Recent Developments in Enforcement of Forum Selection Clauses

Forum selection clauses are an important contractual tool for equipment lease finance companies. Such provisions allow a lessor, among other things, to institute all collection actions in a single jurisdiction. The result is reduced legal fees and costs, better predictability of results, and a lower risk of “home town” verdicts based upon factors other than a neutral application of the law. In short, judicial enforcement of forum selection clauses lowers the cost of leasing.

In the recent case of Financial Planning Alternatives, Inc. v. De Lage Landen Financial Services, Inc., 2012 WL 2588553 (Mass. App. June 28, 2012), the court affirmed a trial court's dismissal of a lessee's tort and consumer protection claims on the grounds that the lawsuit was brought in the wrong jurisdiction. The court observed that Massachusetts courts generally enforce forum selection clauses, even when included in so-called “contracts of adhesion.” Accordingly, plaintiff was bound by the contract's selection of a Pennsylvania forum.

Such holding was itself unremarkable. For 40 years following the Supreme Court's seminal decision in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), courts have repeatedly held that forum selection clauses are valid and enforceable. The more newsworthy aspect of the Financial Planning Alternatives decision was tucked away in a footnote, in which the court commented: “While recognizing and applying the established law that compels the decision in this matter, we are not unmindful of the inequities potentially created by De Lage's use of a boilerplate forum selection clause.” Id. at *2, n. 4. That footnote further alluded to a consent decree entered in a decade-old dispute between Leasecomm Corporation and various federal and state government authorities, in which a lessor agreed to abandon its standard forum selection clause and to institute collection suits where the consumer resided or did business.

The court's decision to include such observations, even while upholding the particular forum selection provision at issue, underscores the point that such clauses are not immune from attack. Lessors must avoid complacency in the drafting and enforcement of these critical provisions. This article highlights several practical tips that will increase the probability that a forum selection clause will be enforced to its maximum effect.

Forum Selection Clauses Should Be Clear and Straightforward

Since the Supreme Court's decision in M/S Bremen, federal courts and most state courts have applied the rule that forum selection clauses are presumptively valid. Accordingly, absent fraud, such provisions will typically be given effect unless it is determined that enforcement would be unfair or unreasonable. Establishing that a forum selection clause is unfair or unreasonable is a high hurdle to overcome. However, courts are far more apt to make such a finding if it is determined that the lessee did not meaningfully agree to litigate disputes in the selected forum.

Refuting a claim that a forum selection clause is unfair or unreasonable is a task made simpler where the clause in question can be easily read and understood. In this regard, the drafter should employ common-sense techniques, such as writing the provision in plain English; utilizing uniform and reasonable font size; placing the forum selection clause in its own section or paragraph of the agreement; and using bold face or capitalization for emphasis. Likewise, the drafter should refrain from using one-sided forum selection provisions that apply only to suits instituted by the lessee. In short, forum selection clauses are valid and important contractual provisions, which should be drafted in a straightforward and unapologetic manner. Any factors that serve to hide or obscure such a clause, or to make the clause unduly favorable to the lessor, might feed into the sentiment expressed in Financial Planning Alternatives, regarding the “inequities” that potentially exist in such a clause, and will provide ammunition for a lessee seeking to strike down the provision as unfair or unreasonable.

Forum Selection Clauses Should Be Exclusive and Mandatory

In order to maximize effectiveness, a forum selection clause must be both exclusive and mandatory. A contractual provision in which the lessee consents to jurisdiction and venue in a particular forum ' but does not require that all disputes be brought there ' might be useful in collection actions instituted by the lessor. However, such a clause will have little effect if the lessee acts first by initiating legal action in a forum of its own choosing. For instance, a recent Florida federal court decision rejected a lessor's motion to transfer an action to Georgia, where the forum selection clause at issue provided for venue and non-exclusive jurisdiction in Georgia or Florida. Kenneth F. Hackett & Assocs., Inc. v. GE Capital Info. Tech Solutions, 2010 WL 3056600 (S.D. Fla. 2010). While a nonexclusive jurisdiction clause may allow a lessor to preserve a degree of flexibility with respect to where it wishes to institute a future lawsuit, the lessor should not be surprised if such flexibility backfires in cases where it is beaten in the proverbial race to the courthouse door.

Forum Selection Clauses Should Be Broad As to Coverage

Numerous cases involving the enforcement of forum selection clauses have arisen in the context of a claim that a lease agreement was induced by fraud. In such cases, the lessee may initiate suit in another jurisdiction and argue that dismissal or transfer is not appropriate because the lessor never made a valid agreement to litigate disputes in a particular forum. It goes without saying that no amount of caution can guarantee that a lessor will never be subject to a dubious fraudulent inducement claim. However, careful drafting can improve the likelihood that any such dispute will be resolved in the forum designated in the parties' contract. Courts are more likely to find that a forum selection clause governs where such provision is broadly drafted to apply to any dispute between the parties relating to the subject matter of the lease, as opposed to a more narrow provision that, for example, applies only to “actions on the lease.” In the latter case, a court may determine that the lessee agreed to litigate in the selected forum only breach of contract actions ' and not tort claims arising out of the parties' relationship.

Forum Selection Clauses Should Be Specific As to Jurisdiction

While forum selection clauses should be broad with respect to coverage, they should be specific as to the jurisdiction in which a suit must be brought. As one cautionary example, a Florida appellate court recently refused to enforce a forum selection clause that provided “[e]ach of the parties hereto agrees that any such claim or cause of action shall be tried by a court trial without a jury in Seller's county and state of choice.” Lopez v. United Capital Fund, LLC, 88 So.3d 421, 423 (Fla. App. May 16, 2012). The court found that such a clause was too broad and nonspecific to be enforced, noting that the clause's “lack of specificity impugned a fundamental purpose of such clauses: to eliminate uncertainties by agreeing in advance on a forum acceptable to both parties.”

Similarly, lessors and their assignees have had mixed success enforcing so-called “floating” forum selection clauses, in which the contractual provision at issue does not designate a particular forum, but rather requires suit in the lessor's principal place of business or, if the lease is assigned, the state in which the assignee's principal offices are located. See Enforceability of Floating Forum Selection Clauses, 39 A.L.R. 6th 629 (2008). Although the majority of courts to consider the issue have found such clauses to be reasonable and enforceable, other courts have refused enforcement finding that such clauses are unreasonable because they could result in the lessee being subject to suit anywhere in the entire country, in a forum that would not be identifiable until sometime after the agreement is entered. Additionally, at least one court has declined to enforce a floating forum selection clause on the basis of the lessor's superior knowledge, where the lessor intended to assign the lease and knew the assignee's principal places of business, but did not disclose that information. Absent a compelling business reason to include a floating forum selection clause, the better practice is to specify exclusive jurisdiction in a particular forum.

Lessors Should Act Aggressively and Without Delay Enforcing Forum
Selection Clauses

In addition to including a well-drafted forum selection clause in lease agreements, a lessor should enforce the clause aggressively and without delay when a dispute arises. Because forum selection clauses are generally not viewed as jurisdictional, i.e., they are enforced as a matter of contract law and not because the court is without jurisdiction to hear the case, a party that permits litigation instituted in the wrong venue to continue without objection may be estopped from invoking the forum selection clause at a later stage of the case. Similarly, where it is reasonably likely that the breaching lessee may assert its own affirmative claims, the best defense may be a good offense. Such is particularly true in cases where the lessee is likely to claim that the lease agreement was the product of fraud. A lessor may be better positioned to ensure that a forum selection clause is given effect when the action can be characterized as a collection action, in which fraud is alleged as a defense to breach of contract, rather than primarily as an action by the lessee to recover damages. For instance, in two recent cases in which I was involved, the lessor was able to cause the litigation to proceed in the correct jurisdiction, despite competing litigation by the lessee, by instituting collection litigation and acting aggressively to enforce the forum selection clause.

Patrick M. Northen is a partner at Dilworth Paxson LLP and a member of the Litigation Department's Operating Committee. A member of this newsletter's Board of Editors, Northen concentrates his practice on commercial and complex litigation, including extensive representation of equipment leasing companies in matters involving allegations of programmatic lease fraud. He may be contacted at [email protected].

Forum selection clauses are an important contractual tool for equipment lease finance companies. Such provisions allow a lessor, among other things, to institute all collection actions in a single jurisdiction. The result is reduced legal fees and costs, better predictability of results, and a lower risk of “home town” verdicts based upon factors other than a neutral application of the law. In short, judicial enforcement of forum selection clauses lowers the cost of leasing.

In the recent case of Financial Planning Alternatives, Inc. v. De Lage Landen Financial Services, Inc., 2012 WL 2588553 (Mass. App. June 28, 2012), the court affirmed a trial court's dismissal of a lessee's tort and consumer protection claims on the grounds that the lawsuit was brought in the wrong jurisdiction. The court observed that Massachusetts courts generally enforce forum selection clauses, even when included in so-called “contracts of adhesion.” Accordingly, plaintiff was bound by the contract's selection of a Pennsylvania forum.

Such holding was itself unremarkable. For 40 years following the Supreme Court's seminal decision in M/S Bremen v. Zapata Off-Shore Co. , 407 U.S. 1 (1972), courts have repeatedly held that forum selection clauses are valid and enforceable. The more newsworthy aspect of the Financial Planning Alternatives decision was tucked away in a footnote, in which the court commented: “While recognizing and applying the established law that compels the decision in this matter, we are not unmindful of the inequities potentially created by De Lage's use of a boilerplate forum selection clause.” Id. at *2, n. 4. That footnote further alluded to a consent decree entered in a decade-old dispute between Leasecomm Corporation and various federal and state government authorities, in which a lessor agreed to abandon its standard forum selection clause and to institute collection suits where the consumer resided or did business.

The court's decision to include such observations, even while upholding the particular forum selection provision at issue, underscores the point that such clauses are not immune from attack. Lessors must avoid complacency in the drafting and enforcement of these critical provisions. This article highlights several practical tips that will increase the probability that a forum selection clause will be enforced to its maximum effect.

Forum Selection Clauses Should Be Clear and Straightforward

Since the Supreme Court's decision in M/S Bremen, federal courts and most state courts have applied the rule that forum selection clauses are presumptively valid. Accordingly, absent fraud, such provisions will typically be given effect unless it is determined that enforcement would be unfair or unreasonable. Establishing that a forum selection clause is unfair or unreasonable is a high hurdle to overcome. However, courts are far more apt to make such a finding if it is determined that the lessee did not meaningfully agree to litigate disputes in the selected forum.

Refuting a claim that a forum selection clause is unfair or unreasonable is a task made simpler where the clause in question can be easily read and understood. In this regard, the drafter should employ common-sense techniques, such as writing the provision in plain English; utilizing uniform and reasonable font size; placing the forum selection clause in its own section or paragraph of the agreement; and using bold face or capitalization for emphasis. Likewise, the drafter should refrain from using one-sided forum selection provisions that apply only to suits instituted by the lessee. In short, forum selection clauses are valid and important contractual provisions, which should be drafted in a straightforward and unapologetic manner. Any factors that serve to hide or obscure such a clause, or to make the clause unduly favorable to the lessor, might feed into the sentiment expressed in Financial Planning Alternatives, regarding the “inequities” that potentially exist in such a clause, and will provide ammunition for a lessee seeking to strike down the provision as unfair or unreasonable.

Forum Selection Clauses Should Be Exclusive and Mandatory

In order to maximize effectiveness, a forum selection clause must be both exclusive and mandatory. A contractual provision in which the lessee consents to jurisdiction and venue in a particular forum ' but does not require that all disputes be brought there ' might be useful in collection actions instituted by the lessor. However, such a clause will have little effect if the lessee acts first by initiating legal action in a forum of its own choosing. For instance, a recent Florida federal court decision rejected a lessor's motion to transfer an action to Georgia, where the forum selection clause at issue provided for venue and non-exclusive jurisdiction in Georgia or Florida. Kenneth F. Hackett & Assocs., Inc. v. GE Capital Info. Tech Solutions, 2010 WL 3056600 (S.D. Fla. 2010). While a nonexclusive jurisdiction clause may allow a lessor to preserve a degree of flexibility with respect to where it wishes to institute a future lawsuit, the lessor should not be surprised if such flexibility backfires in cases where it is beaten in the proverbial race to the courthouse door.

Forum Selection Clauses Should Be Broad As to Coverage

Numerous cases involving the enforcement of forum selection clauses have arisen in the context of a claim that a lease agreement was induced by fraud. In such cases, the lessee may initiate suit in another jurisdiction and argue that dismissal or transfer is not appropriate because the lessor never made a valid agreement to litigate disputes in a particular forum. It goes without saying that no amount of caution can guarantee that a lessor will never be subject to a dubious fraudulent inducement claim. However, careful drafting can improve the likelihood that any such dispute will be resolved in the forum designated in the parties' contract. Courts are more likely to find that a forum selection clause governs where such provision is broadly drafted to apply to any dispute between the parties relating to the subject matter of the lease, as opposed to a more narrow provision that, for example, applies only to “actions on the lease.” In the latter case, a court may determine that the lessee agreed to litigate in the selected forum only breach of contract actions ' and not tort claims arising out of the parties' relationship.

Forum Selection Clauses Should Be Specific As to Jurisdiction

While forum selection clauses should be broad with respect to coverage, they should be specific as to the jurisdiction in which a suit must be brought. As one cautionary example, a Florida appellate court recently refused to enforce a forum selection clause that provided “[e]ach of the parties hereto agrees that any such claim or cause of action shall be tried by a court trial without a jury in Seller's county and state of choice.” Lopez v. United Capital Fund, LLC , 88 So.3d 421, 423 (Fla. App. May 16, 2012). The court found that such a clause was too broad and nonspecific to be enforced, noting that the clause's “lack of specificity impugned a fundamental purpose of such clauses: to eliminate uncertainties by agreeing in advance on a forum acceptable to both parties.”

Similarly, lessors and their assignees have had mixed success enforcing so-called “floating” forum selection clauses, in which the contractual provision at issue does not designate a particular forum, but rather requires suit in the lessor's principal place of business or, if the lease is assigned, the state in which the assignee's principal offices are located. See Enforceability of Floating Forum Selection Clauses, 39 A.L.R. 6th 629 (2008). Although the majority of courts to consider the issue have found such clauses to be reasonable and enforceable, other courts have refused enforcement finding that such clauses are unreasonable because they could result in the lessee being subject to suit anywhere in the entire country, in a forum that would not be identifiable until sometime after the agreement is entered. Additionally, at least one court has declined to enforce a floating forum selection clause on the basis of the lessor's superior knowledge, where the lessor intended to assign the lease and knew the assignee's principal places of business, but did not disclose that information. Absent a compelling business reason to include a floating forum selection clause, the better practice is to specify exclusive jurisdiction in a particular forum.

Lessors Should Act Aggressively and Without Delay Enforcing Forum
Selection Clauses

In addition to including a well-drafted forum selection clause in lease agreements, a lessor should enforce the clause aggressively and without delay when a dispute arises. Because forum selection clauses are generally not viewed as jurisdictional, i.e., they are enforced as a matter of contract law and not because the court is without jurisdiction to hear the case, a party that permits litigation instituted in the wrong venue to continue without objection may be estopped from invoking the forum selection clause at a later stage of the case. Similarly, where it is reasonably likely that the breaching lessee may assert its own affirmative claims, the best defense may be a good offense. Such is particularly true in cases where the lessee is likely to claim that the lease agreement was the product of fraud. A lessor may be better positioned to ensure that a forum selection clause is given effect when the action can be characterized as a collection action, in which fraud is alleged as a defense to breach of contract, rather than primarily as an action by the lessee to recover damages. For instance, in two recent cases in which I was involved, the lessor was able to cause the litigation to proceed in the correct jurisdiction, despite competing litigation by the lessee, by instituting collection litigation and acting aggressively to enforce the forum selection clause.

Patrick M. Northen is a partner at Dilworth Paxson LLP and a member of the Litigation Department's Operating Committee. A member of this newsletter's Board of Editors, Northen concentrates his practice on commercial and complex litigation, including extensive representation of equipment leasing companies in matters involving allegations of programmatic lease fraud. He may be contacted at [email protected].