A Forum Selection Clause Must Be "Mandatory" To Be Enforceable

Everybody loves a penguin, or at least I think that is so.  But Penguin Toilets, the Defendant in Roth v. Penguin Toilets, LLC, 2011 NCBC 45, can't be loving the result it got on its Motion to Dismiss, which was denied in the Business Court by Judge Murphy on Wednesday.

The Motion to Dismiss was based on Penguin's argument that litigation against it had to be brought in Michigan and that North Carolina was therefore an improper venue.  This was premised on a forum selection clause in the LLC's operating agreement which said that:

Any dispute or other legal action concerning this Agreement, including any arbitration or litigation proceedings shall be conducted in Wayne County, Michigan.

I don't know why even a penguin would choose to litigate in Wayne County, which boasts of being the home of the City of Detroit, over the North Carolina Business Court, but Wayne County is where Penguin has its headquarters, so that provides some explanation.

Roth was the former President of Penguin.  He had sued Penguin after his termination, claiming violations of the terms of his Employment Agreement.  He was also a member of the LLC.  Penguin said that venue was improper in North Carolina because of the forum selection clause in the Operating Agreement, although there was no forum selection language in the Employment Agreement.  Judge Murphy held that the terms of the Operating Agreement had not been incorporated by reference into the Employment Agreement and that the lawsuit was about the obligations owed to Roth under his Employment Agreement, not his rights as an LLC member.

Judge Murphy ruled that the clause would not be enforceable even if had been properly incorporated into the Employment Agreement.  North Carolina will only dismiss a case based on a forum selection clause if the clause is mandatory as to where the case must be filed.  That has been the ruling of the NC Court of Appeals before, in Mark Group Int'l, Inc. v. Still, 151 N.C. App. 565, 566 S.E.2d 160 (2002).  Although the Penguin clause specified that "any arbitration or litigation proceedings shall be conducted in Wayne County, Michigan," that language wasn't "mandatory" enough. 

You might think that the word "shall" is equivalent to "must," and therefore mandatory, but the word "shall" is falling into disfavor as a command.  The Committee drafting the Restyled Rules of Federal Evidence, which became effective yesterday, dropped the use of that word in a number of the Restyled Rules. The Committee on Rules of Practice and Procedure said:

'shall' is no longer generally used in spoken or clearly written English. The restyled rules replace "shall" with 'must,' 'may,' or 'should,' depending on which one the context and established interpretation make correct in each rule.

See here. at 29.  Words like "exclusive," "sole," or "only" are the magic words that will carry the ball across the line for an enforceable forum selection clause, as the NC Court of Appeals noted in the Mark Group case.

So what's this Penguin to do?  Leave some of that Michigan winter gear at home and resign itself to litigating in North Carolina.  Keep selling the Penguin toilets with overflow protection it offers from its headquarters in Michigan.  And work on revising that forum selection clause so it will stick the next time.  There's pretty clear guidance now about the words that it takes. 

Oh, and don't forget about N.C. Gen. Stat. §22B-3,  which makes a forum selection clause unenforceable if it requires litigation outside of North Carolina and it's "in a contract entered into in North Carolina."  That type of forum selection clause is against North Carolina's public policy, per the statute.  Roth presumably didn't enter into the Employment Agreement in North Carolina so that statute wasn't an issue in the case.

 

 

 

Laney v.Corn, November 9, 2009 (Diaz)(unpublished)

When the parties to a contract have negotiated and agreed to a mandatory forum selection clause, that clause is valid except when compelling reasons dictate otherwise. 

The Court enforced a forum selection clause in a franchise agreement, and transferred venue of the case from Gaston County to Buncombe County. 

Full Opinion

Fourth Circuit Enforces Forum Selection Clause Requiring Litigation In Amsterdam

The Fourth Circuit today affirmed the dismissal of a personal injury action based on a forum selection provision requiring that any claims would be resolved in the courts of Amsterdam.  The case is Baker v. Adidas America, Inc.

Plaintiff, who had sued in federal court in North Carolina, argued that she was a college student without the financial means to fund a lawsuit in Amsterdam, that contingency fee arrangements were not permitted in Amsterdam, and that she wouldn't be able to pursue her claim if the forum selection clause was enforced.

The Fourth Circuit, relying on the Supreme Court's decision in The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), held that the inconvenience of litigating in a foreign forum doesn't warrant setting aside a selection clause "where it can be said with reasonable assurance" that at the time the contract was made the parties contemplated the claimed inconvenience.  The party seeking to avoid a forum selection clause also must show that a trial in the specified forum "will be so gravely difficult and inconvenient that he will for all practical purposes be deprived of his day in court." 

The Fourth Circuit found the clause to be valid, ruling that the claimed burden of a trial in Amsterdam should have been foreseeable when Plaintiff accepted the benefits of the agreement, and that she had presumably been compensated for those burdens.

The North Carolina Business Court rejected an attack earlier this year on a forum selection clause specifying litigation in the Commercial Court of Paris, in Speedway Motorsports International Ltd. v. Bronwen Energy Trading, Ltd., 2009 NCBC 3 (N.C. Super. Ct., February 18, 2009).  The party objecting to the application of that clause said that litigation in France would deprive it "of the full scope of discovery that would otherwise be available in" the North Carolina Courts. 

In the Speedway case, Judge Diaz held that there was "no authority . . . for the proposition that merely requiring a party to litigate in a forum with substantially different discovery rules than those applied in a U.S. court is sufficient cause to override the parties' choice of forum."  He ruled that the party forced to fight its claim in France was neither "deprive[d] of its day in court" nor "without an adequate remedy."

Another issue in the Fourth Circuit decision today concerned whether Plaintiff, a professional tennis player who was a minor when the contract with Adidas was signed by her agent, had acted promptly enough to disaffirm the agreement after she attained the age of majority.  The Fourth Circuit said that she hadn't, because her agent had accepted payments from Adidas after she turned 18, and she didn't inform Adidas that she was voiding the contract until 32 months after her 18th birthday.

French Choice Of Forum Provision Enforced by North Carolina Business Court

The North Carolina Business Court ruled today on an issue of first impression -- when a North Carolina Court should apply the law of a foreign country -- and concluded that it would apply North Carolina law to a forum selection clause requiring the parties to litigate their dispute in the Commercial Court of Paris, under French law.

The result was that the Court enforced the forum selection clause and dismissed a crossclaim brought by an Arizona corporation (Swift) against a French Bank (Paribas), in Speedway Motorsports International Ltd. v. Bronwen Energy Trading, Ltd., 2009 NCBC 3 (N.C. Super. Ct., February 18, 2009).

The provisions specifying French law and a French choice of forum were contained in a series of Third Party Letter of Credit Agreements which had been submitted by Swift and another Defendant (Bronwen) to Paribas. They stated that French law would apply and that "[a]ny disputes arising [t]hereunder or in connection [t]herewith shall be exclusively submitted to the commercial court of Paris, France."

When the Bank moved to dismiss, Swift argued that the Bank had never signed the agreement, that Its tort claims were not in any event subject to the clause, and also that it would violate public policy to make it litigate its claims in a French court.

The first issue for the Court was whether North Carolina law or French law should be applied to determine the validity of the forum selection provision.  The opinion is the first published decision under Rule 44.1 of the North Carolina Rules of Civil Procedure, which addresses a trial court's determination of the law of a foreign country.  Judge Diaz, relying on federal cases, determined that:

  • He had "broad authority to conduct [his] own independent research to determine foreign law," but that he had no duty to so.
  • It was the burden of both parties to "raise[]the issue that foreign law may apply in an action, and the burden of adequately proving foreign law to enable the court to apply it in a particular case."
  • When the "parties fail to satisfy either burden the court will ordinarily apply the forum's law."

The Business Court applied North Carolina law, because the parties hadn't provided the Court "with any authority or evidence from which it might discern how French law would evaluate the validity and scope of the forum selection clause in the" Agreements. 

Under North Carolina law, it didn't make a difference that Paribas hadn't signed the agreement.  Judge Diaz reasoned that the only signature required should be that of "the party to be charged therewith," that Swift had signed the Agreements, and that the Agreements spoke to Swift's obligations to Paribas  He also relied on cases involving arbitration provisions, which are often enforced against non-signatories when the claims are "intimately founded in and intertwined with the underlying contract obligations."  The Judge also noted the "strong seal of approval that our Supreme Court has given to contract clauses requiring litigation in a foreign jurisdiction."

Swift's argument that its claims sounded in tort, and that they were therefore outside the scope of the clause, was rejected.  The Court determined that claims stemmed from the contracts themselves, and that they could not be restyled as tort claims to avoid the agreement to the Parisian forum.

Lastly, the Court rejected the public policy argument that it simply wasn't fair for Swift to have to litigate its claims in France.  Swift said it would "be deprived of the full scope of discovery that would otherwise be available in" the Business Court.  Judge Diaz said there was "no authority . . . for the proposition that merely requiring a party to litigate in a forum with substantially different discovery rules than those applied in a U.S. court is sufficient cause to override the parties' choice of forum."  Swift was neither "deprive[d] of its day in court" nor "without an adequate remedy."

Brief in Support of Motion to Dismiss Crossclaim

Brief in Opposition to Motion to Dismiss Crossclaim

Reply Brief in Support of Motion to Dismiss Crossclaim