X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
A forum selection clause is a provision within an equipment lease, contract, or agreement that designates a particular jurisdiction as the forum for the resolution of any dispute that may arise between the parties involved. Traditionally, courts have been reluctant to enforce these clauses on the theory that such provisions divested a court of jurisdiction and were contrary to public policy. Today, the trend to uphold forum selection clauses is directly attributable to the U.S. Supreme Court’s 1972 landmark decision in Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972). Bremen involved a controversy over a clause which provided that any dispute between a German and an American corporation would be determined by English courts. The Supreme Court found such forum clauses to be “prima facie valid” and that they would be enforced unless enforcement was shown by the resisting party to be unreasonable or unjust under the circumstances. To determine whether a forum selection clause was unreasonable, the Court suggested factors such as whether it was affected by fraud, undue influence, or overweening bargaining power; whether the clause violated some strong policy of the forum in which the suit is brought or whether the forum chosen was seriously inconvenient. Though initially applicable to district courts sitting in admiralty only, the Bremenanalysis has been adopted by both state and federal courts in virtually all forum-selection settings. The Supreme Court expanded Bremeneven further in Carnival Cruise Lines Inc. v. Shute, 499 U.S. 585 (1991). That case involved a Washington state couple who purchased a pair of cruise tickets that contained a clause designating Florida as the exclusive venue for litigating disputes. When the wife was injured on the ship allegedly due to the crew’s negligence, the couple sued in Washington state. The Supreme Court upheld the forum clause and found, among other things, that there was no evidence of fraud or overreaching and that the couple had ample notice of the forum clause and had the option of rejecting the contract. While Carnival Cruisemay not be as clear a case as Bremendue to the relative positions of the plaintiffs and the defendant, it does demonstrate that these forum selection clauses are almost always enforced if found to be reasonable, freely negotiated, and not seriously inconvenient. RECENT DEVELOPMENTS IN NEW JERSEY New Jersey has joined the majority of jurisdictions that allow parties to consent in advance to personal jurisdiction. The New Jersey courts use similar factors and analysis as the Bremencourt used, refusing to give forum selection clauses effect if they are products of “fraud or coercive bargaining power,” or if enforcement would be “seriously inconvenient.” Most recently, in Copelco Capital Inc. v. Shapiro, 331 N.J. Super.1 (2000), a New Jersey state court struck down a forum selection clause that invoked the unknown jurisdiction of some unidentified lease assignee as the jurisdiction that would govern in the event of a dispute. What makes this decision surprising is the fact that the exact same forum selection clause was upheld by a federal district court sitting in New Jersey and interpreting New Jersey law nearly two years before. In Danka Funding, L.L.C. v. Page Scrantom, Sprouse, Tucker & Ford, P.C., 21 F. Supp.2d 465 (D.N.J. 1998), the U.S. District Court in New Jersey decided a case in which a Delaware corporate lessor originated a lease of two copiers and related equipment to a law firm in Georgia. Subsequently the lease was assigned to a leasing company that was organized as a New York limited liability company with its principal place of business in New Jersey. The lease contained a choice-of-law/forum selection clause printed in bold language, stating the following:
This rental and each schedule shall be governed by the internal laws for the state in which our or our assignee’s principal offices are located. You consent to the jurisdiction of any local, state or federal court located within our or our assignee’s state, and waive any objection relating to improper venue. [FOOTNOTE 1]

The lessee defaulted under the lease and the lessor (assignee) sued in New Jersey state court to enforce the lessee’s payment obligations. The lessee had the case removed to the district court in New Jersey on procedural grounds. The district court there denied the law firm’s motion to dismiss and found the forum selection clause to be valid. The court held that “where a forum selection clause professing consent to jurisdiction in the state where a party’s or its assignee’s principal place of business lies is part of an agreement in a sophisticated business transaction, and one party is a law firm, the forum selection clause is valid absent fraud, serious inconvenience, or a violation of public policy, notwithstanding that the law firm was unaware of the assignee’s principal place of business at the time of signing the agreement.” Nearly two years later, the Superior Court of New Jersey decided Copelco Capital, which involved the lease of a copier system by the same originating lessor to a Missouri law firm. Again, the originating lessor assigned the lease to an assignee lessor, whose principal place of business was in New Jersey. Upon the lessee’s default, the lessor (assignee) filed a lawsuit in New Jersey state court to recover monies due it, relying on the identical choice-of-law/forum selection clause at issue in Danka Funding. The New Jersey Superior Court ruled in favor of the lessor. On appeal, the New Jersey Appellate Division reversed the decision, now finding for the lessee. Though noting that forum selection clauses are generally enforced in New Jersey, the Appellate Division found this particular clause unenforceable because it failed the requirements of notice and reasonableness. Ultimately, the court believed that the lack of notice about the assignee and the assignee’s principal place of business, coupled with the likelihood that the assignee’s identity was unknown even to the originating lessor, made the clause unreasonable and fundamentally unfair. RECONCILING ‘DANKA FUNDING’ AND ‘COPELCO CAPITAL’ This difference of opinion has raised questions with respect to forum selection clauses that do not specifically designate the forum where disputes will be litigated. How can two strikingly similar cases, both involving the lease of copiers to law firms from the same lessor, both using the same forum selection clause, have such different results? At least two points are worthy of analysis to help resolve this dilemma. The first point deals with the Copelco Capitalcourt’s treatment of Danka Funding. The second point addresses the differing approaches the two courts took toward a prior New Jersey case that appears to favor nonspecific forum selection clauses. Additionally, there is a third point that arose from dicta in a subsequent district court case decided by the Danka Fundingcourt that may help lenders foresee and predict future treatment of forum clauses in New Jersey. ‘COPELCO CAPITAL’ COURT’S TREATMENT OF ‘DANKA FUNDING’ Why did the majority in Copelco Capitalfail to mention Danka Fundingin its decision? Notably, it was the concurring opinion that cited the lack of differences between the two cases and sought to reconcile their impacts. Curiously, the concurring judge concluded that, despite finding no material differences between the two cases and agreeing with New Jersey’s presumption in favor of forum selection clauses, the majority decision was correct. This was true even though the concurring judge expressed his concern that the plaintiff would be unable to recover damages due to the possible running of the statute of limitations in Missouri. Ultimately, the answer to why Copelco Capitalcame out differently may lie within the concurring judge’s discussion of his court’s power and control over state law matters. Notwithstanding his belief that federal district court opinions have precedential value, the concurring judge determined that such opinions were not binding on state courts who are the “final arbitrators of issues of state law, including the law governing its jurisdiction.” SHELTER SYSTEMS The second point concerns the differing weight as a precedent accorded the New Jersey case Shelter Systems v. Lanni Builders, 263 N.J. Super. 373 (App.Div. 1993). Though there is no clear reason as to why the case was viewed so differently, it is likely based on the Copelco Capitalcourt’s belief that it is the only one that can decide issues of New Jersey law. In Shelter Systems, the Appellate Division enforced a forum selection clause which stated that all claims or suits were to be brought in courts of the state where the seller’s principal place of business was located. Though the clause left the seller’s principal place of business unknown to the buyer, the court found that the buyer was in possession of facts which alerted him that New Jersey was involved. The court went even further and ruled that because the buyer had agreed to the forum clause, the buyer could not claim lack of notice because he should have inquired as to the sellers’ location. The Danka Fundingcourt used Shelter Systemsas a springboard in its decision, stating that it was holding what Shelter Systems“contemplated but did not need to hold.” More specifically, the Danka Fundingcourt held that a clause that is part of an agreement in a sophisticated business transaction would be valid notwithstanding that the buyer was unaware of the assignee’s principal place of business. The Danka Fundingcourt also found that the buyer was required to make any inquiries it felt necessary to ascertain the identity of the assignee and that the failure to do so would result in the court’s conclusion that the buyer had consented. The Danka Fundingcourt’s reliance on Shelter Systemsis markedly in contrast to the Copelco Capitalcourt view of the case. That court distinguished Shelter Systems, noting that its lessee did not have the same facts or evidence as did the lessee in Shelter Systemsto help it determine where the seller was located. The Copelco Capitalcourt also felt that a clause which could have resulted in a forum anywhere in the country did not further the objectives of the majority rule, which is based on freedom of contract and predictability. By approaching it this way, the Copelco Capitalcourt was able to show its agreement with the majority view and its prior decision in Shelter Systems, and also make clear that it had the right and power to strike down a mutually agreed on forum clause. CADAPULT GRAPHIC SYSTEMS A third point arises out of comments made by the Danka Fundingcourt in Cadapult Graphic Systems Inc. v. Tektronix Inc., 98 F. Supp.2d 560 (D.N.J. 2000) just a few days after Copelco Capitalwas decided. In Danka Funding, the district court used the choice-of-law rules of New Jersey (the state in which it sat in diversity) and applied New Jersey law to decide whether the clause was valid. In Cadapult Graphic, the same district court held that federal law would determine the effect of contractual forum selection clauses in diversity cases. The court’s use of federal and not state law was based on Jumara v. State Farm Ins. Co., 55 F.3d 873 (3d Cir. 1995), in which the 3rd U.S. Circuit Court of Appeals found that “questions of venue and the enforcement of forum selection clauses” were procedural and not substantive in nature. Since Cadapult Graphicinvolved a motion to transfer venue, the Court of Appeals applied a federal statute which required that only some weight be given to state public policy. Cadapult Graphicraises some important questions. First, inasmuch as Jumarawas decided by 1995, why did the district court decide to follow it in Cadapult Graphicbut not in Danka Funding? Regardless of the answer, the court’s comments in Cadapult Graphicdemonstrate that federal courts in New Jersey will apply mostly federal law and some state law in future cases. If this is true, what effect will those comments have on the holding in Danka Funding, since it was decided using mostly state law? Is Danka Fundingbinding precedent on New Jersey federal courts? If so, then it would appear that Copelco Capitalwould be given only some weight in future determinations by district courts, thus making it more likely that forum clauses that are drafted by reference to the lessor’s or the assignee’s principal place of business will be upheld if challenged in a federal court in New Jersey. If it is not binding, then parties using such forum selection clauses may continue to operate in a state of confusion. Under New Jersey and federal law, the enforceability of forum selection clauses are principally governed by the requirements of notice and reasonableness. These requirements are intended to promote fundamental fairness. While the same clause may seem fair to one court, it may not seem so to another. It’s clear that clauses which specifically designate a particular state as the forum where disputes will be litigated are enforceable in New Jersey and most jurisdictions. Furthermore, it’s extremely likely that clauses that do not specifically provide for a particular state but instead designate the lessor’s “principal place of business” as the place to litigate will likewise be enforceable. On the other hand, it is not clear how the next New Jersey state or federal court will deal with forum clauses that designate the “principal place of business of the [unidentified future lessor's] assignee” as the forum to litigate disputes brought by an assignee of the lessor (or its prior assignee). Does the lack of actual notice of the assignee make such clause invalid per se in New Jersey, or will the enforceability of such clauses depend on which court examines the issue? Unfortunately for the many parties who make use of such forum clauses, the answer in New Jersey remains unclear. Anthony Altamura is a member of New York’s Hahn & Hessen LLP, specializing in federal and state taxation and equipment leasing. Telephone: (212) 736-1000; e-mail: [email protected]. Harris J. Diamond assisted in the preparation of this article. ::::FOOTNOTES:::: FN1We note that the above-quoted clause contains a “choice-of-law” provision as well as a “choice of forum” provision. Our focus is exclusively on the issues surrounding the forum selection provision. Our analysis of the forum selection issues may not be applicable to the choice-of-law issues presented by the clause under review. Finally, the National Conference of Commissioners on Uniform State Laws currently is revising Article 1 (General Provisions) of the Uniform Commercial Code. The most recent draft (Summer 2000) recommends that current UCC � 1-105 (the “choice-of-law” provision, which is premised on “reasonable nexus” principles) be replaced in favor of new UCC � 1-301(a). New UCC � 1-301(a) would adopt a general rule that parties are free to adopt any state’s or country’s law as the governing law of their transaction (subject to certain prescribed limitations for consumer transactions and some minimum nexus requirements for choosing the law of a foreign country). The Reporter’s Notes indicate that the drafting committee considered whether to add a provision governing the effect of choice-of-forum clauses, as recommended by the American Bar Association’s Task Force on UCC Article 1, but decided not to do so.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.