When Forum Selection Clause Submitting Only to Federal Jurisdiction is Unenforceable, Parties May Bring Suit in Other Jurisdiction

On June 4, 2021, Justice Cohen of the New York County Commercial Division issued a decision in Serface Care, Inc. v. Berry Good Labs, LLC, 2021 NY Slip Op. 31900(U), holding that when a forum selection clause selecting only a federal forum is unenforceable, the parties can sue in other jurisdictions, explaining:

The forum selection clauses contained in both the Manufacturing Agreement and the Settlement Agreement state that:

Any conflict or controversy arising out of or in connection with this Agreement or any breach thereof shall be adjudicated in the Federal courts of the United States of America located in Austin Texas, and competent courts of appeals therefrom.

New York courts routinely enforce such provisions, which are not to be set aside unless a party demonstrates that the enforcement of such '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.

As noted above, Plaintiff initially sought to litigate this dispute in Texas federal court consistent with the terms of the forum selection provisions. However, the case was dismissed by stipulation, without prejudice, because the federal court did not have subject matter jurisdiction. As this Court noted in a similar case in which the parties could not litigate a contract dispute in their chosen forum (federal court) due to lack of subject matter jurisdiction, the forum selection clause, as drafted, simply cannot be applied under these circumstances. And because it cannot be applied, the forum selection clause is properly viewed as non-mandatory and alternative fora can be considered.

TBL's reliance on Matter of Rosewood Private Investments, Inc. (2018 WL 4403749 [Tex App 2018]) for the proposition that the forum selection provision in this case should be deemed - really, re-written - to mandate that disputes be resolved in Texas state court is misplaced. First, the enforcement of the forum selection clause in this case is governed by New York law, not Texas law. Second, the facts in Rosewood are distinguishable. In that case, it was unclear whether the federal court - to which the forum selection provision pointed - had jurisdiction over the dispute, and thus the parties were required to comply with the provision by permitting the federal court to make that determination. Here, by contrast, the lack of federal jurisdiction is undisputed, and thus referring the parties to federal court is not an option. The Rosewood court's alternative suggestion that even if the federal court determined it did not have jurisdiction the severability provision in the contract could be employed to strike the word federal from the forum selection clause is dicta, and the Court chooses not to follow it here. Myro and TBL limited the forum selection provision to the federal courts of Texas, and the Court sees no reason to override that choice.

In sum, the forum selection provisions in the parties' agreements do not preclude litigating this action in this Court, though they do reflect the fact that the locus of the parties' commercial arrangement was in Texas.

(Internal quotations and citations omitted).

New York generally enforces contracts as written, including contractual provisions specifying where a lawsuit may be brought. The plaintiff's problem here was that the forum selection clause required a lawsuit to be brought in federal, not state, court, and the federal court could not hear the case, making the clause void. 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.