Search results for: ""forum selection clauses"

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.

 

Baker v. Impact Holding, Inc., C.A. No. 4960-VCP (Del. Ch. May 13, 2010), read opinion here.  

The Court of Chancery in this opinion addresses issues related to those discussed in recent articles and seminars about the exodus of cases involving Delaware corporate law to courts outside of Delaware in which Delaware corporate issues are decided by those foreign courts. See, e.g., here, here and here. 

Professor Ribstein provides scholarly analysis of the case here.

Issues  Involved

The corporate issue in this case involved DGCL Section 225 and whether the director was entitled to a seat on the board of directors of the defendant Delaware corporation. However, before that substantive issue could be addressed, the Court needed to decide a motion to dismiss based on a forum selection clause in an agreement that required all suits to be filed in Dallas, Texas.

Holding

The Court of Chancery upheld the exclusive forum selection clause and dismissed the case without prejudice to it being filed in Dallas, Texas–even though Delaware corporate law clearly applied under the internal affairs doctrine.

Arguments of the Parties

Baker filed this action pursuant to Section 225 of the DGCL to seek a declaratory judgment that his removal from the board was a violation of a right embodied in a Stockholders Agreement (SHA) with the defendant  Delaware corporation and the stockholder that appointed Baker. However, Baker himself was not a signatory to the SHA. He was appointed to the board by a stockholder who was a signatory.

A motion to dismiss was filed based on an exclusive forum selection clause that required all suits related to the SHA to be filed in Dallas, Texas. Because Baker relied on the SHA as the basis for his right to be appointed to the board, the Court reasoned that the suit was clearly related to the SHA.

Baker opposed the motion on the basis that  it was against the public policy of Delaware to enforce an agreement that allowed a court outside of Delaware to adjudicate a matter of Delaware corporate law governed by the internal affairs doctrine and DGCL Section 225. In addition, Baker relied on the fact that he was not a signatory to the agreement.

LLC Act  v. DGCL

Although a Delaware corporation was involved in this case, Baker relied on Section 18-109(d) of the Delaware LLC Act which prohibits a "member who is not a manager" from waiving its right to maintain a legal action or proceeding in the courts of the State of Delaware "with respect to matters relating to the organization or internal affairs of a limited liability company."

The problem with Baker’s argument, the Court explained, was three-fold: First, the DGCL applied in this case and not the LLC Act. Second, even if the LLC Act applied by analogy, only members were prohibited by Section 18-109(d) from waiving the right to litigate in Delaware. However, Baker was a director and by analogy would be in "the same shoes" as a manager of an LLC for purposes of applying this statute by analogy–but the LLC statute does not prohibit managers from waiving their rights to litigate in Delaware any of their disputes related to the LLC. Third, when the Delaware Legislature amended the LLC Act, it did not enact a similar prohibition in the corporate context regarding such waiver. The Court inferred from this that the Legislature did not intend to make an analogous provision applicable to corporations.

Reasoning

A.   Public Policy

The Court ruled that "Delaware does not have an overarching public policy that prevents the stockholders of Delaware corporations from agreeing to exclusive foreign jurisdiction of any matter involving the internal affairs of such entities." Slip op. at 5. See also n. 8 (citing cases where Delaware courts routinely uphold forum selection clauses, even if they specify foreign jurisdictions.)

B.  Non-Signatory Bound by Forum Selection Clause

As for the argument that Baker was not bound by the agreement because he was not a signatory, the Court reasoned that he was estopped from refusing to comply with the forum selection clause provision. Prior Delaware cases have applied a three-step analysis for determining the applicability of a forum selection clause to a non-signatory. See Slip op. at 8 (citing Weygandt v. Weco, LLC, 2009 WL 1351808, at * 4 (Del. Ch. May 14, 2009)(other citations omitted)). The first factor is whether the forum selection clause is valid. Second, the Court inquires as to whether the non-signatories are third-party beneficiaries or closely related parties? Third,  the question is asked: does the claim arise from their standing related to the agreement. All three factors applied to support the conclusion that Baker should be bound by the agreement. This holding is sound notwithstanding the truism, supported by recent Delaware law, that an individual is not personally liable on a contract that he only signs in his representative capacity. See n. 14.

Thus, the motion to dismiss pursuant to Court of Chancery Rule 12(b)(3) for improper venue was granted, without prejudice.

Ashall Homes Limited v. ROK Entertainment Group, Inc., C.A. No. 4643-VCS (Del. Ch. Apr. 23, 2010), read opinion here.

 This Court of Chancery decision upheld a forum selection clause that required the dispute between the parties to be litigated in the Courts of the United Kingdom and to be governed by the laws of England. Notably, the Court observed that the internal affairs doctrine did not require the application of Delaware corporate law to this dispute. This instant decision spends a large proportion of its 25-pages addressing the public policy reasons why forum selection clauses are upheld including the Court’s aversion to “issue splitting”.
 

Compare a more recent Court of Chancery opinion that upheld a forum selection clause requiring the case to be litigated in Texas even though the internal affairs doctrine in that separate case did require the application of Delaware corporate law. See Baker opinion from Chancery here.

 

Weygandt v. Weco, LLC, Del. Ch., No. 4056-VCS (May 14, 2009), read opinion here

Issue Presented

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.

Background

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.

Legal Analysis

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.)

Direct Benefit

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.

Foreseeability

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.

Conclusion

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.

 

In Troy Corp. v. Schoon, (Del. Ch., March 26, 2007), 2007 WL 949441, read opinion here, the Chancery Court reiterated the settled Delaware jurisprudence that forum selection clauses are enforceable but that in order to achieve their purpose, if they are meant to be exclusive, they must clearly express that intent unequivocally. The clause in this case was unequivocal in stating that the parties agreed to choose as an exclusive forum the federal court for the Southern District of New York. In this Motion to Dismiss under Rule 12(b)(3), however, the issue was joined because the complaint filed did not raise an issue of federal jurisdiction. The Chancery Court was compelled to make an unusual analysis–for a state court–about whether a federal court had jurisdiction over a particular dispute. Reasoning that there was no federal court jurisdiction (based on diversity or otherwise), and the agreement not having provided for an alternative forum, the court concluded based on the facts presented that Delaware state court was a permissible forum to adjudicate the dispute.

One lesson to be learned from this decision, especially for those drafting forum selection clauses, is that they must provide for an alternative court in the chosen state if, as in this case, the only court chosen did not have subject matter jurisdiction over the dispute.  Another example  for avoiding the result in this case arises from the following hypothetical:  if an agreement only provided for Chancery Court as a forum, it would be possible, depending on the type of claim asserted,  that the court would not have equitable jurisdiction–which cannot be created by consent of the parties–as opposed to personal jurisdiction–much like federal subject matter jurisdiction cannot be conferred by the parties. Thus, if the drafter wanted to be certain that all disputes would remain in Delaware courts, the drafter should allow for an alternative Delaware court if Chancery did not have equitable jurisdiction.

 In Cornerstone Brands, Inc. v. O’Steen, read opinion here , the Chancellor discussed, among other things,  the topic of  forum selection clauses, which are routinely upheld in Delaware. The most noteworthy aspect of this opinion, which I predict will be an often cited opinion for this reason, held that a claim for attorneys’ fees could proceed based on the breach of a forum selection clause, and an award of such damages would not contravene the American rule (which is that everyone pays their own attorneys’ fees, despite prevailing).  Thus, a motion to dismiss that claim was denied. The Chancery Court cited for support of this proposition the Delaware Supreme Court decision in El Paso Natural Gas Co. v. TransAmerican Natural Gas Corp., 669 A.2d 36, 40 (Del. 1995).  The Court also cited other decisions from other jurisdictions for support of the view that attorneys’ fees for breach of a forum selection clause may be awarded–and that is not deemed to be in contravention of the American rule.  This letter opinion also discussed the elements of promissory estoppel, as well as equitable estoppel. 

  In addition, especially notable about this case is a footnote indicating that an oral ruling in this matter was made from the bench on January 23, 2006, in which the Chancellor denied a motion to dismiss based on the following reasoning: the defendant here was a third-party beneficiary to the merger agreement in dispute, and therefore would be deemed to have consented to the forum selection clause in that agreement being litigated in the case.

 Also of  importance was the Court’s discussion of subject matter jurisdiction with reference to  DGCL  Section 111(a)(2) (granting jurisdiction for interpretation of the validity of any documents relating to the sale or creation of stock or options relating thereto); as well as 10 Del .C. Section 341 (granting the Chancery Court jurisdiction to hear and determine all matters and causes in equity);  and 10 Del. C. Section 342 (the Court of Chancery shall not have jurisdiction to determine any matter wherein sufficient remedy may be had by common law or statute before any other Court or jurisdiction of this state). 

 The Court noted three basic ways in which it can have subject matter jurisdiction: (1) One or more of the claims is equitable in character; (2) The plaintiff requests relief that is equitable in nature; or (3) If subject matter jurisdiction is conferred by statute.

UPDATE: Dan Tin, Esq. just brought to my attention the following article he wrote about forum selection clauses:   Tan, Daniel S., "Damages for Breach of Forum Selection Clauses, Principled Remedies, and Control of International Litigation" . Texas International Law Journal, Vol. 40, p. 623, 2005.  Available at SSRN: http://ssrn.com/abstract=628581

In Episode 3 of the Delaware Corporate Litigation Insights Podcast, hosts Francis Pileggi & Chauna Abner are joined by Lewis Brisbois partner Aimee Czachorowski to examine three recent Delaware Court of Chancery decisions that every corporate litigator should have on their radar. The trio explore how Delaware courts are approaching forum selection clauses in the wake of recent amendments to Section 122(18) of the Delaware General Corporation Law, including when fiduciary duty claims can be contractually litigated in another jurisdiction.

The hosts also analyze what it takes to establish jurisdiction over foreign executives who oversee investor-appointed directors. Finally, they review a recent decision confirming that parties who disregard a valid forum selection clause may be required to pay the opposing party’s attorneys’ fees and costs.

Listen to the full episode for key insights on practical drafting considerations, litigation strategies, and navigating corporate governance disputes and forum selection issues in Delaware. Delaware Corporate Litigation Insights: A Lewis Brisbois Podcast – Podcast – Apple Podcasts

A recent decision of the Delaware Court of Chancery acknowledged longstanding precedent which prohibits a state court from enjoining proceedings in a federal court.  In Schwartz v. Cognizant Technologies Solutions Corporation, C.A. No. 2021-0634-LWW (Del. Ch. March 25, 2022), the court recited several well­-established principles barring it from issuing an injunction to interfere with a federal court proceeding–which should be compared to the many decisions that have been discussed on these pages over the last 17 years regarding the well-settled enforceability of forum selection clauses.

Extensive background facts about the underlying advancement litigation appears in a Reuters article that describes the dispute between the parties as “lurid”. Extensive commentary on advancement cases have appeared on these pages over the last 17 years, but this case provides an usual procedural twist.

Highlights:

  • The court relied on several United States Supreme Court decisions for the principle that a state court cannot enjoin proceedings in a federal court. See Slip op. at 7-11.  The court described it as “black letter law” that an anti-suit injunction was not permissible in this context.  Cf.  Suits to enforce Delaware forum selection clauses.
  • The court distinguished the enforcement of forum selection clauses involving cases in other state courts. See Slip op. at 12.
  • The court explained that the federal court where related litigation is pending is the court that will decide whether the forum selection clause before that court should be enforced, and cited several cases where federal courts have routinely enforced forum selection clauses.  See Slip op. at 13.