A Lesson on Forum-Selection Clauses and the Preferences of New York State

By Michael Vandermark | Staff Writer

Given the pervasive nature of forum-selection clauses in many (if not most) contractual agreements, this article provides a useful overview of first, the function and importance of forum selection clauses and second, (given the location of many of our local readers) the policies in New York regarding those clauses. The recent decision of USA-India Export-Import, Inc. v. Coca-Cola Refreshments USA, Inc. is instructive on these points.

In USA-India, Plaintiffs, several stores that sold Coca-Cola products, brought a class-action against the Defendant who allegedly charged a deposit handling fee (or Code 1100 charge) for beverages Plaintiffs purchased from Defendant that were eligible for a recyclable refund. Plaintiffs argued that Defendant’s actions frustrated the purpose of the “Bottle Bill,” which was enacted by New York in response to concerns of litter and disposal costs. In sum, the Bottle Bill required “deposit initiators,” here Coca-Cola, to pay all deposits received from the sale of containers into a special interest-bearing account in trust for New York State. Allegedly, in an attempt to mitigate such costs, Coco-Cola imposed the Code 1100 charge on its dealers. Plaintiffs alleged that such cost-cutting moves were prohibited under ECL § 27-1007(8), which expressly provides that it is the responsibility of deposit initiators to bear such costs, not dealers.

Moreover, several Plaintiffs asserted that they were required to enter into a written agreement with Defendant, which contained the forum selection and choice of law clause listed in part, below. Plaintiffs argued that those clauses were used solely to frustrate the purpose of the Bottle Bill because the State of Georgia, the stipulated forum, had not enacted any type of Bottle Bill. Therefore, to enforce the contractual provisions would preclude several class members from litigating their claims under the Bottle Bill. Defendant moved to dismiss, citing New York’s deference to forum selection clauses.

As its name suggests, a forum selection clause in a contract allows a party to select a particular forum, or several potential forums, in which disputes that arise between the contracting parties must be litigated. These clauses may be written narrowly so that they only encompass specific claims listed in the agreement, or they may (and usually are) written broadly to include any and all contractually related disputes. The forum selection clause in USA-India serves as an example of a “broadly” written forum selection clause and provides in relevant part:

“Disputes and Governing Law: This Agreement and any dispute arising out of or relating to it will be governed by and construed in accordance with the laws of the state of Georgia without reference to its conflict of law rules. The exclusive venue for litigation will be in the federal or state courts located in Atlanta, GA, and the parties agree to submit to the personal jurisdiction of the courts in the State of Georgia . . . .”

Forum selection clauses are often considered “boilerplate language,” and may even be adhesive in nature depending on the relevant strength of each contracting party. Furthermore, in adhesive contracts, the dominant (or drafting) party stands to gain a significant advantage over the weaker party. By forcing the weaker party to agree to litigate in a specific venue, a venue whose laws are almost certainly favorable (or at least more familiar) to the drafting party, the weaker party is almost always put in a disadvantageous position. On the other hand, because forum selection clauses are so common, issues may arise in multi-party agreements, where the parties are in arms-length transactions with one another, and where each party has its own forum selection clause. However, such discussions are beyond the scope of this article.

In the State of New York forum selection clauses are enforced as long as the chosen forum bears a reasonable relation to the agreement and “the enforcement of the provision applying a foreign rule of law [does] not violate a fundamental public policy of New York.” Gambar Enter., Inc. v. Kelly Serv., Inc., 69 AD2d 297, 303 (2d Dept 1979). Notably, choice of law provisions only “import” the substantive law of the chosen jurisdiction, whereas procedural matters remain dictated by New York law. Moreover, New York courts have held that New York law governs whether the clause is enforceable.

Under New York law, a forum selection clause is prima facie valid and may only be overturned where the objecting party can prove that to enforce the provision would be (1) unreasonable; (2) unjust; (3) in contravention of New York public policy; (4) invalid due to either fraud or overreaching; or (5) so gravely difficult that the challenging party would, for all practical purposes, be deprived of its day in court. Trump v. Deutsche Bank Trust Co. Am., 65 AD3d 1329, 1131 (2d Dept 2009). In India-USA the court focused on whether the clause was in contravention of New York Policy. There the court noted that provisions are only contrary to New York public policy in cases where “the applicable foreign law would violate some fundamental principle of justice, some prevalent conception of good morals, [or] some deep-rooted tradition of the common weal.” Additionally, merely because the law of another state is “different” is almost never sufficient.

The court held that both the forum-selection clause and choice of law clause were permissible. The court noted that Georgia’s lack of legislation on the matter does not automatically render the foreign jurisdiction “hostile” to Plaintiffs’ claims. Further, the court noted several of New York’s major policy reasons behind its general support of forum selection clauses: (1) the general freedom of parties to contract as they see fit and the voluntary choice to enter into such an agreement even if some terms or provisions prove to be unfavorable to a party and (2) the belief that the clauses “provide certainty and predictability in the resolution of disputes” and greatly aid the courts on matters of conflict.

In sum, forum selection clauses are a powerful tool in the world of contracts, particularly in states like New York that regularly enforce them. USA-India stands as a stark reminder that practitioners and business-owners alike must be on the lookout for such clauses and, at times, be wary of their potential impact. As noted earlier, the burden is high and heavy for someone looking to overturn one of these clauses and therefore should not be taken lightly during the initial contractual discussions.

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