Allegations of Fraud Unrelated to Forum Selection Clause Do Not Bar Enforcement of Clause

On April 1, 2020, Justice Borrok of the New York County Commercial Division issued a decision in Abyss Ltd. v. Netki, Inc., 2020 NY Slip Op. 31523(U), holding that allegations of fraud unrelated to an agreement's forum selection clause do not bar enforcement of the clause, explaining:

A forum selection clause is a contractual provision designating a forum for the resolution of all disputes arising out of a contract and rendering that forum convenient as a matter of law. The purpose of forum selection clauses is to avoid litigation over personal jurisdiction, as well as disputes arising over the application of the long-arm statute. Forum selection clauses are prima facie valid and enforceable unless shown by the resisting party to be unreasonable.

A party opposing the enforcement of a forum selection clause

must show that enforcement would be unreasonable and unjust or that the clause is invalid because of fraud or overreaching, such that a trial in the contractual forum would be so gravely difficult and inconvenient that the challenging party would, for all practical purposes, be deprived of his or her day in court.

A party opposing enforcement of a forum selection clause must allege fraud or overreaching, not with respect to the contract as a whole, but with respect to the forum selection clause itself.

Netki argues that dismissal is mandated because pursuant to Section 11.8 of the Netki MSA, the parties clearly and unambiguously designated the state and federal courts of Los Angeles as the exclusive forum for any action relating to the Netki MSA. And, the use of the term shall makes the forum selection clause mandatory rather than permissive.

In their opposition papers, and relying on DeSola Group, Inc. v Coors Brewing Co., Abyss argues that the forum selection clause is unenforceable because the complaint contains extensive allegations of Defendants’ fraud luring Plaintiff into signing Defendants’ forms and transferring over $80,000 for services Defendants were never going to perform. Abyss’ reliance is, however, misplaced.

In DeSola, the plaintiff alleged that it had an oral agreement where it was to be paid a monthly retainer of $75,000 plus expenses for marketing services, none of which included market research. The defendants moved to dismiss based on a forum selection clause. The IAS court, relying on a standard integration clause in the agreement, dismissed the complaint. On appeal, the First Department reversed, holding that the forum selection clause was inapplicable because the complaint made no reference to the agreement which contained the forum selection clause, and that reliance on the integration clause was misplaced because that clause expressly provided that all prior communications concerning the subject matter of the agreement (i.e., market research and not marketing services), were superseded (id.). The First Department when on to write that

[e]ven assuming the Agreement is applicable, the forum selection clause contained therein is unenforceable since the record is replace with allegations indicating that the entire Agreement was permeated with fraud. Plaintiff claims that the Agreement was not intended to constitute a binding contract between the parties and that defendant represented that the sole purpose of the Agreement was to provide a billing number for accounting purposes so that plaintiff could be paid. Lending credence to this argument is the fact, as stated above, that the Agreement does not describe the very services plaintiff had been hired to provide (i.e., market analysis), but rather, pertains to market research. Since plaintiff’s allegations of fraud pervading the Agreement would render the entire Agreement void, the forum selection clause contained therein is unenforceable.

Those allegations are very different than the allegations that Abyss makes here. To wit, Abyss does not allege that it thought it was signing a different agreement and that the agreement does not govern the parties relationship. In fact, Abyss alleges that Plaintiff and Netki were bound by the terms of the Order Form, which was governed by the Netki MSA, and that Netki breached its obligations under the Order Form by failing to provide any services specified in the Order Form. Put another way, the gravamen of the complaint is that Netki misrepresented its capabilities and its intent to perform its obligations and is in breach of the Order Form and Netki MSA, not that the agreements themselves are unenforceable.

To the extent that Abyss argues that it should not be bound by the forum selection clause because it was buried in the Agreement, the argument is equally unavailing. A forum selection clause is reasonably communicated if it is set forth in clear and unambiguous language. Here, as discussed above, the forum selection clause set forth in Section 11.8 of the Netki MSA is clear and unambiguous.

Finally, and for the avoidance of doubt, Abyss has failed to demonstrate that enforcement of the forum selection clause would be unreasonable, unjust, or invalid. Accordingly, the forum selection clause is prima facie valid and enforceable and this court is not a proper forum for this action.

(Internal quotations and citations omitted).

New York generally enforces contracts as written, including contractual provisions specifying where a lawsuit may be brought. There are exceptions, as this decision discusses, but they are limited and narrowly construed. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure whether a contract limits where an action can be brought.