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NorVergence Maelstrom Rolls On: Floating Forum Clause Invalidated As Unreasonable
A recent decision from the Ohio Supreme Court may have an impact on the marketability of commercial lease agreements. In Preferred Capital, Inc. v. Power Engineering Group, Inc., 112 Ohio St. 3d 429, 860 N.E.2d 741 (2007), the court held that an open-ended forum selection clause, often referred to as a 'floating forum clause,' was not enforceable. The Preferred Capital court found that a floating forum clause in a lease agreement, which provided that any lawsuit arising from the lease would be venued in the state of the lessor's or its assignee's principal place of business, was unreasonable and contrary to public policy. While one might conclude that the subject forum clause is innocuous, the court took issue with the fact that the designated forum could be transferred to another jurisdiction if the lease agreement were assigned. In other words, if the lease were assigned to an assignee with a principal place of business that differed from that of the lessor, the appropriate forum would change. Another significant consideration for the court was the disparity of information between the parties. At the time the lease agreements were executed, the lessor was aware that the leases would be assigned to a company that was based in a foreign jurisdiction. The court's refusal to enforce the forum clause was based, in large part, on the lessor's failure to disclose that information at the time the parties entered into the lease.
The Preferred Capital decision should be required reading for leasing company executives and managers that do business in Ohio or with Ohio-based companies. However, the potential significance of this opinion extends beyond Ohio's borders. While Preferred Capital is not binding on courts in the other 49 states, the key question for those in the leasing industry is whether this opinion represents the first step toward increased judicial oversight and restriction of floating forum selection clauses.
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