By: Alexander A. Miuccio Gregory J. Spaun Published: February 2019

Court Enforces Out-of-State Forum Selection Clause of Supply Contract

Contracts between parties frequently contain provisions specifying that litigation relating to the contract may be initiated only in a specified forum.  Courts generally enforce these forum selection clauses, and there is a high bar to challenge their enforceability.  In the recent case of Somerset Fine Homes Building, Inc. v Simplex Industries, Inc., a New York home builder challenged the validity of a sales agreement with a supplier which provided that any disputes would be litigated in a Court in Pennsylvania and determined by the law of Pennsylvania

Background

Somerset Fine Homes, a home builder in Suffolk County, entered into a sales agreement with Simplex Industries, a manufacturer of modular homes in Scranton, Pennsylvania, for Simplex to manufacture and transport a house to a site in Bridgehampton, New York, where Somerset was to erect the home for the homeowners. The agreement between Somerset and Simplex provided that any disputes would be determined by the law of Pennsylvania and that the exclusive forum for any action to enforce the agreement would be the Court of Common Pleas of Lackawanna County, Pennsylvania.

Somerset commenced a lawsuit against Simplex in Supreme Court in Suffolk County, claiming that Simplex breached the contract, breached the warranty, and committed fraud because it failed to deliver conforming, merchantable goods pursuant to the sales contract.  Simplex moved to dismiss the lawsuit, arguing that the parties’ agreement provides for the litigation of their dispute in the Pennsylvania court. In opposition to the motion, Somerset argued that the forum selection clause should be set aside as unconscionable, unreasonable and unjust, because it is a small company and traveling to Pennsylvania would cause it financial distress. In support of its argument, Somerset characterized itself as the weaker bargaining party and claimed it “had no choice” but to agree to the contract, as drafted by Simplex.

Decision

The court granted Simplex’s motion to dismiss, holding that parties to a contract may freely select their forum in the absence of unconscionability. The court, citing well established case law, held that a party claiming unconscionability bears a heavy burden of making a “strong showing” that the consenting party had no choice, and that the contract unreasonably favored the other party. According to the court, “the fact that the parties do not possess equal bargaining power does not invalidate a contract”. Moreover, the court noted that “the parties acknowledged in the agreement that they had the opportunity to obtain the assistance of counsel in the negotiation, drafting and execution of the agreement.” The court further ruled that simply claiming financial distress does not warrant setting aside a valid forum selection clause.  The court pointed out that there was no evidence that the cost of commencing an action in Pennsylvania would be “so financially prohibitive that for all practical purposes, [Somerset] would be deprived of its day in court”.  

Comment

It is well established that forum selection clauses are presumptively valid and enforceable.  To set aside a forum selection clause, the opposing party must show that enforcement of the clause is unreasonable, unjust or invalid due to fraud or overreaching.  This case demonstrates the high bar that a party must meet to convince the court that enforcement of a forum selection clause is unconscionable.

It must be noted that if this were a contract which required the performance of construction work in New York, the result would have been different by statute. Section 757 of the General Business Law specifically declares any attempt to change the venue of a construction contract dispute, or the law to be applied to such a dispute, void and unenforceable. Accordingly, in the construction context, forum selection clauses in New York are valid only with regard to supply contracts. For contracts which require any work, as opposed to contracts for the supply of goods only, the venue and choice of law will be in New York.

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