A Comparison of Forum Selection Clause Treatment in Nevada, New York and Federal Common Law

Posted by: on Mon, Dec 14, 2015

Share this post

FEDERAL COMMON LAW ON FORUM SELECTION CLAUSES

In Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), the Supreme Court announced the Federal common law rule that forum selection clauses are valid and enforceable, except when it is shown that enforcement would be unreasonable. The modern view is that forum selection clauses are to be enforced if it is fair and reasonable to do so. See, Restatement (Second) of Conflict of Laws Section 80 (1988 revision) (“The parties’ agreement as to the place of the action will be given effect unless it is unfair or unreasonable”) [Note 5]; Annot., Validity of Contractual Provision Limiting Place or Court in which Action may be Brought, 31 A.L.R.4th 404, 409 (1984 & Supp. 1994). 
In 1972, the Supreme Court in Breman v. Zapata Off-Share, recognized the general validity of forum-selection clauses. The Court found that the traditional rationales American courts used to reject the validity of forum-selection clauses were contrary to public policy and ousted the courts of jurisdiction. Further, these rationales were unsound in light of the realities of the modern business world and rested on “vestigial legal fiction.” The Bremen court held that forum-selection clauses “are prima facie valid and should be enforced unless enforcement is shown by the resisting party to be unreasonable under the circumstances.” The Court concluded that “the elimination of all such uncertainties by agreeing in advance on a forum acceptable to both parties is an indispensable element in international trade, commerce and contracting.” 
The Bremen Court focused on four factors in determining the validity of forum-selection clauses. In holding that such clauses are prima facie valid, the Court mandated that they be specifically enforced unless the party challenging enforcement could show one of the four factors.
First, a clause will not be enforceable if its enforcement is unreasonable and unjust. Second, a clause is not enforceable if there is fraud, undue influence, or overwhelming bargaining power. Fraud was later defined to mean fraud in the inducement of the forum-selection clause itself, not simply any fraud related to the contract. Therefore, a forum-selection clause can remain valid and enforceable even in the face of fraudulent conduct.
In paragraph 4.6 of all eight of the Promissory Notes involved in the instant case, New York law is selected as the governing law, and New York is selected as the mandatory venue in the forum selection clause as follows:
4.6 Governing Law. This Note shall be governed by and construed in accordance with the laws of New York without regard to principles of conflicts of law. Any action brought by either party against the other concerning the transactions contemplated by this Note shall be brought only “in the state courts of New York or in the federal courts located in the state and county of Nassau. (Emphasis added).

Likewise, all eight of the relevant Securities Purchase Agreements contain an identical provision which states as follows:
8. Governing Law.

a. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of New York or in the federal courts located in the state and county of Nassau. (Emphasis added).

The only difference in the forum selection and choice of law provisions contained in the Note and in the Securities Purchase Agreement is that the clause in the Note refers to “this Note” and the clause in the Securities Purchase Agreement refers to “this Agreement.” The language is particularly broad in that it refers to “any action brought by either party against the other.”
Both clauses are mandatory (“shall be”) and are broad enough to encompass this action since it is worded in such a way that it applies “to any action brought by either party against the other “concerning the transactions contemplated by this Agreement.” Thus, it is clearly broad enough to include the instant action filed in Nevada. Mandatory forum selection provisions such as those which were negotiated by the parties in the instant case are presumptively valid and should be enforced. Mis Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972). Indeed, even in a consumer context where a party has no realistic ability to negotiate the terms of a forum selection clause, the United States Supreme Court has found that the inclusion of such clauses is permissible when they are reasonable. See, Carnival Cruise Lines v. Shute, 499 U.S. 585, 586 (1991). 
Nevada Law on Forum Selection Clauses
The forum selection clauses at issue here are eminently reasonable under the circumstances. Players Network is a Nevada entity, while the Defendants are based in Delaware and New York. The court should only disregard mandatory forum selection clauses in extreme circumstances, none of which exist here. See, Coppola v. Baron, Inc., 2007 WL 4180590 (Nev. Nov. 20, 2007) (“Forum selection clauses are prima facie valid and enforceable after a strong showing by the party opposing the clause that enforcement would be unreasonable and unjust.”) There is also no question that the governing law provision and the forum selection clause are both mandatory since they both use the words “shall be.” 
The Nevada Supreme Court noted in Tuxedo Int’l v. Rosenberg, 251 P.3d 690 (Nev. 2011) that forum selection clauses would be rendered meaningless if parties were simply allowed to circumvent them completely by merely alleging fraudulent inducement of the contract rather than simply asserting contract based claims. The Nevada Supreme Court in Tuxedo Int’l eventually adopted the intent of the parties approach as set forth in Berrett v. Life Ins. Co. of the Southwest, 623 F.Supp. 946, 948-49 (D. Utah 1985), and there the court concluded that the “key factor in determining whether court claims are subject to a forum selection clause was the intention of the parties reflected in the wording of the particular clauses and the facts of each case.” Ibid. at 948-49. Applying the intent of the parties approach recommended by the Nevada Supreme Court, and by the Utah District Court, the governing law provision and choice of law provision contained in both the numerous Promissory Notes and Securities Purchase Agreements indicate that “any action” brought by either party “concerning the transactions contemplated by this Agreement” shall be brought “only in the state courts of New York or in the federal courts located in New York.” This is clearly sufficiently broad language to encompass the complaint filed herein since the complaint concerns the transactions contemplated by the Securities Purchase Agreement and by the eight Promissory Notes. 
Forum Selection Analysis is Procedural in Nature
Even though what the Nevada Supreme Court would do may not be dispositive of the issue, it is certainly persuasive even though (1) New York law applies and (2) questions of venue in the enforcement of forum selection clauses, are “essentially procedural, rather than substantive, in nature.” See, Jones v. Weibrecht, 901 F.2d 17, 19 (2nd Cir 1990). In Jones, the court noted that the United States Supreme Court in the Stewart Org., Inc. V. Ricoh Corp., 487 U.S. 22, 108 S. Ct. 2239, 101 L.Ed.2d 22 (1988), was presented with the question of whether state or federal law controlled the resolution of a motion to transfer an action pursuant to 28 U.S.C. § 1404(a) to the venue provided for in a contractual forum selection clause entered into between the parties. The forum selection clause at issue provided that any action arising out of the parties’ agreement would be brought in either state or federal court in Manhattan, somewhat similar to the forum selection clause in the instant case. The court held that federal law governed the disposition of a Section 1404(a) motion. Ib id. at 32, 108 S. Ct. at 2245. Furthermore it held that the presence of a forum selection clause was but one factor in the district court’s consideration of fairness and convenience to transfer a case to another venue under Section 1404(a). However, in Jones v. Weibrecht, the court noted that the same broad based balancing test is not appropriate where a party seeks to have an action dismissed or remanded to state court rather than transferred on the basis of a forum selection clause to a specific state or federal forum. 
In 1993, in Falconwood Financial Corp. v. Griffin, 838 F.Supp. 836 (S.D.N.Y. 1993), the court noted as follows:
Although the existence of a forum selection clause does not foreclose the court from deciding that the case should be heard in a different forum from that chosen, “such clauses are prima facie valid and should be enforced unless enforcement is shown by the resisting party to be ‘unreasonable’ under the circumstances. … Recent cases stress that the party seeking to avoid such a clause must satisfy a “heavy burden of proof” to convince the court that the “serious inconvenience of the contractual forum” warrants setting aside the forum selection clause…. While the forum selection clause in the parties’ contract does not preclude this court from granting defendants’ motion for a change of venue, the choice of forum already made by the parties should be given considerable weight in the court’s analysis.

Id. at 840.
New York Law on Forum Selection Clauses
The United States District Court for the Southern District of New York in 2005 addressed these issues in Koninklijke Philips Electronics v. Digital Works, Inc., 358 F. Supp.2d 328 (S.D.N.Y. 2005). In this case, the District Judge Conner found that the forum selection clause in the parties’ agreement was enforceable, explaining that forum selection clauses incorporated in an agreement between two sophisticated parties is not unreasonable simply because it may not have been a negotiated term. The court noted that the law does not relieve a commercial entity of a contractual obligation knowingly assumed simply because the complaining party lacked bargaining leverage to avoid the unwanted term. A valid contractual forum selection clause establishes sufficient contacts with New York for exercise of personal jurisdiction over the non-resident defendant to satisfy the constitutional principles of due process. The court also noted that the enforcement of forum selection clauses are essentially procedural rather than substantive in nature, and that federal law applies in diversity cases. The court explained that the validity of a contractual forum selection clause is determined by federal not state law, and that federal law applies in diversity cases. Id. at 329. 
In any case, the court held that “forum selection clauses such as the one found in the agreement in question are enforceable under both federal and New York law.” Id. The court explained that enforcement of forum selection clauses in contracts has been followed throughout the Second Circuit and applied in federal diversity cases. Id. at 331. The court noted that the unreasonable exception to enforce forum selection clauses is narrowly construed and “renders a forum selection clause unenforceable in the following limited circumstances: (1) if its incorporation into the agreement was the result of fraud or overreaching; (2) if the complaining party will for all practical purposes be deprived of his day in court due to the grave inconvenience of the selected forum; (3) if the fundamental unfairness of the chosen law may deprive the plaintiff of a remedy; or (4) if the clauses contravene a strong public policy of the forum state.” Id. at 332. This is in line with federal law that forum selection clauses are enforced unless the incorporation of the clause itself was the result of fraud. In addition, the Second Circuit makes it clear that a combination of a permissive forum selection clause and a waiver of any claims of forum non conveniens amounts to a mandatory forum selection clause. See, Aguas Lenders Recovery Group, LLC v. Suez, 2009 WL 3413172 (2nd Cir. October 23, 2009). 
In the instant case, there is both a mandatory selection clause and a waiver of claims to forum non conveniens. The laws of New York, Nevada and federal common law all mandate that this case be tried in New York (state or federal) applying New York laws. Hence, the Amended Complaint should be dismissed or the case transferred to the related case pending in New York.
CONCLUSION
In light of the foregoing, this court can either dismiss the complaint and direct the Plaintiff to refile its suit in New York state or New York federal court, or this court can simply transfer this case to the United States District Court for the Eastern District of New York, to be consolidated with the related pending case now pending in the United States District Court for the Eastern District of New York. 

About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our firm’s practice includes a strong emphasis on personal injury accidents. Call us at 702-384-7111.

Note: This article, and any other information you obtain at this website, is not offered as legal advice, nor should it be relied upon as such, nor is it a solicitation for legal services. Only a licensed attorney can advise you with respect to your specific legal needs. We welcome your contacting our firm to discuss such representation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

Some Pixel Tracking Code