'Floating' Forum-Selection Clauses: The M/S Bremen Afloat in the Wake of Norvergence

History of Cases

Prior to the Supreme Court's decision in Breman v. Zapata, “forum-selection clauses ha[d] historically not been favored by American courts.” M/S Breman v. Zapata Off-Shore Co., 92 S. Ct. 1907, 1913, 407 U.S. 1, 9 (1972). Typically the rationale behind this view of forum-selection clauses was that they were “contrary to public policy” or that their effect was to “oust the jurisdiction” of the court. Id. The Supreme Court itself, in Home Insurance Co. of N.Y. v. Morse, held that “agreements in advance to oust the courts of the jurisdiction conferred by law were illegal and void.” Home Insurance Co. of N.Y. v. Morse, 20 Wall. (87 U.S.) 445, 451, 22 L.Ed. 365 (1874).

In Bremen v. Zapata, however, the Supreme Court found that this argument was “hardly more than a vestigial legal fiction” which arose out of “historical judicial resistance to any attempt to reduce the power and business of a particular court and has little place in an era when all courts are overloaded and when businesses once essentially local now operate in world markets.” Bremen, 92 S. Ct. at 1914, 407 U.S. at 12. “Thus, in light of present-day commercial realities and expanding international trade … forum clause[s] should control absent a strong showing that it should be set aside” and unless a party opposing such a provision “could clearly show that enforcement would be unreasonable and unjust, or that the clause was invalid for such reasons as fraud or overreaching,” it should be upheld. Bremen, 92 S. Ct. at 1916, 407 U.S. at 15. The Bremen Court went on to note that a claim of inconvenience is not a basis for striking the provision unless the party raising inconvenience can demonstrate that “trial in the contractual forum will be so gravely difficult and inconvenient that he will for all practical purposes be deprived of his day in Court.” Bremen, 92 S. Ct. at 1917, 407 U.S. at 17-18.

The modern view of forum-selections clauses was further advanced in Stewart Organization, Inc. v. Ricoh Corp., where Justice Anthony Kennedy, in a concurring opinion, wrote:

The federal judicial system has a strong interest in the correct resolution of these questions, not only to spare litigants unnecessary costs but also to relieve courts of time-consuming pretrial motions. Courts should announce and encourage rules that support private parties who negotiate such clauses. … [T]he authority and prerogative of the federal courts to determine the issue [of propriety of venue], as Congress has directed by '1404(a), should be exercised so that a valid forum-selection clause is given controlling weight in all but the most exceptional cases. 487 U.S. 22, 33, 108 S.Ct. 2239, 2246 (1988) (Kennedy, J. concurring).

Only 3 years after Stewart and almost 20 years after Bremen, the Supreme Court continued to soften its stance on forum-selection clauses by ruling, in Carnival Cruise Lines, Inc. v. Shute, that the inclusion of a forum-selection clause in small type on the back of a standard-form passenger ticket, which was not the subject of bargaining, was not unreasonable. See Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 111 S.Ct. 1522 (1991). Among the reasons given by the Court for enforcing the clause were the fact that the cruise line had an interest in limiting the forum where it might be sued and the fact that the inclusion of such clauses likely benefited the passengers by allowing the cruise line to reduce fares in an amount “reflecting the savings that the cruise line enjoys by limiting the fora in which it may be sued.” Id. at 585-86, 1523. Additionally, the Court noted that “there is no indication that petitioner set Florida as the forum in which disputes were to be resolved as a means of discouraging cruise passengers from pursuing legitimate claims.” Id. at 595, 1528.

While numerous attempts have been made to limit the application of the Bremen standard to admiralty cases or international cases [See e.g., Visicorp v. Software Arts, Inc., 575 F. Supp. 1528 (N.D. Cal 1983)], the majority of courts have found that this standard applies with equal force to all diversity cases involving forum-selection clauses. See e.g., Pelleport Investors, Inc. v. Budco Quality Theatres, Inc., 569 F.Supp. 612, 614 (C.D.Cal.1983); Northeast Theatre Corp. v. Edie and Ely Landau, Inc., 563 F.Supp. 833, 834 (D.Mass.1983); and Taylor v. Titan Midwest Const. Corp., 474 F.Supp. 145, 148 (N.D.Tex.1979). Additionally, a large number of state courts have implicitly or explicitly adopted this standard in determining whether a forum-selection clause is enforceable. See e.g., Professional Ins. Corp. v. Sutherland, 700 So.2d 347 (Ala. 1997); Volkswagenwerk, A.G. v. Klippan, GmbH, 611 P.2d 498 (Alaska 1980), cert. denied, 449 U.S. 974, 101 S.Ct. 385, 66 L.Ed.2d 236 (1980); Societe Jean Nicolas et Fils, J.B. v. Mousseux, 123 Ariz. 59, 597 P.2d 541 (1979); SD Leasing, Inc. v. Al Spain and Assocs., Inc., 277 Ark. 178, 640 S.W.2d 451 (1982); Smith, Valentino & Smith, Inc. v. Super.Ct. of Los Angeles County, 17 Cal.3d 491, 131 Cal.Rptr. 374, 551 P.2d 1206 (1976); ABC Mobile Sys., Inc. v. Harvey, 701 P.2d 137 (Colo.App.1985); Funding Sys. Leasing Corp. v. Diaz, 34 Conn.Supp. 99, 378 A.2d 108 (1977); Elia Corp. v. Paul N. Howard Co., 391 A.2d 214 (Del.Super.1978); Calanca v. D & S Mfg. Co., 157 Ill.App.3d 85, 109 Ill.Dec. 400, 510 N.E.2d 21 (1987); Prudential Resources Corp. v. Plunkett, 583 S.W.2d 97 (Ky.App.1979); Hauenstein & Bermeister, Inc. v. Met-Fab Indus., Inc., 320 N.W.2d 886 (Minn.1982); Air Economy Corp. v. Aero-Flow Dynamics, Inc., 122 N.J.Super. 456, 300 A.2d 856 (1973); Credit Francais Int'l, S.A. v. Sociedad Financiera de Comercio, C.A., 128 Misc.2d 564, 490 N.Y.S.2d 670 (1985); United Standard Management Corp. v. Mahoning Valley Solar Resources, Inc., 16 Ohio App.3d 476, 476 N.E.2d 724 (1984); Reeves v. Chem Indus. Co., 262 Or. 95, 495 P.2d 729 (1972); St. John's Episcopal Mission Ctr. v. South Carolina Dept. of Social Services, 276 S.C. 507, 280 S.E.2d 207 (1981); Green v. Clinic Masters, Inc., 272 N.W.2d 813 (S.D.1978); International Collection Serv., Inc. v. Gibbs, 147 Vt. 105, 510 A.2d 1325 (1986).

In applying the reasonableness standard espoused by Bremen and its progeny, federal courts across the country have shown an increasing willingness to enforce forum-selection clauses that are not the product of fraud or overreaching, even where such clauses are applied to persons who were not a party to the original agreement containing the clause conferring jurisdiction upon them. See e.g., Stephens v. Entre Computer Centers, Inc., 696 F. Supp. 636 (N.D. Ga. 1988); Adelson v. World Transportation, Inc., 631 F.Supp. 504, 508 (S.D.Fla.1986); Friedman v. World Transportation, Inc., 636 F.Supp. 685, 690-91 (N.D.Ill.1986); Dukane Fabrics International, Inc. v. M.V. Hreljin, 600 F.Supp. 202, 203 (S.D.N.Y.1985); Clinton v. Janger, 583 F.Supp. 284, 290 (N.D.Ill.1984).

The increasing willingness of courts to allow forum-selection clauses to stand in the absence of clear fraud is also reflected in a number of decisions by courts enforcing forum-selection clauses that are open-ended with respect to the forum. See e.g., Lyon Financial Services, Inc. v. Hall & Son Builders, Inc., 2005 WL 503371 (D.Minn.) (finding the NorVergence open-ended forum-selection clause that is the subject of this article to be enforceable); Commerce Commercial Leasing, LLC v. Jay's Fabric Center, 2004 WL 2457737 (E.D.Pa. 2004) (finding the NorVergence open-ended forum-selection clause that is the subject of this article to be enforceable); GreatAmerica Leasing Corp. v. Telular Corp., Civ. A. No. 98-127, 1999 WL 33656867, at *4 (N.D.Iowa Apr. 20, 1999) (finding forum-selection clause to be enforceable, but granting motion to transfer); Danka Funding, LLC v. Page, Scrantom, Sprouse, Tucker & Ford, P.C., 21 F.Supp.2d 465 (D.N.J. 1998) (enforcing forum-selection clause contained in lease conferring jurisdiction over lessee in any jurisdiction where lessor or its assignee maintain their principal corporate offices); A.I. Credit Corp. v. Dijounas, Civ. A. No. 91-6234, 1992 WL 131783, at *1 (S.D.N.Y. 1992) (enforcing open-ended forum-selection clause which allows suit in partnership's place of business or transferee's principal place of business despite that there was no certain geographic jurisdiction named); But see, IFC Credit Corp. v. Aliano Bros. General Contractors, Inc., 2005 WL 643288 (N.D.Ill. 2005) (refusing to enforce NorVergence forum-selection clause); Copelco Capital, Inc. v. Shapiro, 331 N.J. Super. 1, 750 A.2d 773 (N.J. Super. Ct. App. Div. 2000) (refusing to enforce an open-ended forum-selection clause).

Factors Used to Determine Enforceability

While the clear trend of the courts, both state and federal, in interpreting forum-selection clauses, is to allow them to be enforced as written, except where there is clear evidence of fraud, their enforceability will be determined by the facts of the case and the state in which the case is being litigated. Among the factors that these courts are likely to consider in applying Bremen to determine whether enforcement of the forum-selection clause would be reasonable under the circumstances are whether: 1) the incorporation of the forum-selection clause into the agreement was the product of fraud, undue influence or overreaching; 2) requiring the party contesting the provision to litigate in the selected forum is so gravely difficult and inconvenient that this party would for all practical purposes be deprived of its day in court; or 3) the enforcement of the forum-selection clause would contravene a strong public policy of the forum state. See e.g., Bonny v. Society of Lloyd's, 3 F.3d 156 (7th Cir. 1993).

Because of the popularity of small ticket leasing for the business community especially in light of Article 2A of the Uniform Commercial Code, it is not uncommon to employ a variant of the typical forum-selection clause that delays an identification of the forum until a determination of the financing entity to which the paper is either sold or assigned is made. The forum-selection clause in this variant, like those contained in the NorVergence leases, identifies the forum as the principal place of business of an as yet to be determined financing entity. Such a provision enhances the value of this financial paper and lends to its free transferability in keeping with the objectives of Article 2A. The ability to initiate suit where the financing entity's business is located, in the event of a lease default, is a major inducement for finance companies to agree to finance a lease transaction in a distant location, thereby increasing the number of finance companies available to a lessee and willing to complete any transaction. In light of the popularity of these clauses and the rational basis for the inclusion of these clauses, it is unlikely that any given lessee will prevail under this first factor.

In applying this second factor, courts have noted that the level of inconvenience necessary to preclude enforcement of a forum-selection clause goes well beyond that which is required to transfer venue based on the inconvenience of the forum. See e.g., Pelleport Investors, Inc. v. Budco Quality Theatres, Inc., 569 F.Supp. 612, 614 (C.D.Cal.1983) (the location of the witnesses and the area of performance of the contract, while relevant to a forum non conveniens motion, are not persuasive in the context of an attack on the enforceability of a forum-selection clause). Additionally, “the burden of proving this element is much more difficult for sophisticated businesses than for individual consumers.” Titan Indemnity Co. v. Hood, 2004 WL 2651187, *8 (Miss. 2004). It requires more than a showing of insufficient resources to litigate the case in the distant forum or inability to take time away from one's business. See e.g. Barbuto v. Medicine Shoppe Intern., Inc., 166 F.Supp.2d 341, 347 (W.D.Pa. 2001) [See also, Carron ex rel. Carron v. Holland America, 51 F.Supp.2d 322, 326 (E.D.N.Y. 1999) (finding that because "coast to coast traveling has become commonplace in today's high-tech, modernized, global world ... [requiring] a litigant residing in New York [to] litigate thousands of miles away from home … is not unprecedented or overly burdensome); Karlberg European Tanspa v. J.K.-Josef Kratz Vertriebsgesellschaft, 618 F.Supp. 344 (N.D.Ill.1985) (upholding a forum-selection clause requiring litigation in West Germany over objections that plaintiff's witnesses were in the United States, the defective product was in the United States, the documents were in English, and there were more limited discovery rules in Germany)]. Because the complaints of inconvenience made by the lessees in the NorVergence cases generally relate to the expense of litigating in the chosen forums, it is unlikely that this factor will allow them to escape enforcement of the forum-selection clause.

It is the final factor, public policy, which will be used by some courts as a vehicle for providing an out for those lessees that have garnered the sympathy of the court. While some courts have recognized the strong public policy in favor of enforcement of forum-selection clauses specifically [See e.g., Argueta v. Banco Mexicano, S.A., 87 F.3d 320 (9th Cir. 1996)], or generally recognize the enforceability of contracts “as written” [See e.g., Lieberman v. Wyoming.com LLC, 82 P.3d 274 (Wyo. 2004)], other states may focus on the public policy of notice [See e.g., Copelco Capital, Inc. v. Shapiro, 331 N.J. Super. 1, 750 A.2d 773 (N.J. Super. Ct. App. Div. 2000)]. For those courts weighing the public policy of notice, whether against competing public policies of enforcement or otherwise, certain case-specific factors will counsel in favor of the forum-selection clauses at issue. (Note, because any adverse rulings on the enforceability of these provisions will negatively impact the negotiability of finance leases, which will, in turn, increase their cost for the consumer, this fact should be brought to the attention of any court considering public policy in determining whether to enforce these leases.) These will include whether the lessees received a Notice of Assignment of Rental, or some equivalent document, without objecting to the same, whether they participated in a telephone verification subsequent to their receipt of the equipment, and whether they made payments under the lease before defaulting.

If they received a Notice of Assignment or some other equivalent documents and failed to object within a reasonable time, it can be argued that the receipt of this document was sufficient, when read in conjunction with the lease, to put the lessee on notice of the proper forum in the event of any subsequent dispute between the lessee and the assignee. Additionally, in some cases, finance companies will have performed telephone verifications prior to funding each lease, as is commonplace in the industry. During these telephone verifications, each lessee is typically informed, among other things, of the name and location of the finance company and the place to which payment is to be sent. The lessee is also typically informed that the transaction has not yet been funded and the lessee is then given the option, during this call, to articulate any reason why the finance company should not fund the transaction. This presents yet another opportunity for the lessee to voice an objection to a distant forum if this is, in fact, objectionable. The lessee's failure to object to the assignment immediately upon receipt of notice of the same could be read as an implicit agreement to the assignment and, when taken in conjunction with the forum-selection language contained in the lease, to the application of the law of the state where the assignee's principal offices are located. Finally, any payments made by the lessee to the assignee prior to the lessee's breach would serve as additional support for the conclusion that the lessee had notice of the proper forum in the event of a dispute and assented to this forum. See e.g., Shelter Systems v. Lanni Builders, 263 NJ Super 373 (App Div. 1993) (holding that while the forum-selection clause was open-ended, and the seller's principal place of business was unknown to the buyer, the buyer was in possession of facts that alerted him that New Jersey would be the forum in the event of a dispute).

Because the Notice of Assignment of Rental and/or the telephone verification provides every lessee with the opportunity to escape an inconvenient or onerous forum before funding, the fact that no lessee now complaining about a supposed inconvenient forum chose to avail itself of this opportunity before the obligation attached should be all the information that any disinterested party would need to know to fairly characterize the bona fides of such claim. Any argument to the contrary should be read as nothing more than a disingenuous attempt to evade the clear protections afforded by Article 2A of the Uniform Commercial Code.

Conclusion

In light of the foregoing, it is of critical importance for financing companies considering purchasing paper that contains open-ended forum-selection clauses to understand the legal challenges they may face in enforcing this paper in an event of default. This requires reviewing applicable law to determine the manner in which these clauses are treated and considering all applicable factors where the law is silent regarding the enforcement of these clauses. Where a finance company has already purchased the paper, it is of critical importance that it treats all telephone verifications seriously. Prepare a list of questions to wade through and don't deviate from the script. The call should end with a catch all question inquiring whether the lessee knows of any reason why the transaction should not be funded. Invest the modest sum necessary to tape the conversation and save not only the tape recordings but also long distance telephone records that further corroborate that the call took place. Finally, it is a good idea to be certain that forum-selection clauses are in clear and conspicuous print.

On June 30, 2004 an Involuntary Petition under Chapter 11 of the Bankruptcy Code was filed against NorVergence, Inc., the New Jersey telecommunications company. While this filing represented the likely end of a telecommunications company which, at its zenith, employed 1500 people, with more than 11,000 equipment leases in effect worth some $200 million, it also marked the beginning of litigation arising out of those leases now being waged in various state and federal courts across the country involving thousands of lessees, scores of finance companies and dozens of governmental agencies.

While this litigation is of obvious importance to the finance companies and the lessees involved, these actions could also have far-reaching consequences on the entire leasing industry and those businesses that rely on leasing as a cost-effective and tax-friendly means of acquiring equipment. Of particular consequence is the enforceability of the open-ended, or “floating,” forum-selection clauses that are contained in the Equipment Rental Agreements at issue in this litigation. The typical forum-selection clause at issue in these cases provides: “This agreement shall be governed by, construed and enforced in accordance with the laws of the State in which Rentor's [referring to NorVergence] principal offices are located or, if this Lease is assigned by Rentor, the State in which the assignee's principal offices are located, without regard to such State's choice of law considerations and all legal actions relating to this Lease shall be venued exclusively in a state or federal court located within that State, such court to be chosen at Rentor or Rentor's assignee's sole option.”

Various lessees have attacked these clauses on the grounds that the absence of an identifiable forum at the time of execution of the lease renders these clauses unconscionable and unenforceable. While the lessees, and indeed certain governmental bodies, are attempting to characterize these leases as consumer leases, in an effort to advance their cause, it is clear that not only are the leases involved in these cases Article 2A finance leases between commercial entities, but also that the forum-selection clauses at issue represent the next logical step in furthering the negotiability of Article 2A finance leases and are entirely consistent with the modern view of these clauses.

History of Cases

Prior to the Supreme Court's decision in Breman v. Zapata , “forum-selection clauses ha[d] historically not been favored by American courts.” M/S Breman v. Zapata Off-Shore Co., 92 S. Ct. 1907, 1913, 407 U.S. 1, 9 (1972). Typically the rationale behind this view of forum-selection clauses was that they were “contrary to public policy” or that their effect was to “oust the jurisdiction” of the court. Id. The Supreme Court itself, in Home Insurance Co. of N.Y. v. Morse, held that “agreements in advance to oust the courts of the jurisdiction conferred by law were illegal and void.” Home Insurance Co. of N.Y. v. Morse, 20 Wall. (87 U.S.) 445, 451, 22 L.Ed. 365 (1874).

In Bremen v. Zapata, however, the Supreme Court found that this argument was “hardly more than a vestigial legal fiction” which arose out of “historical judicial resistance to any attempt to reduce the power and business of a particular court and has little place in an era when all courts are overloaded and when businesses once essentially local now operate in world markets.” Bremen, 92 S. Ct. at 1914, 407 U.S. at 12. “Thus, in light of present-day commercial realities and expanding international trade … forum clause[s] should control absent a strong showing that it should be set aside” and unless a party opposing such a provision “could clearly show that enforcement would be unreasonable and unjust, or that the clause was invalid for such reasons as fraud or overreaching,” it should be upheld. Bremen, 92 S. Ct. at 1916, 407 U.S. at 15. The Bremen Court went on to note that a claim of inconvenience is not a basis for striking the provision unless the party raising inconvenience can demonstrate that “trial in the contractual forum will be so gravely difficult and inconvenient that he will for all practical purposes be deprived of his day in Court.” Bremen, 92 S. Ct. at 1917, 407 U.S. at 17-18.

The modern view of forum-selections clauses was further advanced in Stewart Organization, Inc. v. Ricoh Corp., where Justice Anthony Kennedy, in a concurring opinion, wrote:

The federal judicial system has a strong interest in the correct resolution of these questions, not only to spare litigants unnecessary costs but also to relieve courts of time-consuming pretrial motions. Courts should announce and encourage rules that support private parties who negotiate such clauses. … [T]he authority and prerogative of the federal courts to determine the issue [of propriety of venue], as Congress has directed by '1404(a), should be exercised so that a valid forum-selection clause is given controlling weight in all but the most exceptional cases. 487 U.S. 22, 33, 108 S.Ct. 2239, 2246 (1988) (Kennedy, J. concurring).

Only 3 years after Stewart and almost 20 years after Bremen, the Supreme Court continued to soften its stance on forum-selection clauses by ruling, in Carnival Cruise Lines, Inc. v. Shute, that the inclusion of a forum-selection clause in small type on the back of a standard-form passenger ticket, which was not the subject of bargaining, was not unreasonable. See Carnival Cruise Lines, Inc. v. Shute , 499 U.S. 585, 111 S.Ct. 1522 (1991). Among the reasons given by the Court for enforcing the clause were the fact that the cruise line had an interest in limiting the forum where it might be sued and the fact that the inclusion of such clauses likely benefited the passengers by allowing the cruise line to reduce fares in an amount “reflecting the savings that the cruise line enjoys by limiting the fora in which it may be sued.” Id. at 585-86, 1523. Additionally, the Court noted that “there is no indication that petitioner set Florida as the forum in which disputes were to be resolved as a means of discouraging cruise passengers from pursuing legitimate claims.” Id. at 595, 1528.

While numerous attempts have been made to limit the application of the Bremen standard to admiralty cases or international cases [ See e.g., Visicorp v. Software Arts, Inc., 575 F. Supp. 1528 (N.D. Cal 1983)], the majority of courts have found that this standard applies with equal force to all diversity cases involving forum-selection clauses. See e.g., Pelleport Investors, Inc. v. Budco Quality Theatres, Inc., 569 F.Supp. 612, 614 (C.D.Cal.1983); Northeast Theatre Corp. v. Edie and Ely Landau, Inc., 563 F.Supp. 833, 834 (D.Mass.1983); and Taylor v. Titan Midwest Const. Corp. , 474 F.Supp. 145, 148 (N.D.Tex.1979). Additionally, a large number of state courts have implicitly or explicitly adopted this standard in determining whether a forum-selection clause is enforceable. See e.g., Professional Ins. Corp. v. Sutherland , 700 So.2d 347 (Ala. 1997); Volkswagenwerk, A.G. v. Klippan, GmbH , 611 P.2d 498 (Alaska 1980), cert. denied , 449 U.S. 974, 101 S.Ct. 385, 66 L.Ed.2d 236 (1980); Societe Jean Nicolas et Fils, J.B. v. Mousseux , 123 Ariz. 59, 597 P.2d 541 (1979); SD Leasing, Inc. v. Al Spain and Assocs., Inc., 277 Ark. 178, 640 S.W.2d 451 (1982); Smith, Valentino & Smith, Inc. v. Super.Ct. of Los Angeles County , 17 Cal.3d 491, 131 Cal.Rptr. 374, 551 P.2d 1206 (1976); ABC Mobile Sys., Inc. v. Harvey, 701 P.2d 137 (Colo.App.1985); Funding Sys. Leasing Corp. v. Diaz , 34 Conn.Supp. 99, 378 A.2d 108 (1977); Elia Corp. v. Paul N. Howard Co., 391 A.2d 214 (Del.Super.1978); Calanca v. D & S Mfg. Co., 157 Ill.App.3d 85, 109 Ill.Dec. 400, 510 N.E.2d 21 (1987); Prudential Resources Corp. v. Plunkett , 583 S.W.2d 97 (Ky.App.1979); Hauenstein & Bermeister, Inc. v. Met-Fab Indus., Inc., 320 N.W.2d 886 (Minn.1982); Air Economy Corp. v. Aero-Flow Dynamics, Inc., 122 N.J.Super. 456, 300 A.2d 856 (1973); Credit Francais Int'l, S.A. v. Sociedad Financiera de Comercio, C.A., 128 Misc.2d 564, 490 N.Y.S.2d 670 (1985); United Standard Management Corp. v. Mahoning Valley Solar Resources, Inc., 16 Ohio App.3d 476, 476 N.E.2d 724 (1984); Reeves v. Chem Indus. Co., 262 Or. 95, 495 P.2d 729 (1972); St. John's Episcopal Mission Ctr. v. South Carolina Dept. of Social Services , 276 S.C. 507, 280 S.E.2d 207 (1981); Green v. Clinic Masters, Inc., 272 N.W.2d 813 (S.D.1978); International Collection Serv., Inc. v. Gibbs , 147 Vt. 105, 510 A.2d 1325 (1986).

In applying the reasonableness standard espoused by Bremen and its progeny, federal courts across the country have shown an increasing willingness to enforce forum-selection clauses that are not the product of fraud or overreaching, even where such clauses are applied to persons who were not a party to the original agreement containing the clause conferring jurisdiction upon them. See e.g., Stephens v. Entre Computer Centers, Inc., 696 F. Supp. 636 (N.D. Ga. 1988); Adelson v. World Transportation, Inc., 631 F.Supp. 504, 508 (S.D.Fla.1986); Friedman v. World Transportation, Inc., 636 F.Supp. 685, 690-91 (N.D.Ill.1986); Dukane Fabrics International, Inc. v. M.V. Hreljin, 600 F.Supp. 202, 203 (S.D.N.Y.1985); Clinton v. Janger, 583 F.Supp. 284, 290 (N.D.Ill.1984).

The increasing willingness of courts to allow forum-selection clauses to stand in the absence of clear fraud is also reflected in a number of decisions by courts enforcing forum-selection clauses that are open-ended with respect to the forum. See e.g., Lyon Financial Services, Inc. v. Hall & Son Builders, Inc., 2005 WL 503371 (D.Minn.) (finding the NorVergence open-ended forum-selection clause that is the subject of this article to be enforceable); Commerce Commercial Leasing, LLC v. Jay's Fabric Center, 2004 WL 2457737 (E.D.Pa. 2004) (finding the NorVergence open-ended forum-selection clause that is the subject of this article to be enforceable); GreatAmerica Leasing Corp. v. Telular Corp., Civ. A. No. 98-127, 1999 WL 33656867, at *4 (N.D.Iowa Apr. 20, 1999) (finding forum-selection clause to be enforceable, but granting motion to transfer); Danka Funding, LLC v. Page , Scrantom, Sprouse, Tucker & Ford, P.C., 21 F.Supp.2d 465 (D.N.J. 1998) (enforcing forum-selection clause contained in lease conferring jurisdiction over lessee in any jurisdiction where lessor or its assignee maintain their principal corporate offices); A.I. Credit Corp. v. Dijounas, Civ. A. No. 91-6234, 1992 WL 131783, at *1 (S.D.N.Y. 1992) (enforcing open-ended forum-selection clause which allows suit in partnership's place of business or transferee's principal place of business despite that there was no certain geographic jurisdiction named); But see, IFC Credit Corp. v. Aliano Bros. General Contractors, Inc., 2005 WL 643288 (N.D.Ill. 2005) (refusing to enforce NorVergence forum-selection clause); Copelco Capital, Inc. v. Shapiro , 331 N.J. Super. 1, 750 A.2d 773 (N.J. Super. Ct. App. Div. 2000) (refusing to enforce an open-ended forum-selection clause).

Factors Used to Determine Enforceability

While the clear trend of the courts, both state and federal, in interpreting forum-selection clauses, is to allow them to be enforced as written, except where there is clear evidence of fraud, their enforceability will be determined by the facts of the case and the state in which the case is being litigated. Among the factors that these courts are likely to consider in applying Bremen to determine whether enforcement of the forum-selection clause would be reasonable under the circumstances are whether: 1) the incorporation of the forum-selection clause into the agreement was the product of fraud, undue influence or overreaching; 2) requiring the party contesting the provision to litigate in the selected forum is so gravely difficult and inconvenient that this party would for all practical purposes be deprived of its day in court; or 3) the enforcement of the forum-selection clause would contravene a strong public policy of the forum state. See e.g., Bonny v. Society of Lloyd's , 3 F.3d 156 (7th Cir. 1993).

Because of the popularity of small ticket leasing for the business community especially in light of Article 2A of the Uniform Commercial Code, it is not uncommon to employ a variant of the typical forum-selection clause that delays an identification of the forum until a determination of the financing entity to which the paper is either sold or assigned is made. The forum-selection clause in this variant, like those contained in the NorVergence leases, identifies the forum as the principal place of business of an as yet to be determined financing entity. Such a provision enhances the value of this financial paper and lends to its free transferability in keeping with the objectives of Article 2A. The ability to initiate suit where the financing entity's business is located, in the event of a lease default, is a major inducement for finance companies to agree to finance a lease transaction in a distant location, thereby increasing the number of finance companies available to a lessee and willing to complete any transaction. In light of the popularity of these clauses and the rational basis for the inclusion of these clauses, it is unlikely that any given lessee will prevail under this first factor.

In applying this second factor, courts have noted that the level of inconvenience necessary to preclude enforcement of a forum-selection clause goes well beyond that which is required to transfer venue based on the inconvenience of the forum. See e.g., Pelleport Investors, Inc. v. Budco Quality Theatres, Inc., 569 F.Supp. 612, 614 (C.D.Cal.1983) (the location of the witnesses and the area of performance of the contract, while relevant to a forum non conveniens motion , are not persuasive in the context of an attack on the enforceability of a forum-selection clause). Additionally, “the burden of proving this element is much more difficult for sophisticated businesses than for individual consumers.” Titan Indemnity Co. v. Hood, 2004 WL 2651187, *8 (Miss. 2004). It requires more than a showing of insufficient resources to litigate the case in the distant forum or inability to take time away from one's business. See e.g. Barbuto v. Medicine Shoppe Intern., Inc. , 166 F.Supp.2d 341, 347 (W.D.Pa. 2001) [ See also, Carron ex rel. Carron v. Holland America , 51 F.Supp.2d 322, 326 (E.D.N.Y. 1999) (finding that because "coast to coast traveling has become commonplace in today's high-tech, modernized, global world ... [requiring] a litigant residing in New York [to] litigate thousands of miles away from home … is not unprecedented or overly burdensome); Karlberg European Tanspa v. J.K.-Josef Kratz Vertriebsgesellschaft , 618 F.Supp. 344 (N.D.Ill.1985) (upholding a forum-selection clause requiring litigation in West Germany over objections that plaintiff's witnesses were in the United States, the defective product was in the United States, the documents were in English, and there were more limited discovery rules in Germany)]. Because the complaints of inconvenience made by the lessees in the NorVergence cases generally relate to the expense of litigating in the chosen forums, it is unlikely that this factor will allow them to escape enforcement of the forum-selection clause.

It is the final factor, public policy, which will be used by some courts as a vehicle for providing an out for those lessees that have garnered the sympathy of the court. While some courts have recognized the strong public policy in favor of enforcement of forum-selection clauses specifically [ See e.g., Argueta v. Banco Mexicano, S.A. , 87 F.3d 320 (9th Cir. 1996)], or generally recognize the enforceability of contracts “as written” [ See e.g., Lieberman v. Wyoming.com LLC , 82 P.3d 274 (Wyo. 2004)], other states may focus on the public policy of notice [ See e.g., Copelco Capital, Inc. v. Shapiro , 331 N.J. Super. 1, 750 A.2d 773 (N.J. Super. Ct. App. Div. 2000)]. For those courts weighing the public policy of notice, whether against competing public policies of enforcement or otherwise, certain case-specific factors will counsel in favor of the forum-selection clauses at issue. (Note, because any adverse rulings on the enforceability of these provisions will negatively impact the negotiability of finance leases, which will, in turn, increase their cost for the consumer, this fact should be brought to the attention of any court considering public policy in determining whether to enforce these leases.) These will include whether the lessees received a Notice of Assignment of Rental, or some equivalent document, without objecting to the same, whether they participated in a telephone verification subsequent to their receipt of the equipment, and whether they made payments under the lease before defaulting.

If they received a Notice of Assignment or some other equivalent documents and failed to object within a reasonable time, it can be argued that the receipt of this document was sufficient, when read in conjunction with the lease, to put the lessee on notice of the proper forum in the event of any subsequent dispute between the lessee and the assignee. Additionally, in some cases, finance companies will have performed telephone verifications prior to funding each lease, as is commonplace in the industry. During these telephone verifications, each lessee is typically informed, among other things, of the name and location of the finance company and the place to which payment is to be sent. The lessee is also typically informed that the transaction has not yet been funded and the lessee is then given the option, during this call, to articulate any reason why the finance company should not fund the transaction. This presents yet another opportunity for the lessee to voice an objection to a distant forum if this is, in fact, objectionable. The lessee's failure to object to the assignment immediately upon receipt of notice of the same could be read as an implicit agreement to the assignment and, when taken in conjunction with the forum-selection language contained in the lease, to the application of the law of the state where the assignee's principal offices are located. Finally, any payments made by the lessee to the assignee prior to the lessee's breach would serve as additional support for the conclusion that the lessee had notice of the proper forum in the event of a dispute and assented to this forum. See e.g., Shelter Systems v. Lanni Builders, 263 NJ Super 373 (App Div. 1993) (holding that while the forum-selection clause was open-ended, and the seller's principal place of business was unknown to the buyer, the buyer was in possession of facts that alerted him that New Jersey would be the forum in the event of a dispute).

Because the Notice of Assignment of Rental and/or the telephone verification provides every lessee with the opportunity to escape an inconvenient or onerous forum before funding, the fact that no lessee now complaining about a supposed inconvenient forum chose to avail itself of this opportunity before the obligation attached should be all the information that any disinterested party would need to know to fairly characterize the bona fides of such claim. Any argument to the contrary should be read as nothing more than a disingenuous attempt to evade the clear protections afforded by Article 2A of the Uniform Commercial Code.

Conclusion

In light of the foregoing, it is of critical importance for financing companies considering purchasing paper that contains open-ended forum-selection clauses to understand the legal challenges they may face in enforcing this paper in an event of default. This requires reviewing applicable law to determine the manner in which these clauses are treated and considering all applicable factors where the law is silent regarding the enforcement of these clauses. Where a finance company has already purchased the paper, it is of critical importance that it treats all telephone verifications seriously. Prepare a list of questions to wade through and don't deviate from the script. The call should end with a catch all question inquiring whether the lessee knows of any reason why the transaction should not be funded. Invest the modest sum necessary to tape the conversation and save not only the tape recordings but also long distance telephone records that further corroborate that the call took place. Finally, it is a good idea to be certain that forum-selection clauses are in clear and conspicuous print.