financing, ownership, operational control and other rights of each party regarding, among other things, Westaub II LLC. Relevant to the appeal, the 2015 Amendment provided that it was governed by French law, and that all disputes in connection with its performance or interpretation that could not be resolved amicably were to be brought before a specific court in France:
If an amicable agreement cannot be reached, any dispute between the undersigned parties in connection with the performance or interpretation of this Agreement shall be referred to the Colmar District Court (le Tribunal de Grande Instance de Colmar).
By 2018, the relationship between Staub and Westermann soured. In June 2019, Westermann notified Staub that unless their disputes were resolved amicably, he would take all steps necessary to recover his unpaid salary and unreimbursed expenses. In response, in September 2019, plaintiffs filed the action in New York.
In October 2019, Westermann filed an action in Colmar, France to recover his unpaid compensation and reimbursements, and to enforce his rights in the entities created under the Amended Contract.
Westermann moved to dismiss the New York action based on the forum selection clause in the 2015 Amendment, and alternatively under the doctrines of prior action pending and forum non conveniens.
Westermann argued, inter alia, that he and Westaub II LLC and CSI Finances were parties to the Amended Contract and/or were all so closely related to each other with regard to the joint venture that it was intended and foreseeable that they would be bound by the forum selection clause.
Staub opposed the motion, contending, inter alia, that neither Westermann nor Westaub II LLC was a signatory to the 2015 Amendment, which contained the forum selection clause.
The motion court granted the motion, finding that the forum selection applied, thereby warranting dismissal of the complaint. The court also held that since the 2015 Amendment expressly amended the 2014 Agreement, the forum selection clause applied to Westermann. The court further found that all parties to the action were bound by the forum selection clause because its application was foreseeable as against each of them, whether as signatories or under the “close relationship” doctrine.
[Ed. Note: Under New York law, a non-party that is “closely related” to one of the signatories of an agreement can enforce a forum selection clause in that contract.4 The relationship between the non-party and the signatory in such cases must be sufficiently close so that enforcement of the clause is foreseeable by virtue of the relationship between them.5]
On appeal, the First Department unanimously affirmed.
The Court found that “[t]he motion court correctly read the 2014 Agreement and 2015 Amendment together to find that the forum selection clause in the 2015 Amendment applied to this dispute and required its dismissal.”6 The Court noted that the 2015 Amendment was titled “amendment” and that the parties intended it to “amend the 2014 Agreement, which [was] expressly referred to at least once in the Amendment and whose validity and ongoing force and effect, to the extent not contrary to the Amendment, was reiterated in … the Amendment.”7
Moreover, explained the Court, “the complaint describe[d] the 2015 Amendment as having been the decision of the parties to the 2014 Agreement — defendant and plaintiff CSI Finances SAS — who, the complaint allege[d], amended the original agreement to reflect an additional capital contribution by CSI and a revised equity allocation, and both agreements are described as having been part and parcel of the same overall transaction, namely, the establishment, operation, and management of the restaurant at issue.”
The Court also held that “the motion court properly invoked the close relationship doctrine to render the 2015 Amendment’s forum selection clause binding on nonsignatories defendant and plaintiff Westaub II LLC.”8 The Court explained that “Defendant’s enforcement of the forum selection clause was readily foreseeable, given that his close relationship to signatory Envol was well known to plaintiffs; defendant signed the 2014 Agreement on behalf of himself and Envol, and the 2015 Amendment itself indicate[d] that defendant [was] the manager and sole shareholder of Envol and provide[d] that throughout the document Envol [would] be referred to interchangeably as ‘Envol’ and ‘AW’ (defendant’s initials).”
Finally, the Court said that it was “foreseeable that plaintiff Westaub II LLC, closely involved in the matters at issue in this dispute and closely intertwined with plaintiff CSI, would also be found to be within the reach of the forum selection clause.”9 The Court noted that in the Westaub II LLC operating agreement, Westaub II LLC “designated Francis Staub as its sole manager, and the 2014 Agreement and 2015 Amendment identif[ied] Staub as the chairman of CSI.”
The Court found that the relationship between Westaub II LLC and CSI further evinced a close relationship sufficient to invoke the doctrine: “Both Westaub II LLC and CSI are involved in funding another entity, Westaub Inc., per the 2014 Agreement, with Westaub II LLC obtaining the funds to do so from another entity, Westaub France SARL, 75% of which, the complaint alleges, is owned by CSI. The documents further reflect that all shares of Westaub II LLC are owned by Westaub France SARL, which, again, is 75% owned by CSI.”10
Westaub 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). In Westaub, plaintiffs could not overcome their burden of demonstrating that the forum selection clause should be set aside.
Westaub is also notable for its application of the “close relationship” doctrine. As noted, a signatory to a contract may enforce a forum selection clause against a non-signatory if the non-signatory is “closely related” to one of the signatories such that enforcement of the forum selection clause is foreseeable by virtue of the relationship between the signatory and the party sought to be bound.11 If the non-signatory has an ownership interest or a direct or indirect controlling interest in the signing party (as in Westaub) or, the entities or individuals consulted with each other regarding decisions and were intimately involved in the decision-making process (as in Westaub), then application of a forum selection clause will be proper, as it achieves the purpose behind binding closely related entities to the forum selection clause: it “promote[s] stable and dependable trade relations.”12
Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.
This article is for informational purposes and is not intended to be and should not be taken as legal advice.
- Landmark Ventures, Inc. v. Birger, 147 A.D.3d 497, 497 (1st Dept. 2017); see also Lifetime Brands, Inc. v. Garden Ridge, L.P., 105 A.D.3d 1011, 1012 (2d Dept. 2013).
- Molino v. Sagamore, 105 A.D.3d 922, 923 (2d Dept. 2013) (citation and internal quotation omitted).
- Phillips v. Audio Active Ltd., 494 F.3d 378, 383, 386 (2d Cir. 2007).
- See ComJet Aviation Mgt. v. Aviation Investors Holdings Ltd., 303 A.D.2d 272, 273 (1st Dept. 2003).
- Freeford Ltd. v. Pendleton, 53 A.D.3d 32, 38-39 (1st Dept. 2008).
- Slip Op. at *1.
- Id. (citations omitted)
- Id. at *2-*3.
- Tate & Lyle Ingredients Ams., Inc. v Whitefox Tech. USA, Inc., 98 A.D.3d 401 (1st Dept. 2012).
- Id. (citation omitted).