Search results for: ""forum selection clauses"

Delaware_State_CapitolLegislation is being proposed to ask the Delaware Legislature to limit the ability of corporations to adopt fee-shifting provisions in their charter and bylaws, but to provide additional support for adopting forum selection clauses in those same corporate documents. The proposed legislation is available at this link. A memo describing the policy analysis on which the proposal is based has also been provided by a cross section of Delaware lawyers representing the major constituencies involved, such as shareholders, directors and corporations. Also available is a FAQ with answers to the most likely questions about the proposed bill. (Slight modifications to the proposed legislation were made after this post was published, and I would expect other amendments to be made prior to its final passage.)

Most readers are aware that the Corporation Law Section of the Delaware State Bar Association annually proposes amendments to the Delaware General Corporation Law for the Delaware Legislature to pass, in order to refine the DGCL on a regular basis and to make sure it adapts to changes in the marketplace. My first hand experience is that those “routine” amendments are often passed by the Delaware Legislature “routinely”. This is so because the process works well and has a long track record of benefitting the state. If the proposals for amendments to the DGCL ever backfired on the legislators–as a political matter, not necessarily a legal matter, then the next proposed bill to amend the DGCL would not pass as easily the following year. That risk, however, has not come to pass for many decades, if ever.

The proposed legislation provides that if a charter or bylaw includes a forum selection clause for stockholder disputes, Delaware must be one forum that is selected. If another state is selected as a forum, Delaware must be included as an additional optional forum. Thus, a state other than Delaware cannot be selected as the exclusive forum. This would be a legislative reversal of the First Citizens decision recently decided in Chancery. The legislation does not directly address the validity of forum selection clauses that choose states other than Delaware, but the proposed DGCL amendment does not ban a permissive forum outside of Delaware as long as Delaware is also included as a permissive forum.

The proposed legislation about fee-shifting clauses and forum selection provisions in corporate charters or bylaws may be sui generis in some ways. Most amendments to the DGCL that are presented to the Delaware Legislature are not controversial and pass without debate. This one is different. The proposed legislation linked above is, in part, a result of the ATP case, styled as ATP Tour, Inc. v. Deutscher Tennis Bund, Del. Supr., No. 534, 2013 (May 8, 2014), highlighted here on these pages, in which the Delaware Supreme Court upheld the facial validity of fee-shifting bylaws for a non-stock corporation. Many legal commentators read that decision to apply to stock corporations as well. Not everyone agreed.

Last year, before the June 30 close of the legislature’s term, legislation was proposed to prohibit stock corporations from adopting fee-shifting bylaws. The DuPont Company and other large companies as well as the U.S. Chamber of Commerce opposed the legislation that was proposed last year to limit fee-shifting bylaws. Institutional investors and shareholder-rights groups supported the proposal. Law professors lined up on both sides of the debate. In light of the short amount of time available last year before the close of the legislative session, and the strong lobbies on both sides of the issue, the legislature deferred consideration until the 2015 legislative session.

Unlike routine amendments to the DGCL, this proposed legislation confronts powerful lobbyists on both sides of the issue. Thus, this proposal may be more akin to typical legislation in which the final version of the bill that is passed is not always similar to the first version of the bill that was introduced. The only certainty about this proposed bill, is that it will generate an enormous amount of commentary and discussion. I would not expect a final outcome until the last day of the session on June 30.

If some legislation is passed that ultimately limits the ability of a corporation to adopt fee-shifting bylaws, an interesting issue will be the impact, if any, that the legislation will have on those companies that already adopted fee-shifting provisions. Generally, there is a prohibition against ex post facto laws. Stay tuned.

SUPPLEMENT: Professor Stephen Bainbridge, one of the nation’s foremost corporate law scholars, has written three commentaries already within the one business day since this proposal surfaced, including links to his prolific scholarship on the topic of fee-shifting and forum selection provisions in corporate organic documents. Each of the following titles is hyperlinked to his corresponding post: An Open Letter to the Delaware Legislature on Fee-Shifting Bylaws; Open Letter to the Delaware Legislature on Forum Selection Bylaws; Delaware Legislative Proposals on Fee-Shifting and Forum Selection Bylaws.

SUPPLEMENT II: Professor Larry Hamermesh, Director of the Institute of Delaware Corporate and Business Law, provides scholarly and insightful analysis on the issue of the potential retroactive impact of the proposed legislation on existing fee-shifting bylaws. If the proposed legislation is passed, this may be one of the first issues litigated.

BE & K Engineering Company LLC v. Rocktenn CP, LLC, C.A. No 8837-VCL (Del. Ch. Jan 15, 2014)

This useful Court of Chancery opinion addresses the familiar issue of competing forum selection clauses in related agreements and how to decide which forum will prevail for purposes of determine the controlling forum for disputes.

The court’s reasoning in the context of a motion for summary judgment under Rule 56 relied in part on the doctrine of “judicial admissions” in connection with factual statements made to a court in Georgia in a parallel proceeding, including those made in pleadings, depositions, statements of counsel to the court and responses to discovery. Many of those admissions were inconsistent with positions taken by the defendant in Delaware. Such statements are binding upon the parties against whom they operate and serve to limit triable issues of fact.

This 54-page opinion explains in great detail the factual basis for its findings regarding which disputes between the parties are covered by which applicable agreement. The court also explained the standard to convert a preliminary injunction into a permanent anti-suit injunction.

Boilermakers Local 154 Retirement Fund v. Chevron Corporation, C.A. No. 7220-CS (Del. Ch. June 25, 2013). Court of Chancery Building

Issue Addressed: Enforceability of bylaws adopted by the Board of Directors providing that litigation relating to the internal affairs of the corporation must be filed only in Delaware.

Short Answer:  Enforceability upheld.  See, e.g., 8 Del. C. § 109(a).

Preface

This momentous decision will undoubtedly result in an increase in the number of companies that amend their bylaws to require lawsuits regarding internal affairs of Delaware companies to be brought only in Delaware courts.  The number of companies that currently have similar bylaws is likely to rise sharply. This opinion noted that over 250 publicly held companies currently have similar provisions. (The sketch above is a likeness of the Court of Chancery Courthouse in Georgetown, Delaware, from the Court’s website.)

Background

This case challenged the bylaws of Chevron and was consolidated with a suit challenging similar bylaws of FedEx Corporation.  Both cases were filed at about the same time as complaints against ten other companies with similar bylaws.  The opinion was decided on a motion for judgment on the pleadings relating to the statutory and contractual validity of the bylaws amended by the Board of Directors to require suits regarding the internal affairs of the Delaware corporations involved to be brought in Delaware, when all indispensable parties are within the jurisdiction of the court.

Analysis

The court’s analysis can be divided primarily into two parts.  The first part was the power of the Board of Directors under the Delaware General Corporation Law Section 109 to amend the bylaws, as part of the contract between the stockholders and the corporation.  The second category of analysis was the enforceability generally of forum selection clauses in contracts.

The following syllogism summarizes the reasoning of the court.  First, the bylaws were properly amended pursuant to statutory authority to include a forum selection clause.  Second, forum selection clauses are enforceable generally.  Therefore, the bylaw amendment providing for a forum selection clause is enforceable.

In its ruling, the Court of Chancery relies heavily on decisions of the United States Supreme Court recognizing the internal affairs doctrine, as well as the general validity of forum selection clauses in contracts.  In addition, the court relies on the scholarship of Professor Joseph Grundfest who is one of the leading scholars advocating forum selection clauses as part of the organic documents of a corporation.

The court engaged in an extensive discussion of DGCL Section 109 to support its reasoning that the board was within its authority to amend the bylaws in the manner that it did, and that stockholders buying stock in a Delaware corporation are on notice that the board has the authority to amend the bylaws in such a manner.

The stated purpose of the forum selection bylaws was to avoid the chaos and the expense of duplicative and multiple derivative and similar corporate lawsuits against directors filed in multiple fora around the country, often on the same day.

The Court of Chancery explained that:

“… an unbroken line of decisions dating back several generations, [by] our Supreme Court has made clear that the bylaws constitute a binding part of the contract between the Delaware corporation and its stockholders.  Stockholders are on notice that, as to those subjects that are the subject of regulation by bylaw under 8 Del. C. § 109(b), the board itself may act unilaterally to adopt the bylaws addressing those subjects.”  See footnotes 97 and 98.

The court also emphasized the limited nature of the forum selection clause in this matter to the extent that it does not foreclose a plaintiff from exercising any statutory right of action created by the federal government.  Rather, the forum selection bylaws focus on claims covered by the internal affairs doctrine which applies the law of the state of incorporation.

The court concluded that its ruling was based on merely a facial challenge, and did not address how it would rule if a concrete factual situation developed in which a plaintiff believed that the board was operating in an unreasonable or unlawful manner, and whether the plaintiff could challenge the use of the board’s power under the bylaws as being inconsistent with its fiduciary duties in some future dispute.  See footnote 146.

It is also noteworthy to clarify and emphasize what this decision did not address and did not opine on.  For example, this opinion did not rule on the validity of a forum selection clause in a certificate of incorporation.  Nor does the decision specifically address the fiduciary obligations of boards in adopting such provisions.  It also remains to be seen whether courts outside of Delaware addressing the same issue will follow suit.

Postscript: In the short time since its publication, predictably, this opinion has already generated substantial commentary. For example, Peg Brickley wrote an article for The Wall Street Journal in which she quoted yours truly. Professor Stephen Bainbridge provides scholarly insights at this link.

National Industries Group (Holding) v. Carlyle  Investment Management LLC, Del. Supr., No. 596, 2012 (May 29, 2013).

Issues Addressed: Enforceability of a forum selection clause, and the prerequisites to vacate a judgment under Court of Chancery Rule 60(b)(6).

Brief Background

This case involved a dispute between two sophisticated entities. One was based in Kuwait and one in the U.S. The parties’ forum selection clause required disputes to be litigated exclusively in the courts of Delaware. When the Kuwaiti company sued the U.S. company, Carlyle Investment Management, in Kuwait, Carlyle sued in the Delaware Court of Chancery seeking an injunction to bar the suit in Kuwait. The strange part of this case is that the Kuwaiti company ignored the Delaware proceedings, based on its position that there was no jurisdiction over it, and allowed a default judgment to be entered against it. Then, a year later, the Kuwaiti company tried to have the judgment against it vacated. After it sought to vacate the judgment, it admitted that it was aware of the proceedings in Delaware. Bad strategy.

The Supreme Court upheld the default judgment.  The Court of Chancery opinion was highlighted on these pages at this link.

Key Takeaway: Forum selection clauses in an agreement between sophisticated parties will be upheld in Delaware, as a general principle. Although, there still must be equitable jurisdiction for the Court of Chancery to hear a case, because the parties cannot confer that by contract. Nonetheless, Delaware’s high court found that there was equitable jurisdiction in this matter.

As a practice tip, in order to avoid the issue of equitable jurisdiction, a forum selection clause should allow for any court in Delaware to be the forum for disputes, as compared to naming a particular court. There are many other nuances about a forum selection clause issue in this decision, as well as an exploration of the deep roots on which the court’s reasoning is based, including U.S. Supreme Court opinions. This decision is must reading for those who need to know the latest Delaware law on forum selection clauses.

As an added bonus, Delaware’s high court discusses the requirements for vacating a default judgment under Court of Chancery Rule 60(b)(6). Hint: Not a good idea to ignore the proceedings and then wait a year before seeking to vacate.

Supplement: Frank Reynolds of Thomson Reuters provides helpful commentary about the case at this link.

Carlyle Investment Management L.L.C. v. National Industries Group (Holding), C.A. No. 5527-CS (Del. Ch. Oct. 11, 2012).

Issue Presented: Whether a default judgment should be opened when the defendant Kuwaiti company agreed to a forum selection clause in Delaware and willfully ignored multiple opportunities to participate in the lawsuit.

Short Answer: No.

Brief Background: This case involves the Carlyle Group, which the Court described as one of the largest private equity firms in the world, and National Industries Group, which is described as a multi-national, multi-billion dollar conglomerate based in Kuwait. (Note Kuwaiti flag above.)  The parties entered into various agreements involving the investment by National in various closed-end investment funds of Carlyle which were unsuccessful.  The agreements between the parties included a forum selection clause requiring that any disputes to be litigated exclusively in the Delaware Court of Chancery.  Carlyle filed suit in the Court of Chancery to enjoin National from litigating a dispute regarding the agreements in Kuwait.  Despite multiple attempts to encourage National to participate, National continued to ignore the Delaware lawsuit and continued to litigate in Kuwait.  The Delaware Court of Chancery issued a default judgment which included an anti-suit injunction preventing National from litigating in Kuwait.  After many months of ignoring Delaware proceedings, and in connection with a motion by Carlyle to have National held in contempt for violation of the injunction, National filed a motion to vacate the default judgment under Court of Chancery Rule 60(b)(4) and Rule 60(b)(6).  The Court denied the motion to vacate the judgment.

Analysis

Although most businesses do not intentionally permit a default judgment to be entered against them, this case is still notable for its robust analysis of the enforceability of forum selection clauses and the policy underpinning the enforceability of those clauses.  This opinion is also helpful to explain why it is a gamble not worth taking, to allow a default judgment to be entered and thereafter to seek to have that judgment vacated under Rule 60.  The Court rejected arguments based on alleged lack of personal jurisdiction and based on an alleged lack of subject matter jurisdiction, as well as rejecting arguments about the non-enforceability of the forum selection clause.  Highlights from this relatively short 33-page opinion include the following:

●          A Rule 60(b) motion is “not an opportunity for a do-over or an appeal.”

●          At a Rule 60(b) hearing, a party does not have the privilege of contesting whether the injunction should have issued.  Rather, one must show that the judgment is void under Rule 60(b)(4) or that “extraordinary circumstances” warrant vacating it under Rule 60(b)(6).

●          Decisions from the Supreme Court of the United States and of Delaware’s Supreme Court were cited to support the general enforceability of forum selection clauses.  See, e.g., footnote 54.

●          A party may use a Rule 60(b)(4) motion only to attack the jurisdiction of the Court and not to attack the resolution of a case on the merits.

●          Delaware courts prevent a party from “making an end-run around an otherwise enforceable forum selection provision through an argument about the enforceability of other terms in the contract.”  See footnote 87.

●          The recent Delaware Supreme Court decision in Ingres Corp. v. CA, Inc. ruled that the Court of Chancery did not err in granting an anti-suit injunction in order to enforce a forum selection clause and prevent a party from litigating in another forum.  See footnote 99, and highlights of that case on these pages available here.  See also Malouf decision by the Court of Chancery, highlighted here.

●          Although Rule 60(b)(6) may be seen as a catch-all provision, and the Court may grant relief “for any other reason,” the standard is stringent and the moving party must show “extraordinary circumstances.”  A strategy by National in this case not to appear and to allow a default judgment may have been unwise, but it does not constitute extraordinary circumstances relieving it of the consequences of its own tactical choice.

We typically focus on summarizing corporate and commercial decisions of Delaware’s Supreme Court and Court of Chancery, but today we find noteworthy a bevy of new lawsuits just filed in the Delaware Court of Chancery.

These new suits challenge bylaws in several companies that require shareholder suits to be filed exclusively in the Delaware Court of Chancery.  If suits are filed elsewhere, the company threatens to sue those shareholders to recoup fees for breach of the bylaw provision. The challenge is based on the alleged violation of due process rights because there was no mutual consent by the shareholders. The suits were filed by the highly-regarded corporate litigator Michael Hanrahan of the Prickett Jones firm in Wilmington. Among the companies sued by shareholders challenging the exclusive forum bylaw provision, in separate lawsuits, are the following Delaware corporations:

Navistar International Corp., AutoNation, Inc. Chevron Corp., SPX Corp., Superior Energy Services, Inc., Franklin Resources, Inc., Curtiss-Wright Corp., Danaher Corp., and Solutia Inc.

Friend of this blog and well-recognized corporate law expert, Professor Stephen Bainbridge, provides timely comments on these new lawsuits. Thomson Reuter’s Alison Frankel wrote an excellent article about these cases that provides a very helpful overview and also has a link to the actual complaints. Broc Romanek on his site called The Corporate Counsel.net, provides helpful observations on this development.

The concept of a forum selection clause in a corporate charter was given momentum by the dicta and citations to Delaware decisions and law review articles, in Vice Chancellor Laster’s footnote 8 in his opinion in the case of In Re Revlon, Inc. Shareholders Litigation, Consol. C.A. No. 4578-VCL (Del. Ch. March 16, 2010), read opinion here.

Scholarship on the Topic

Corporate law scholars have written extensively about this topic and we have featured much of that scholarship on these pages. For example, Professor Joseph Grundfest of Stanford, one of the early promoters of the idea of adding a charter provision (as compared with a bylaw provision), with an exclusive forum selection clause for shareholder suits, presented a lecture in Delaware before the Bench and Bar on the issue, as discussed on these pages here . Prof. Steven Davidoff provided insights on the topic here. Ted Mirvis of Wachtell Lipton, who often litigates high-stakes matters in the Delaware Court of Chancery, has also been credited with this particular forum-selection concept, as indicated in his 2007 article available here.

Although Delaware Courts have not squarely decided the issue of a forum selection clause in a bylaw provision, that is not voted on by the shareholders, a California court struck down a provision in a case noted on these pages here. Professor Bainbridge comments on the topic here.  Prof. Brian J.M. Quinn wrote a law review article on the issue, available here.

Our post here  on this topic and related issues, includes commentary by the late, great scholar Prof. Larry Ribstein and others who have addressed the related problems with multi-jurisdictional litigation and the challenges that arise with an apparent increase in the number of non-Delaware courts deciding issues of Delaware corporate law. A ruling on these new cases by the Delaware Court of Chancery, which will likely be appealed to the Delaware Supreme Court, will be a welcome addition to provide a measure of certainty on this cutting edge topic.

Supplement: Corporate attorney Claudia Allen prepared a study of Delaware forum selection clauses in charters and bylaws that is available via a post by Professor Bainbridge here. Delaware litigator Edward Micheletti has written an article on the issues of multi-jurisdictional litigation that these bylaw amendments are attempting to address. Kevin La Croix on his blog called The D & O Diary compiles articles and statistics and related sources on the various issues related to an increase in M& A/Takeover litigation here  including multi-jurisdictional aspects of that litigation here.

The Wilmington News Journal has an article co-authored by Phil Milford that examines average awards of attorneys’ fees in cases challenging deals even when it is not apparent if the shareholders are receiving a quantifiable benefit from the lawsuit.

In ASDC Holdings, LLC, et al. v. The Richard J. Malouf 2008 All Smiles Grantor Retained Annuity Trust, et al., C.A. No. 6562-VCP (Del. Ch. Sept. 14, 2011), read opinion here, the Court of Chancery held that where a forum selection clause is enforceable in a Delaware court, the Court will enforce it even if Delaware, based on McWane Cast Iron Pipe Corp. v. McDowell-Wellman Engineering Co., would otherwise default to the first-filed forum.  Accordingly, the Court enforced the forum selection clause and enjoined the first-filed action.

This summary was prepared by Kevin F. Brady and Ryan P. Newell of Connolly Bove Lodge & Hutz LLP.

Background

Plaintiffs included a dental practice (“All Smiles”), a private equity firm and its management firm (“Valor”), a limited liability company formed by Valor to invest in All Smiles (“ASDC”), the CEO and director of the private equity firm, and some directors and officers of the dental group and private equity firm.  Defendants are Dr. Richard J. Malouf, the founder and controlling shareholder of the dental practice, as well as a trust Malouf established and controls (collectively, “Defendants” or “Malouf”).

In a 2010 contract with Malouf, ASDC agreed to invest $65 million in All Smiles, receiving in return 71% of its stock.  At the same time, some of the Plaintiffs entered into various side agreements (the “Agreements”) with the Defendants.  In the Agreements, they agreed to the exclusive jurisdiction in Delaware for “any claim or cause of action arising under or relating to t[he] Agreement[s] . . . .”  In February 2011, Malouf and three other parties filed suit in Texas against a number of the Plaintiffs.  The Plaintiffs who were sued in the Texas action moved to dismiss on the grounds that the forum selection clause in the Agreements conferred jurisdiction only in Delaware.

The Plaintiffs then brought suit in Delaware in June 2011.  Plaintiffs sought specific performance under the Agreements, a declaratory judgment that Defendants must litigate exclusively in Delaware, and a preliminary injunction to enjoin the Texas action.  Defendants moved to dismiss, challenging the Court’s subject matter jurisdiction on the basis that Plaintiffs had an adequate remedy at law as they could have raised the forum selection clause as an affirmative defense in Texas.  They also claim that Plaintiffs cannot satisfy the standard for a preliminary injunction.  Specifically, Defendants contend Plaintiffs have not shown (1) a reasonable probability of success and (2) that they would suffer imminent and irreparable harm if the Texas court determined whether the forum selection clause applied.

Broad vs. Narrow Forum Selection Clauses

In Malouf’s motion to dismiss, he relied upon El Paso Natural Gas Co. v. TransAmerican Natural Gas Corp. where the Delaware Supreme Court affirmed the holding that the Court of Chancery lacked subject matter jurisdiction to enjoin a proceeding in Texas even though the parties had agreed to exclusive jurisdiction in the Court of Chancery.

The Court pointed to two key distinctions between El Paso and this matter.  First, in El Paso the parties contracted to confer subject matter jurisdiction specifically on the Court of Chancery for both legal and equitable claims between the parties.  Because the underlying claims in Texas were legal in nature, the Court of Chancery could not exercise jurisdiction.  Contrary to El Paso, in this case the forum selection clause was broader than the one in the El Paso case and enforceable as to legal and equitable claims because the parties submitted “‘to the exclusive jurisdiction of any state court within New Castle County, Delaware or, if it can obtain jurisdiction, the United States District Court for the District of Delaware sitting in Wilmington, Delaware . . . with respect to any claim or cause of action arising under or relating to th[e] Agreement[s] . . . .’”

Second, the forum selection clause in El Paso was narrower than the one in this case.  The El Paso clause was limited to “ALL ACTIONS TO ENFORCE OR SEEK DAMAGES, SPECIFIC PERFORMANCE . . . FOR THE ALLEGED BREACH OF THIS AGREEMENT . . . .” Such “narrow forum selection clauses only cover claims dealing directly with rights embodied in the relevant contract.”   Because it was so narrow, even if there was subject matter jurisdiction, it was unlikely that the clause could have applied to the claims.  The clause in this case, rather, concerned “any claim or cause of action arising under or relating to th[e] Agreement[s].”  Such broad clauses “apply not only to claims dealing directly with the terms of the contract itself, but also to ‘any issues that touch on contract rights or contract performance.’”  The Court concluded that where such a clause is enforceable the parties’ contract should be honored even if the McWane first-filed analysis would suggest otherwise.

Texas Action Should Be Enjoined

The Court found that Plaintiffs satisfied the three elements for a preliminary injunction.  On the first element, the Court held that even though some of the Delaware plaintiffs in Texas were not signatories to the Agreements “‘officers and directors . . . have standing to invoke [a] Forum Selection Provision as parties closely related to one of the signatories such that the non-party’s enforcement of the clause is foreseeable by virtue of the relationship between the signatory and the party sought to be bound.’” It also held that there is a colorable argument that the breach of fiduciary, breach of contract, and unjust enrichment claims arise out of the Agreements, given their broad scope.

On the second element, the Court held that “the procession of a claim in an unwarranted forum poses a threat of irreparable harm warranting a preliminary injunction.” Accordingly, if Plaintiffs are forced to litigate in Texas, they would be deprived of what they bargained for in the forum selection clause.  As to the final element, because the parties agreed to litigate in Delaware, the balance of equities weighed in favor of Plaintiffs and what they bargained for, as opposed to Malouf and his choice of Texas as a forum.

Scully v. Nighthawk is a recent Delaware Court of Chancery case involving multi-state class action litigation, highlighted on these pages here, in which the issue was raised about forum shopping and settlements of suits in multi-state corporate cases that could be potentially collusive.

Professor Brian J.M. Quinn writes here about a short letter dated April 12, 2011 from the Court to counsel in the case, available here, in which the Court offers a mea culpa and accepts the report of the Special Counsel appointed by the Court, which concluded that there was no wrongdoing by any of the lawyers involved and the several issues raised by multi-state class actions, such as what some may describe as forum shopping, are relatively unchartered areas of the law in terms of the absence of bright-line standards in many instances.

The good professor also links to a paper he authored about the increasing trend of merger-related litigation being filed in states other than Delaware as well as the related topic of exclusive forum selection clauses. Some wags refer to the ancillary phenomenon of cases being filed outside of Delaware as "ABC" (anywhere but Chancery).

In a breach of contract dispute, the Delaware Supreme Court on December 1, 2010, in Ingres Corp. v. CA, Inc., No. 105, 2010, read opinion here, affirmed the decision of the Court of Chancery enjoining Ingres Corp. from prosecuting an earlier filed action in California. Ingres brought an action against CA, Inc. in the California Superior Court alleging breach of contract. CA filed an action in Delaware against Ingres requesting injunctive relief that would prevent Ingres from prosecuting the California action and require Ingres to perform its obligations under various contracts. Two of those contracts contained forum selection clauses specifying either Delaware or New York as the chosen forum. The prior decisions of the Court of Chancery in this case were highlighted here.

This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP.

The Supreme Court also clarified its holding in McWane Cast Iron Pipe Corp. v. McDowell-Wellman Engineering Co., 263 A.2d 281 (Del. 1970), in cases where a contract identifies Delaware as the chosen forum in a forum selection clause. In McWane, the Delaware Supreme Court held that Delaware courts should exercise discretion in favor of a stay where a prior action, involving the same parties and issues, is pending elsewhere in a court capable of doing prompt and complete justice. The Supreme Court clarified the application of McWane’s application stating: 

where contracting parties have expressly agreed upon a legally enforceable forum selection clause, a court should honor the parties’ contract and enforce the clause, even if, absent any forum selection clause, the McWane principle might otherwise require a different result. The reason is that the McWane principle is a default rule of common law, which the parties to the litigation are free to displace by a valid contract. Forum selection [] clauses are ‘presumptively valid’ and should be “specifically’ enforced clearly unless the resisting party [] clearly show[s] that enforcement would be unreasonable and unjust, or that the clause [is] invalid for such reasons as fraud and overreaching. (emphasis added)

 

In this case, Ingres argued that the Court of Chancery erred because one of the contracts involved in the dispute did not have a forum selection clause. The Supreme Court rejected that argument noting that after the Court of Chancery considered the entire collection of related contracts governed by the various disputes (including those that contained forum selection clauses specifying Delaware or New York courts as the chosen forum) and then concluded that the agreement that did not have a forum selection clause did not supersede the one that did. In short, the Court of Chancery was simply holding the parties to the promises they made in the agreements. 

 

 

PPF Safeguard LLC v. BCR Safeguard Holding LLC, C.A. No. 4712-VCS (Del. Ch. July 29, 2010), read opinion here.

Brief Overview

Although no new law was announced in this case, the analysis concludes that all the claims are either subject to an arbitration clause or are subject to a mandatory forum selection clause requiring suit to be filed in Louisiana. In addition to the foregoing two provisions, the agreements between the parties had a third permissive (not exclusive) forum clause for Delaware but that was not controlling. The Court described the three overlapping different fora provisions as an “inefficient and convoluted exercise of bargaining liberty . . . .”

Key "Take-Away" Legal Principles

Although the Court acknowledged that because of the overlapping forum selection clauses it was not entirely clear whether certain claims were covered by certain of the forum selection clauses, nonetheless the Court reasoned that dismissal was still required in order to avoid violating the applicable selection clauses neither of which required a Delaware forum. See footnote 59 for cases cited to support the deference that Delaware Courts give generally to forum selection clauses.