• Enforceable Forum Selection Clauses
  • February 29, 2008
  • Law Firm: Buckingham, Doolittle & Burroughs, LLP - Canton Office
  • Contracts sometimes provide that any disputes will be resolved in the courts of a particular jurisdiction. Some courts have held, however, that such provisions are enforceable only when they name the specific state where suit is to be brought. Forum selection clauses that simply provide a framework for identifying the forum state, such as the state of residence of a party or its assignee, have been held invalid by these courts. The Ohio Supreme Court is now considering whether to hear an appeal that would decide whether a forum selection clause must specify the name of the state in whose courts any dispute will be resolved.

    In a case decided February 1, 2006, the Seventh Circuit Court of Appeals (covering Illinois, Indiana, and Wisconsin) considered the validity of a forum selection clause that did not identify the forum state by name. It also addressed for the first time whether a federal court can exercise jurisdiction over a non-resident defendant who otherwise lacked the requisite minimum contacts to be subject to jurisdiction in that Circuit.

    An Out-of-State Assignee

    The dispute in IFC Credit Corp. v. Aliano Bros. 7th Cir. 2006, Case No. 05-1720, 2006 U.S. App. LEXIS 2439, arose out of a contract for the leasing of telecommunications equipment. NorVergeance, Inc. leased the equipment to Aliano Bros., a construction firm, for a monthly rental fee of $20,000. Both NorVergeance and Aliano Bros. were New Jersey corporations. The contract provided that if Aliano Bros. defaulted on the payments, NorVergeance, or any business to whom it assigned the contract, could sue in a state or federal court in the state of the principal place of business of NorVergeance or its assignee.

    NorVergeance assigned the contract to IFC, an Illinois corporation, and shortly thereafter Aliano Bros. defaulted. IFC sued Aliano Bros. in federal district court in Illinois for non-payment of the contract obligation, and Aliano Bros. moved to dismiss the case for lack of jurisdiction, arguing that it had no contact with Illinois. The federal district court granted the motion, holding that the forum selection clause was invalid. IFC appealed to the Seventh Circuit.

    The Circuit court acknowledged the basis on which the federal district court had reached its decision. The Circuit court noted that IFC had sued many times in various Illinois state courts as assignee of NorVergeance contracts under the same forum selection clause. The Circuit court further noted that in most of those cases the courts had found the clause invalid on grounds that it was insufficiently specific, i.e., that it failed to identify by name the state where suit would be brought. It was on that basis that the federal district court had dismissed the case.

    The Seventh Circuit, however, reversed. It noted that counsel for Aliano Bros. had agreed at oral argument that the clause would have been sufficiently specific if it had said suit could be brought in New York or Vermont, or in a federal district court in the First Circuit, “or in any state that George W. Bush carried in the 2004 presidential election.” The court observed that in each of those circumstances the specific forum state would not be known at the time of contracting.

    Courts Protect the Freedom of Assignment

    The court wrote that “[p]arties to contracts are not benefited by rules that make assignment burdensome,” and noted that if the contract had to identify the forum state by name, that requirement would impede the assignment of contracts. The requirement would be burdensome because the assignee would have to litigate in a state that might be inconvenient for it.

    In reversing the district court’s dismissal order, the Circuit court also distinguished between contracts involving an individual and those involving two corporations. In IFC, the court noted that the contract was between two corporations and that Aliano Bros., a construction firm, was experienced in interpreting contracts. The court noted other decisions where forum selection clauses were not enforced when invoked against an individual who contracted with a corporation. Had this been such a case, the court would likely have applied the specificity requirement more rigorously.

    Current Decisions in Ohio Courts

    The IFC decision is consistent with some Ohio appellate court decisions that a forum selection clause, to be valid, need not identify the specific forum. For example, in Preferred Capital, Inc. v. Ferris Bros., Inc. 9th Dist. No. 22581, 2005-Ohio-6221 (November 23, 2005), the court (in another telecommunications equipment lease case) upheld a clause stating that any action to enforce the contract would be brought where the rentor or its assignee had its principal offices. The court noted other Ohio decisions upholding forum selection clauses “in commercial contracts in which the jurisdiction is not stated with particularity.” The Ohio Supreme Court has yet to address the issue, however.

    The court in Preferred Capital noted also that under Ohio law a defendant who agrees to a valid forum selection clause cannot argue insufficient contacts with the forum state to support jurisdiction “because the parties have waived the due process/minimum contacts requirement for personal jurisdiction by way of the forum selection clause….” A dissenting judge in Preferred Capital noted that the Ohio Supreme Court had recognized a forum selection clause as effecting such a waiver only in a case where the forum state was specifically identified.

    The decision in Preferred Capital was appealed to the Ohio Supreme Court in January of 2006 on a discretionary appeal. The court has not yet decided whether to hear the case. The IFC decision should be instructive to the Ohio court if it accepts the appeal in Preferred Capital.