There are many decisions highlighted on these pages ordering the enforcement of forum selection clauses. A recent transcript ruling is notable for granting expedited proceedings, without ruling on the merits, for a plaintiff who sought to enforce a forum selection clause even though the plaintiff was not a signatory to the agreement with the forum selection clause.

The plaintiff in this case is a law firm seeking to enforce a forum selection clause in a release and settlement agreement that released the attorneys of the signatory. See Dentons US LLP, v. Platt, C.A. No. 2019-0177-MTZ, transcript (Del. Ch. March 20, 2019). Regular readers are aware that transcript rulings may be cited in Delaware briefs.

A forum selection clause, controlled by Austrian law, was recently interpreted by the Delaware Court of Chancery as a mandatory forum selection clause requiring the dispute to be litigated in Vienna.  In Germaninvestments A.G. v. Allomet Corporation, C.A. No. 2018-0666-JRS (Del. Ch. May 23, 2019), the court also determined that the choice of law provision designating Austrian law and the forum selection clause requiring litigation in Vienna were both enforceable.

N.B. The Delaware Supreme Court reversed this decision in an opinion dated Jan. 27, 2020.

Procedural Background:

The court observed that Rule 12(b)(3), which addresses improper venue, was “the proper procedural rubric” for addressing a motion to dismiss based on a forum selection clause.  The court also explained that a motion under Rule 12(b)(3) does not “shackle” the court to the plaintiff’s complaint, but rather the court is permitted to consider extrinsic evidence from the outset.  See footnote 63. 

The court also noted that Chancery Rule 44.1 provides the procedure for presenting foreign law to the court to allow the court to interpret a document governed by foreign law.  The rule provides that a party is required to give notice in the pleadings or other reasonable written notice that the law of a foreign country will control.  Prior decisions have recognized that expert affidavits may be considered along with expert testimony.

Key Statements of Law:

·     The court explained the well-settled rule that Delaware courts will give effect to the terms of private agreements providing for forum selection clauses.  See footnote 64 and accompanying text.

·     In order for a forum selection clause to be considered exclusive under Delaware law, the “contractual language must be crystalline in stating the parties’ intent to litigate only in the designated forum.”  See footnote 66.

·     The Delaware courts also generally honor contractually-designated choice of law provisions as long as the jurisdiction selected “bears some material relationship to the transaction.”  See footnote 70.

·     A key issue is whether the forum selection clause states that it is exclusive, or whether the language will be construed as merely permissive. See footnote 80 (citing Delaware cases holding that a mandatory forum selection clause must make clear that the litigation is required to proceed in the designated forum).

·     In this instance, the applicable Austrian law applied to require litigation only in Vienna.

·     The court also rejected the argument that DGCL Section 168 applied because the statute relates to replacements for lost stock certificates, and in this instance the issue was whether the original stock certificate should have been issued.

The Delaware Court of Chancery found that a forum selection clause that was merely permissive rather than exclusive, did not justify enforcing one forum only. In the case styled In re Bay Hills Emerging Partners, I, L.P., C.A. No. 2018-0234- JRS (Del. Ch. July 2, 2018), the court was presented with a case challenging the removal of general partners of a Delaware limited partnership. Many prior decisions upholding (mostly) exclusive forum selection clauses have been highlighted on these pages over the last 13 years.

Brief Background Facts:

Shortly after the Delaware action was filed, the limited partner initiated litigation in the Commonwealth of Kentucky in which it sought judicial declarations that its removal of the general partners was proper, along with other legal and equitable relief.

The defendants in Delaware moved to dismiss the action primarily on the basis of the forum selection clause in the relevant agreements that required the plaintiff in the Delaware case to litigate the dispute in Kentucky. The court disagreed, primarily because the applicable forum selection clause was only permissive, and not a mandatory, exclusive forum selection clause. This is recurring issue in corporate and commercial litigation.

The applicable clause stated that Franklin County Circuit Court in Kentucky is “a proper venue” but it did not designate that court as the “exclusive” forum.

Procedural Posture:

Even though the Kentucky action was filed eight days after the Delaware action, and the claims were nearly identical, the court sua sponte decided to stay the Delaware action in favor of the Kentucky action.

The court reviewed the motion under Rule 12(b)(3), which does not limit the court to the complaint but allows the court to consider extrinsic evidence. In addition to the forum selection clause, the motion to dismiss the Delaware action was based on forum non conveniens as well as “the interests of comity” and the doctrine of sovereign immunity because the Commonwealth of Kentucky was one of the interested parties.

Analysis of the Court:

One of the more interesting aspects of this decision was the analysis of 6 Del. C. § 17-109(d) which prohibits limited partners from waiving the right to litigate matters relating to the internal affairs of the limited partnership in the courts of Delaware.

Forum Selection Clauses:

The court recognized the well-settled rule in Delaware that courts generally should give effect to the selection in a private agreement to resolve disputes in a particular forum.

The Delaware courts often grant motions to dismiss where the parties use express language clearly indicating that the forum selection clause excludes the court where a party improperly filed an action. See footnotes 33 and 34.

Choice of Law Clauses:

There was a choice of law provision in this agreement which provided that the laws of the Commonwealth of Kentucky apply regardless of choice of law principles.

Delaware courts generally honor contractually-designated choice of law provisions, as long as the jurisdiction bears some material relationship to the transaction. See footnote 36.  In this case there is little doubt about the material relationship to Kentucky because the limited partner in each of the limited partnerships involved was a statutorily created entity that manages the retirement systems for the Commonwealth of Kentucky.

Notably, the court referred to the cases where there is a “false conflict” meaning that there is no material difference between the laws of competing jurisdictions–in which case the “court should avoid the choice of law analysis all together.” See footnote 38.  The court applied that principle in this case to decline to undertake a choice of law analysis.

Key Takeaways:

The key rulings with the most widespread applicability that can be gleaned from this case are the following:

1)         Where two cases are filed within a short time of each other, the court will treat them as being filed contemporaneously, and a forum non conveniens analysis will apply.  In this case it applied to favor a stay of the Delaware case and an application of Kentucky law because there were no unique issues of Delaware law presented.

2)         The court recognized the general enforceability of forum selection clauses, as well as choice of law provisions.  Many forum selection clause cases have been highlighted on these pages.

3)         The court observed that both the Delaware LLC Act and the Delaware LP Act prevent non-managers of LLCs and non-general partners of LPs from waiving their right to litigate internal affairs issues in Delaware, but those provisions do not require them to litigate in Delaware; nor do those provisions require LLC managers or general partners of limited partnerships to litigate in Delaware.

The Delaware Supreme Court recently clarified for the first time the test to be used in Delaware to determine whether a contract’s terms are sufficiently definite to create an enforceable contract. In Eagle Force Holdings, LLC v. Campbell, No. 399, 2017 (Del. Supr., May 24, 2018), the court addressed whether various documents signed by the parties met the minimum requirements for enforceable agreements, and the court also observed that personal jurisdiction is established when one is a party to an agreement with a forum selection clause.

Basic Background Facts

The facts presented in this decision by Delaware’s high court present a cautionary tale about the problems that arise when parties sign an agreement despite the first page being marked “draft” at the top and having schedules attached that are blank. The key facts include the following:

  • Two people, Kay and Campbell, agreed to form entities in connection with starting a new business that each would own 50% each of, at least initially. Campbell, for his part, was to contribute intellectual property and Kay would provide about $2 million.
  • Kay contributed the money before final and comprehensive documents were in place and before several key issues, including clear ownership to the IP, were resolved.
  • Although the parties initially signed signature pages for their attorneys to hold in escrow until the deal was consummated, the parties later met–without their attorneys–and signed a Contribution Agreement and an LLC Agreement that were revised after the parties had submitted signature pages to their attorneys. The version the parties signed (without their attorneys present) was marked on the first page as a “draft”. At least one of the attorneys for one of the parties was not aware of the signing, and when he returned from vacation, the attorney sent additional proposed edits to the agreements.
  • After signing the agreements marked “draft” with blank schedules, the parties later acknowledged that there were several open issues that were still not yet resolved. Soon the parties took different positions about whether the agreements they signed were binding or not, in light of the open issues, for example.
  • Kay filed a complaint in the Court of Chancery and obtained expedited injunctive relief, including a status quo order.
  • Campbell appeared initially at an evidentiary hearing but then failed to appear for the second day of the hearing, and other allegations of contempt for his failure to comply with the court’s orders were also presented on appeal.
  • Related to the contract formation issues and the contempt allegations, Campbell argued that the court did not have personal jurisdiction over him.

Key Legal Principles in the Court’s Decision

  • Regarding the issue of personal jurisdiction, the court explained that the parties’ agreements both contained a forum selection clause. If a party consents to jurisdiction by contract, such as through a forum selection clause, that is sufficient to impose personal jurisdiction and the normal personal jurisdiction analysis involving the long-arm statute and the Due Process analysis of “minimum contacts” is not necessary. See footnotes 137 and 138.
  • The court recited the three basic requirements for a valid contract: (i) the parties intended that the instrument would bind them, demonstrated at least in part by its inclusion of all material terms; (ii) these terms are sufficiently definite; and (iii) the putative agreement is supported by legal consideration. This formulation subsumes the concept of an offer and acceptance.
  • Delaware law applies an objective test for determining whether the parties intended to be bound–not subjective intent. Citing Professor Williston, the court observed that a signature is the natural indication of assent in the absence of an invalidating cause such as fraud, duress, mutual mistake or unconscionability. See footnote 153.
  • For the first time, the Delaware Supreme Court announced a standard to determine whether the terms of a contract are sufficiently definite, as follows:   “A contract is sufficiently definite and certain to be enforceable if the court can–based upon the agreement’s terms and applying proper rules of construction and principles of equity–ascertain what the parties have agreed to do.”
  • Quoting from the Corbin treatise on contracts, the court noted that: “The courts must take cognizance of the fact that the argument that a particular agreement is too indefinite to constitute a contract frequently is an afterthought excuse for attacking an agreement that failed for reasons other than the indefiniteness.” See footnote 190.
  • There was an ancillary issue of whether the Court of Chancery could impose sanctions for violation of a court order prior to establishing that it had personal jurisdiction over the person who violated the order. The Supreme Court ruled that: “when a Delaware court issues a status quo order pending its adjudication of questions concerning its own jurisdiction, it may punish violations of those orders with contempt and for sanctions, no matter whether it ultimately finds that it lacked jurisdiction.” The court reasoned that this principle was especially applicable in this case because the party involved appeared in person and litigated the merits of the case.

The recent Chancery decision invalidating a fee-shifting bylaw in connection with a forum selection provision was the subject of an article authored by my colleagues Gary Lipkin and others, which appeared this week in the Delaware Business Court Insider. The article appears below.

In Solak v. Sarowitz [C.A. No. 12299-CB (Del. Ch. Dec. 27, 2016)], the Delaware Court of Chancery held that a corporate bylaw ran afoul of 8 Del. C. § 109(b), as recently amended, where it purported to shift attorneys’ fees and expenses to an unsuccessful stockholder that filed an internal corporate claim outside of the State of Delaware.

Two recent amendments to the Delaware General Corporate Law (“DGCL”) were at issue in the case.  The first was the addition of Section 115, which expressly authorized Delaware corporations to adopt bylaws requiring internal corporate claims to be filed exclusively in the State of Delaware.  The second was the amendment of Section 109, which, in the wake of the Delaware Supreme Court’s decision in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014), precluded Delaware stock corporations from issuing bylaws imposing liability on shareholders for the corporation’s or other parties’ attorneys’ fees and expenses in connection with internal corporate claims.

Shortly after these amendments were codified, the board of Paylocity Holding Corporation (“Paylocity” or the “Company”) adopted new bylaws that: 1) required all internal corporate claims to be filed in the State of Delaware (the “Forum Selection Bylaw”); and 2) purported to shift fees and costs to unsuccessful shareholders that filed internal corporate claims outside the State of Delaware without the Company’s permission (the “Fee-Shifting Bylaw”).  As the Solak Court recognized, to trigger the Fee-Shifting Bylaw, a shareholder must first violate the Forum Selection Bylaw.

Following the adoption of the bylaws, a Paylocity shareholder brought suit, seeking, among other things, a declaration that the Fee-Shifting Bylaw violated Section 109(b) and was thus invalid.  The Company responded in two primary ways.  First, the Company argued that the suit was unripe because there was no action pending in another jurisdiction that could trigger the Fee-Shifting Bylaw, nor did the plaintiff plead any intention to file such a suit.  The Company next argued that, in any event, the Fee-Shifting Bylaw was permitted by law.

With respect to Paylocity’s ripeness defense, although Paylocity correctly asserted that no suit was pending (or threatened by the plaintiff in the complaint), the Court determined that the dispute was ripe for decision.  The Court explained that it was highly unlikely that a rational shareholder would ever file an internal claim outside of Delaware due to the risk of personal liability triggered by the Fee-Shifting Bylaw.  Thus, according to the Court, “[t]o decline to review the Fee-Shifting Bylaw . . . would mean, as a practical matter, that its validity under the DGCL would never be subject to judicial review.”  Moreover, the Court noted that hearing the case now would help clear up any uncertainty and inform other corporations and investors as to the permissibility of fee-shifting bylaws following the recent DGCL amendments.

As to the merits of the Fee-Shifting Bylaw, the defendants advanced three arguments in their defense – all of which were rejected by the Court.  First, defendants argued that the amendment to Section 109(b) should be read in tandem with Section 115, as those provisions were simultaneously adopted.  Thus, according to defendants, Section 109(b) should not be read to preclude fee-shifting for internal corporate claims filed outside of Delaware where the Company had first enacted a bylaw requiring internal corporate claims to be filed in Delaware.  The Court rejected this argument, however, holding that nothing in the text of either provision reflected any intent by the legislature for them to be read in concert.  Additionally, Section 109(b) did not distinguish between internal corporate claims filed inside or outside of Delaware.

The Court next rejected defendants’ argument that Section 109(b) did not displace the common law, which generally permitted fee-shifting.  In doing so, the Court, citing A.W. Financial Services v. Empire Res., Inc., 981 A.2d 1114 (Del. 2009), noted that the common law could be repealed by implication where “there is fair repugnance between the common law and [a] statute, and both cannot be carried into effect.”  To the extent the ATP decision, which prompted the amendment to Section 109(b), could have been read to approve the use of fee-shifting bylaws for stock corporations as they related to internal corporate claims, the legislature expressly removed such a possibility in its recent amendment of that statute.

Finally, the Court rejected defendants’ argument that the Fee-Shifting Bylaw was valid because it contained a savings clause, making it enforceable only to the “fullest extent permitted by law.”  The problem, in the Court’s view, was that there was no part of the Fee-Shifting Bylaw that was permitted by law.  Thus, after the invalid portions of the Fee-Shifting Bylaw were removed, there was nothing left to save.

While the Court held that the Fee-Shifting Bylaw violated Section 109(b), the Court dismissed a similar challenge based on Section 102(b)(6), which generally prevents a corporation from imposing personal liability on shareholders for corporate debts except as specifically set forth in the certificate of incorporation.  The plaintiffs argued that the Fee-Shifting Bylaw violated Section 102(b)(6) because, if upheld, shareholders could be forced to reimburse the Company for its attorneys’ fees and expenses even though there was no provision authorizing the shifting of corporate debts to shareholders in Paylocity’s certificate of incorporation.

In dismissing plaintiffs’ claim, the Court held that plaintiffs failed to meet their heavy burden of establishing that Section 102(b)(6) renders the Fee-Shifting Bylaw “invalid under any circumstances.”  While it is possible that the fees and expenses set forth in the Fee-Shifting Bylaw constitute “debts,” as that term is used in Section 102(b)(6), the Court noted that plaintiffs failed to provide authority supporting that position.  The Court also stated that it was possible that by filing an action outside of Delaware in contravention of the Forum Selection Bylaw, the exception to Section 102(b)(6) may apply, which permits corporations to look to shareholders for corporate debts caused by the shareholders’ own acts.  Finally, the Court noted that dismissal of the Section 102(b)(6) claim was warranted in light of the fact that the Court already found that the Complaint stated a claim under Section 109(b), and as such, there was no practical need for further relief.

The Court similarly dismissed plaintiffs’ claim for breach of fiduciary duty against Paylocity’s directors, in which plaintiffs alleged that the Paylocity board may have acted in bad faith by approving the Fee-Shifting Bylaw and by failing to properly disclose it to the shareholders.  In doing so, the Court observed that Paylocity’s certificate of incorporation contained a Section 102(b)(7) provision exculpating its directors from breaches of the duty of care, and plaintiffs pled no facts from which one could reasonably infer that the Paylocity board acted in bad faith or otherwise knew they were violating the law.

Utilipath, LLC v. Baxter McLindon Hayes, Jr., C.A. No. 9922-VCP (Del. Ch., Apr. 14, 2015), is a short Chancery opinion notable for a few short reasons:5409380582_0b993a45d0_m

  • In light of a non-exclusive forum selection clause pursuant to which the parties agreed to litigate their dispute in Delaware, the court declined to apply the first-filed rule, known as the McWane doctrine, and denied a motion to dismiss. But the greater import of this case lies in its potential application on a larger stage.
  • One reasonable application of this Court of Chancery opinion is that: when parties have irrevocably consented to Delaware courts as a non-exclusive forum, even if a first-filed suit has been filed elsewhere involving similar parties and similar claims, the McWane doctrine may not require that the Delaware action be stayed in deference to the pending action in another forum.
  • This decision may have relevance to the pending legislation in Delaware described on these pages, that would require forum selection clauses that are included in bylaws to provide for the selection of Delaware courts in addition to any other state. In other words, when a forum selection clause is included in a bylaw to cover intra-corporate disputes, any state in the country can be selected as the forum–as long as Delaware is also included as one of those two fora. Stated another way, if the legislation is passed, when forum selection clauses are included in bylaws for stockholder disputes, Delaware must be either (i) the exclusive forum; or (ii) if another forum is selected, Delaware must be included as an additional forum.
  • Also notable is footnote 29 of the opinion which described a conversation that the author of this Chancery opinion had with the federal judge overseeing the related first-filed case in the U.S. District Court for the Eastern District of Pennsylvania, in which both jurists invited cooperation to the extent that there may be some overlap between the two cases.

Roman forum (an ancient forum selection) image above provided by Flikr’s Creative Commons by Benson Kua.

The Third Circuit, applying Delaware law in Carlyle Investment Management LLC v. Moonmouth Company SA, No. 13-3526 (3rd Cir. Feb. 25, 2015), recently bound a non-signatory to a forum selection clause found in a subscription agreement.  The court applied a three part test to determine whether the non-signatory should be bound by the forum selection clause: (1) is the forum selection clause valid, (2) is the non-signatory a third-party beneficiary or closely related to the agreement, and (3) does the claim at hand arise from the non-signatory’s status related to the agreement?  This opinion provides a contrast to a recent decision of the Court of Chancery, as discussed here.

City of Providence v. First Citizens BancShares Inc., et al., No. 9795, 2014 WL 4409816 (Del. Ch. Sept. 8, 2014).

The Delaware Court of Chancery upheld the forum selection clause of the bylaws of a Delaware corporation that requires most shareholder suits against the company to be filed in North Carolina, where the company’s main office is located. This is a natural evolution of the prior Chancery decision in the Chevron decision, highlighted on these pages.

N.B. This decision was later superseded by a change in the Delaware statute.

I wrote an article about this case for a publication of the National Association of Corporate Directors, available at this hyperlink.

Frank Reynolds of Thomson Reuters provides an insightful overview of the case that includes a quote from yours truly and others.

Supplement: Many posts on this topic have appeared on these pages. Ted Mirvis writes on the Harvard Corporate Governance Blog about a recent federal decision that upheld a Delaware forum selection bylaw and which provides useful reasoning that may have broader application in similar cases.

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.