Delaware Chancery Court Requires Party to Submit to Terms of Forum Selection Clause Despite that Party Being a Non-Signatory; Based on Equitable Estoppel
Weygandt v. Weco, LLC, Del. Ch., No. 4056-VCS (May 14, 2009), read opinion here
The question in this case is whether a non-signatory defendant can be required to appear in a forum chosen in an agreement executed by an affiliate.
In this Chancery Court decision, the court determined that a party was subject to the personal jurisdiction of the Delaware courts based on a forum selection clause in an agreement that the party was not a signatory to, but which an affiliated party was a signatory to, based on equitable estoppel.
The factual background involves the negotiated sale of an aviation repair business in California. The sale of the business included a contemporaneous lease agreement for the premises on which the purchased business was located. As a condition to closing for the purchase of the business, the lease agreement was entered into for the premises which the business occupied.
The lease agreement was entered into by the owner of the building where the business was located, which was a different entity than the owner of the business but the same person controlled both entities. The Asset Purchase Agreement for the business contained a forum selection or “consent to jurisdiction” clause providing for exclusive personal jurisdiction over any party to the agreement in any state or federal court sitting in Delaware. The lease agreement, however, did not contain a consent to jurisdiction clause. The court reasoned that the sale of the business was to be paid for in two ways: (i) the basic purchase price of the business, and (ii) the stream of lease payments from the lease for the premises on which the business was located.
The court reiterated that on a motion to dismiss under Rule 12(b)(2), the plaintiff bears the burden of showing a basis for the exercise by the court of jurisdiction over a non-resident defendant.
The court rejected the applicability to these facts of the general rule that “agreements that are part of the same transaction are construed together.” However, the court did find applicable the equitable estoppel theory which many cases have applied to hold that a non-signatory was bound by a forum selection clause based on a three part test. First, the forum selection clause must be valid. Second, the defendants need to be either third-party beneficiaries or “closely-related” to the relevant contract. Third, the claim must arise from the status of the defendant as closely-related to the agreement that contains the forum selection clause.
The purpose of the third prong of the three-part test is that the agreement containing the forum selection clause must also be the agreement that gives rise to the substantive claims brought by or against a non-signatory in order for the forum selection clause to be enforceable against a non-signatory. (See footnotes 13 to 15 and 18.)
The rationale for the cases that have enforced forum selection clauses against non-signatory parties are based on the principle that a third-party beneficiary or closely-related party can not enjoy the benefits of an agreement without accepting its obligations. See Capital Group Cos. v. Armour, 2004 WL 2521295 (Del. Ch. Oct. 29, 2004). See also cases collected at footnote 17.
Importantly, it is not only third-party beneficiaries, but also parties who are “closely related” to the agreement at issue that are estopped from avoiding the obligations of an agreement from which they benefit. Thus, even if an agreement expressly disclaims any third-party beneficiaries, a “closely-related party” to the agreement can still be bound by its terms even if not a signatory. See Capital Group, 2004 WL 2521295, at *6.
A party will be considered “closely related” to an agreement for purposes of binding a non-signatory if: (1) she receives a direct benefit from the program; or (2) it was foreseeable that she would be bound by the agreement. (See footnotes 18 and 19.)
In the instant case, the landlord, who was a non-signatory to the purchase agreement which contained the forum selection clause, received a direct benefit from the purchase agreement because the buyer of the business would not have entered into the lease agreement with the landlord if it was not buying the busines–and the lease was not only part of the “consideration” paid for the business, but was also a condition precedent to the purchase of the business.
When a control person agrees to a forum, it is foreseeable that the entities controlled by that person which are involved in the deal will also be bound to that forum. See cases collected at footnote 25. The rationale for binding such entities rests on the public policy that forum selection clauses “promote stable and dependable trade relations” and it would be inconsistent with that policy to allow entities through which one of the parties chooses to act, to escape the forum selection clause. See cases collected at footnote 26.
If the purchaser of the business in this case was excused from buying the business because of fraud or falsity of representations and warranties, it would have no business reason or legal obligation to enter into the lease agreement which it needed only to operate the business. Thus, it was foreseeable that a dispute involving the purchase agreement and the lease agreements would have to be brought in Delaware because of the forum selection clause in the purchase agreement.
Any contrary result would allow for duplicative and inefficient litigation in multiple forums and undermine the benefit of predictability that was provided to the purchaser by agreeing to a forum clause in the purchase agreement. Thus, the court found that the landlord was equitably estopped from asserting that the Delaware court lacked jurisdiction.
This opinion will be helpful for the many transactions which involve multiple agreements–all of which do not contain a forum selection clause. What this agreement does not directly address, however, is those situations where there are multiple agreements in the transaction which have different forum selection clauses, although there are other decisions that have addressed such situations.