A. Introduction
Consent is fundamental to the law of contract.Footnote 1 If two parties agree to a particular undertaking, then the law will enforce their agreement even if one party later has second thoughts. Similarly, if one party withholds its consent, then no agreement will come into existence.
Even when there is consent, however, it does not always follow that a contract will be enforced. There are many legal doctrines which direct the courts not to enforce an otherwise valid agreement.Footnote 2 When a party is coerced into signing a contract, it may be unenforceable on the basis of duress.Footnote 3 When a party is tricked into signing a contract, the court may decline to give it effect on the grounds of misrepresentation.Footnote 4 Ascertaining whether a party has consented to be bound represents the beginning of the inquiry. It does not carry all the way through to the end.
One question that sometimes arises is whether a party is bound by a particular contract provision if he was unaware of its existence. As a matter of U.S. contract law, it has long been true that “one who assents to a writing is presumed to know its contents and cannot escape being bound by its terms merely by contending that he did not read them; his assent is deemed to cover unknown as well as known terms.”Footnote 5 There are, however, exceptions to this rule. Several of these exceptions relate to the topic of this symposium—the enforcement of choice-of-jurisdiction clauses.
A choice-of-jurisdiction clause is a contract provision which selects a court in which to resolve disputes.Footnote 6 On a number of occasions, U.S. courts have held that one of these clauses was not enforceable due to some failure relating to notice. The theory underlying these decisions is straightforward. Although formal consent may have been obtained, this consent was ineffective due to the fact that (1) the existence of the clause was obscured or undisclosed, or (2) the identity of the court selected in the clause was not clearly identified. In such cases, some courts in the United States have concluded that this lack of notice rendered a choice-of-jurisdiction clause unenforceable.
This Article provides a concise overview as to the role played by notice and consent in the enforcement of choice-of-jurisdiction clauses in the United States. Section B provides background information on U.S. law as it relates to these clauses. Section C discusses cases where the courts refused to enforce a clause because the resisting party was not provided with notice of its existence. Section D turns to cases where the courts were asked to decide whether a clause was invalid because it was impossible for the resisting party to determine the identity of the chosen jurisdiction at the time of signing. Section E identifies and critiques recent cases where U.S. courts have held that notice may serve as a substitute for consent specifically with respect to choice-of-jurisdiction clauses.
B. Choice-of-Jurisdiction Clauses and U.S. Law
The U.S. legal system comprises state and federal courts. State courts are courts of general subject-matter jurisdiction. They usually apply state law to resolve cases that come before them. Federal courts are courts of limited subject-matter jurisdiction. They frequently apply federal law to resolve cases that come before them. The law relating to choice-of-jurisdiction clauses in the United States is complicated because state courts apply state law to determine whether a clause is enforceable. Federal courts, by comparison, apply federal common law to determine the same.Footnote 7
There are a number of state statutes that address the enforceability of choice-of-jurisdiction clauses. Perhaps the most comprehensive is the Model Choice of Forum Act. The Model Act is based on the Convention on the Choice of Court, an instrument approved by the Hague Conference in 1964.Footnote 8 The Act provides that (1) a court must entertain an action if it is designated as a proper forum in the parties’ agreement, and (2) a court must not entertain an action if the parties’ agreement selects another court as the exclusive forum for resolving disputes.Footnote 9 Although this rule is subject to several exceptions, none of them relates to the issue of notice.Footnote 10
The Model Act has, regrettably, been adopted in only four states.Footnote 11 Every U.S. state has, however, enacted at least one statute that invalidates choice-of-jurisdiction clauses when they appear in certain types of contracts.Footnote 12 Most of these statutes do not refer specifically to notice. They simply state that a choice-of-jurisdiction clause shall not be enforced when written into a consumer lease, a franchise agreement, a student loan agreement, an insurance contract, or some other type of agreement.Footnote 13 There are, however, a few notable exceptions. The State of Indiana has enacted a statute which requires choice-of-jurisdiction clauses to be printed “conspicuously in immediate proximity to the space reserved for the signature of the farmer” to be enforceable in seed contracts.Footnote 14 A clause is deemed conspicuous if it is printed in capital letters, if it is printed in a larger, bold, or different typeface, if it printed in a different color, or if it is underlined.Footnote 15 Massachusetts and Minnesota have enacted similar statutes mandating that arbitration provisions in certain types of contracts be “conspicuously disclosed” to be enforceable.Footnote 16
These legislative enactments notwithstanding, most U.S. law relating to choice-of-jurisdiction clauses is made by judges. Perhaps the most important decision in this area is M/S Bremen v. Zapata Off-Shore Company, a case decided by the U.S. Supreme Court in 1972.Footnote 17 The Court held that these clauses were presumptively enforceable as a matter of federal admiralty law subject to three exceptions.Footnote 18 First, a clause was not enforceable if it was unreasonable or unjust.Footnote 19 Second, a clause was not enforceable if it was contrary to a strong public policy of the forum in which the suit was brought.Footnote 20 Third, a clause was not enforceable if it was procured by fraud, undue influence, or overweening bargaining power.Footnote 21 When U.S. courts today hold that choice-of-jurisdiction clauses are unenforceable due to some defect in notice, they frequently invoke the first of these exceptions—a lack of reasonableness—as the basis for their decision.
Another significant decision in this area is Carnival Cruise Lines, Inc. v. Shute.Footnote 22 In that case, the Supreme Court held as a matter of federal admiralty law that choice-of-jurisdiction clauses were presumptively enforceable even when written into non-negotiated consumer contracts.Footnote 23 The effect of this decision was to narrow the range of circumstances under which a clause could be invalidated on the grounds that it was unreasonable. Nevertheless, the Court in Carnival Cruise specifically declined to address whether the party resisting enforcement “had sufficient notice of the forum clause before entering the contract for passage.”Footnote 24 This elision opened the door for U.S. courts to consider lack of notice as a basis for declining to enforce a choice-of-jurisdiction clause in cases where the resisting party argued that the clause had never been “reasonably communicated” to him.
Because M/S Bremen and Carnival Cruise were decided by the Supreme Court as a matter of federal admiralty law, they are not binding on state courts outside of the admiralty context.Footnote 25 This means that the state courts in each U.S. state are free to develop their own jurisprudence relating to choice-of-jurisdiction clauses as a matter of state common law. While most state courts have adopted a framework that generally tracks the one laid down in M/S Bremen, a few have chosen to modify this framework to make it easier for the resisting party to invalidate a clause. The Minnesota courts, for example, will consider whether the contract was one of adhesion in deciding whether to enforce it.Footnote 26 The Ohio courts will inquire whether the contract was a business contract or a consumer contract.Footnote 27 The Kentucky courts will examine whether there was some disparity of bargaining power between the parties.Footnote 28
The end result is a system of dizzying complexity. While there is a uniform national rule with respect to the enforcement of choice-of-jurisdiction in maritime cases, and while many states adhere to the general framework laid down in M/S Bremen as a matter of state common law, there are differences in how these clauses are addressed across the nation. These differences manifest across three primary dimensions.
First, there is enormous variety with respect to how choice-of-jurisdiction clauses are drafted. Some clauses are written in such a way as to leave no doubt as to whether the clause is exclusive, whether it covers non-contract claims, and whether it is selecting state or federal courts.Footnote 29 Other clauses are not drafted with an eye to any of these issues. As a threshold issue, the courts in the United States are constantly called upon to interpret words in choice-of-jurisdiction clauses that are ambiguous with respect to their intended meaning. The meaning of these words will then inform the analysis as to whether the clause is enforceable.
Second, there are significant differences in how issues of enforceability are resolved as between state and federal courts. In principle, the federal courts sitting in a particular state should apply state law to assess whether a choice-of-jurisdiction clause should be given effect.Footnote 30 In practice, the federal courts frequently apply federal common law to resolve this question. Because the content of federal common law is sometimes different from the content of state law, state and federal courts may reach different conclusions as to whether a clause should be given effect. One recent empirical study found, for example, that state courts in New Jersey are much less likely than their federal counterparts to enforce a choice-of-jurisdiction clause.Footnote 31
Third, the courts do not always agree as to whether a clause is reasonable. The benefit of using reasonableness as a standard is that it is flexible and can be adapted to a wide variety of circumstances. The downside to relying on reasonableness is that it can mean different things to different people. One study comparing outcomes across state courts found, for example, that state courts in Alabama enforce choice-of-jurisdiction clauses in virtually every case.Footnote 32 State courts in Pennsylvania, by comparison, routinely invalidate clauses on the grounds that they are unreasonable.Footnote 33
C. Lack of Notice as to the Clause
Although U.S. courts enforce choice-of-jurisdiction clauses in most cases, they will sometimes decline to enforce a clause if the resisting party was not provided with adequate notice as to its existence. This issue tends to arise in one of two contexts. First, the resisting party may argue that the clause should not be enforced because it was inconspicuous. Second, the resisting party may argue that the clause should not be enforced because the contract containing the choice-of-jurisdiction clause was not delivered until weeks or months after the agreement was concluded.
I. Inconspicuousness
Individuals and businesses routinely sign contracts that they have not read. When purchasing goods on the internet, for example, individuals frequently agree to a company’s terms of service sight unseen. The fact that a person did not read an agreement before signing it does not, as a general rule, affect the validity of the contract in the United States. Nevertheless, the courts sometimes recognize an exception to this rule when it comes to choice-of-jurisdiction clauses. When a choice-of-jurisdiction clause is tucked away at the back of a long contract, or when it is not brought to the resisting party’s attention prior to signing, the courts may decline to give effect to that clause on the ground that the resisting party was not provided with adequate notice of its existence.
In O’Brien v. Okemo Mountain, Inc., for example, the plaintiff was injured while skiing at the defendant’s resort in Vermont.Footnote 34 After a lawsuit was brought in Connecticut, the defendant sought to have the suit transferred to Vermont based on a Vermont choice-of-jurisdiction clause.Footnote 35 The court held that the clause was too inconspicuous to be enforceable.Footnote 36 It observed that the clause was “placed near the bottom of the backside of the ticket” and was “written in very small typeface with only a single word capitalized.”Footnote 37 It also noted that “the front of the ticket contain[ed] no instruction to read its back.”Footnote 38 Finally, it pointed out that the “affixing of the ticket on a wicket on the skier’s jacket” was not reasonably calculated to bring the existence of the clause to the plaintiff’s attention.Footnote 39 On these facts, the court held that the choice-of-jurisdiction clause should not be given effect because it was never reasonably communicated to the plaintiff.Footnote 40
In Swipe Ice Corp, Inc. v. UPS Mail Innovations, Inc., the court reached a similar conclusion.Footnote 41 After the defendant was sued in New York state court for breach of a contract, it sought to have the case dismissed based on a Georgia choice-of-jurisdiction clause in an online agreement.Footnote 42 The court held that this clause was not enforceable because its existence was not reasonably communicated to the plaintiff.Footnote 43 The court noted that the online contract “referenced a website hyperlink that contained terms not presented to the offeree at the time of acceptance.”Footnote 44 It then pointed out that this hyperlink was “not a direct link to the service terms and conditions.”Footnote 45 Against this backdrop, the court declined to give effect to the choice-of-jurisdiction clause on the grounds that it was too inconspicuous to put the plaintiff on notice of its existence.Footnote 46
There are also cases where the courts have declined to apply this exception. In Horvath v. Banco Comercial Portugues, S.A., for example, the plaintiff argued that he never received notice of a choice-of-jurisdiction clause selecting the courts in Portugal in an agreement written entirely in Portuguese because (1) he did not understand Portuguese, and (2) he could not recall ever having received a copy of the document in question.Footnote 47 The court rejected these arguments.Footnote 48 It invoked the traditional common law rule to hold that individuals are “charged with knowing and understanding the contents of documents they knowingly sign.”Footnote 49 The plaintiff was directed to refile the suit in Portugal.Footnote 50
And in Geico Marine Ins. Co. v. Amzim Marine Servs., LLC, the plaintiff sued an insurance company in Florida after it refused to pay a liability claim.Footnote 51 The insurer invoked an Indiana choice-of-jurisdiction clause in the insurance agreement and sought to transfer the case to Indiana.Footnote 52 The plaintiff argued that the clause was not enforceable because: (1) the font size was incredibly small, and (2) it appeared on a page in the agreement that came after his signature.Footnote 53 The court ruled in favor of the defendant.Footnote 54 It pointed out that the clause was “set apart in a separate paragraph with a legible font” and that this language was “capitalized to…differentiate it from the surrounding text.”Footnote 55 While the court acknowledged that the clause came after the plaintiff’s signature, it observed that it was “incumbent on [the plaintiff] to keep reading” because “the agreement indicate[d] that more terms [were] contained beyond the first page.”Footnote 56
II. Delayed Disclosure
In some instances, the problem does not derive from the inconspicuousness of the clause itself. Instead, it derives from the fact that the contract containing the choice-of-jurisdiction clause was not delivered to the resisting party until weeks or months after the agreement was concluded. In such cases, a number of U.S. courts have held that this delay may render the clause unenforceable.
Consider a scenario whereby a person books a cruise over the phone and makes a sizable deposit by credit card.Footnote 57 Several weeks later, the traveler receives a copy of the cruise contract in the mail. The contract in question contains a choice-of-jurisdiction clause selecting a distant forum. When the customer calls the cruise company to cancel her trip, she is told that a cancellation will result in the forfeiture of her deposit. The unhappy passenger sues the cruise company to try to obtain a return of her deposit. The company seeks to enforce the choice-of-jurisdiction clause. In such cases, the courts must determine whether delayed disclosure of the contract—and the corresponding lack of notice with respect to the clause—is a valid basis for refusing to enforce it. In a number of cases, U.S. courts have held that it is.
In Johnson v. Holland Am. Line-Westours, for example, a couple booked a trip with a cruise line.Footnote 58 They were not provided with their ticket and cruise contract until they had made the final payment.Footnote 59 Two weeks before the ship set sail, the wife was diagnosed with cancer, making it impossible for her to travel.Footnote 60 When the couple requested a refund or a credit, this request was refused.Footnote 61 The couple sued the cruise line in Wisconsin.Footnote 62 The company sought to have the case dismissed because the contract contained a choice-of-jurisdiction clause requiring all suits to be brought in the State of Washington.Footnote 63 The Wisconsin court declined to enforce this clause because the couple did not receive adequate notice of the term.Footnote 64 It pointed out that the couple had “received the documents less than forty-five days before departure” and that, under the plain terms of the ticket, they would have had to “forfeit one-half the entire purchase price if they had canceled their trip on receipt of the ticket.”Footnote 65 When a contract term cannot be rejected without forfeiting thousands of dollars, the court reasoned, that term is not enforceable.Footnote 66
Other U.S. courts have adopted the same reasoning. In Stobaugh v. Norwegian Cruise Line Ltd., a couple booked a cruise selected from a promotional brochure that made no reference to any choice-of-jurisdiction clause.Footnote 67 They paid for the cruise in June but did not receive their tickets until August 8, 1996.Footnote 68 The ship set sail on August 31, 1996.Footnote 69 After the ship encountered a hurricane, the couple allegedly suffered physical and emotional injuries.Footnote 70 They sued the cruise line in Texas.Footnote 71 The cruise line sought to dismiss based on a Florida choice-of-jurisdiction clause in the ticket.Footnote 72 The court deemed the clause unenforceable.Footnote 73 It noted that even if the couple had “immediately read the Contract of Passage containing the choice-of-jurisdiction clause and attempted to reject the choice-of-jurisdiction clause on the same day it was received, each couple would have been subject to a $400 cancellation penalty.”Footnote 74 To enforce a clause under such circumstances, the court held, was unfair and contrary to public policy.Footnote 75
There are, as always, cases that come out the other way. In Santos v. Costa Cruise Lines, Inc., the court enforced a choice-of-jurisdiction clause in a cruise contract even though the plaintiffs would have had to forfeit fifty percent of their ticket cost to reject the terms.Footnote 76 In Bowen v. Norwegian Cruise Line, Inc., the court enforced a choice-of-jurisdiction clause in a cruise contract even though the plaintiffs did not receive the contract until ten days prior to departure when the deposit was non-refundable.Footnote 77 These decisions notwithstanding, a number of U.S. courts have endorsed the proposition that delayed disclosure of a contract—and the resulting lack of notice with respect to a choice-of-jurisdiction clause—may provide a basis for refusing to enforce the clause when the resisting party cannot exit the agreement without incurring a financial penalty.
D. Lack of Notice as to the Chosen Jurisdiction
In other U.S. cases, the issue of notice does not arise in the context of determining whether a party was aware of the existence of the choice-of-jurisdiction clause itself. Instead, the issue arises because it is difficult or impossible to ascertain the identity of the jurisdiction named in the clause.
I. Vague Clauses
A vague choice-of-jurisdiction clause is one that is drafted in such a way as to make it challenging for the parties to identify the chosen jurisdiction at the time of contracting. U.S. courts routinely hold that vague clauses are unenforceable.
In Hunt v. Superior Court, the choice-of-jurisdiction clause stipulated that the defendants “Freely Consent to Personal Jurisdiction of the Applicable Jurisdiction.”Footnote 78 A California state court was asked to decide whether this clause permitted it to assert personal jurisdiction over the defendants.Footnote 79 It held that it did not. The court observed that this clause “did not give sufficient notice” that the defendants were agreeing “to litigate disputes in California” because the clause “does not identify California as the applicable jurisdiction.”Footnote 80 The court observed that “unless the documents elsewhere clearly define the term ‘applicable jurisdiction’ as used in the guaranty to mean California, the [defendants’] signatures on the guaranty are not indicative of a valid choice-of-jurisdiction clause; it does not give them notice they were consenting to California as the selected forum.”Footnote 81 After determining that the guaranty did not specify that the phrase “applicable jurisdiction” referred to the courts of California, the court declined to enforce the clause.Footnote 82
Similarly, in Redrock Trading Partners, LLC v. Baus Management Corporation, a federal court in Georgia was presented with the following the choice-of-jurisdiction clause:
The [defendant] irrevocably consents to the jurisdiction of the courts of the Quebec and Canada and of any federal court located in such State in connection with any action or proceeding arising out of, or relating to, this Agreement, any document or instrument delivered pursuant to, in connection with, or simultaneously with this Agreement, or a breach of this Agreement or any such document or instrument.Footnote 83
The plaintiff sued the defendant in Georgia.Footnote 84 The defendant moved to dismiss for lack of personal jurisdiction.Footnote 85 The plaintiff argued that the defendant had consented to jurisdiction in Georgia via the choice-of-jurisdiction clause.Footnote 86 The court disagreed:
[T]he forum selection clause potentially provides for jurisdiction in any court north of Mexico…. The Court finds that the forum selection clause at issue is impermissibly vague, contravening the strong public policy in its favor, and thus insufficient to support personal jurisdiction over [defendant].Footnote 87
The problem with this clause, the court reasoned, was the lack of notice provided to the defendant as to the identity of the jurisdiction.Footnote 88 If the plaintiff had sued the defendant in Quebec, it seems likely that the court would have enforced the clause because Quebec was specifically mentioned.Footnote 89 Georgia was not. Accordingly, the court concluded that that the language was too vague to justify the assertion of personal jurisdiction over the defendant by a Georgia court.Footnote 90
II. Unilateral Clauses
A unilateral choice-of-jurisdiction clause is one in which one party is given the unilateral power to select a court after a dispute arises. As this clause does not select the courts of any particular jurisdiction ex ante, it may be challenged ex post on the grounds that it did not provide proper notice to the defendant as to the place of litigation. The case law on unilateral clauses in the United States is mixed. In some situations, the courts have declined to enforce them. In other situations, they have held that they should be given effect.
In Lopez v. United Capital Fund, LLC, the clause stipulated that all disputes had to be resolved “in seller’s county and state of choice.”Footnote 91 This clause was unenforceable, the court reasoned, because it did not “tie the selection of a forum to any mutable and identifiable fact, only to the whim of the [drafter’s] choice.”Footnote 92 The court explained that such a clause should not be given effect because it failed to identify any “criteria for determining the contemplated forum.”Footnote 93 A clause that left the choice of forum entirely to one party after the fact, it held, was unenforceable.Footnote 94
In Central Ohio Graphics, Inc. v. Alco Capital Resource, Inc., a different court declined to give effect to a similar clause that gave one contracting party “the option of pursuing any action under this agreement in any court of competent jurisdiction and the customer…consents to jurisdiction in the state of our choice.”Footnote 95 The court held that the clause was unreasonable, and hence unenforceable, because it was “overbroad and so lacking in specificity that it fails to provide any indicia of the parties’ intent.”Footnote 96 A unilateral clause that gave one contracting party the unilateral power to select any forum, the court concluded, was invalid.Footnote 97
One of the more fulsome discussions of this issue can be found in BBC Chartering & Logistic GmbH & Co. K.G. v. Siemens Wind Power A/S.Footnote 98 The relevant contract provision stated:
All claims against the Carrier arising from or in connection with this Bill of Lading or the underlying contract of carriage shall be brought in the court of relevant jurisdiction in Hamburg, Germany with German law to apply. Nothing in the clause shall be construed to prevent the Carrier from filing suit in any jurisdiction for claims arising under or in connection with this Bill of Lading or the underlying contract of carriage.Footnote 99
When the carrier sued the counterparty in federal court in Texas, the defendant moved to dismiss on the basis of forum non conveniens.Footnote 100 The carrier opposed this motion by arguing that the defendant was contractually precluded from making this argument under the clause quoted above.Footnote 101 The court disagreed.
It observed that the second sentence of the clause “fail[ed] to establish the place, country, state, or type of court where it may bring a lawsuit.”Footnote 102 Indeed, the court observed that the sentence “[did] not select a forum at all.”Footnote 103 The court then rejected the plaintiff’s argument that the sentence amounted to “a universal forum selection clause” pursuant to which the plaintiffs could “hale a contracting party into court in any jurisdiction.”Footnote 104 The court reasoned that “the primary purpose of a forum selection is to eliminate uncertainty” but that the clause in question “encourage[d] uncertainty” by providing no notice as to where the suit would be filed.Footnote 105 To enforce such a clause, the court held, would “vitiate[] the long-standing principles underlying forum selection clauses.”Footnote 106
There is only one type of unilateral clause that is routinely enforced. This is a so-called “service of suit” clause. A service of suit clause typically states that litigation may occur in “any court of competent jurisdiction within the United States.” Insurance companies based in other nations sometimes write these clauses into their contracts with U.S. clients as a means of attracting business.Footnote 107 To allay fears that they cannot be sued in the United States, a foreign insurer will write a service of suit clause into its policy agreeing to consent to personal jurisdiction in any court in the United States where the policyholder wishes to sue it. In these situations—where a foreign insurance company freely consents to jurisdiction in the United States as a means of attracting business from U.S. policyholders—courts have generally held that enforcing the clause is reasonable under the circumstances.Footnote 108 It is also perhaps relevant that foreign insurance companies rarely challenge the assertion of personal jurisdiction by the U.S. court in cases involving service of suit clauses so as to avoid scaring away future policyholders.Footnote 109
III. Floating Clauses
The floating clause represents yet another species of choice-of-jurisdiction clause.Footnote 110 A floating clause ties the choice of forum to a mutable fact that can change after the contract is signed.Footnote 111 A floating clause differs from a unilateral clause in that it is possible to identify the chosen court at the time of signing. The defining characteristic of a floating clause is that it contemplates the possibility that this forum may change between the time of signing and the time of litigation.
A clause which states that all disputes shall be resolved in the courts of the jurisdiction where one party has its principal place of business is a good example of a floating clause.Footnote 112 If the principal place of business were to move to a different jurisdiction, then the chosen forum would change.Footnote 113 In AFC Franchising, LLC v. Purugganan, the U.S. Court of Appeals for the Eleventh Circuit addressed the enforceability of just such a provision.Footnote 114 That clause stated that:
You…agree that all actions arising under this Agreement…must be commenced in a state or federal court of competent jurisdiction within such state or judicial district in which we have our principal place of business at the time the action is commenced.Footnote 115
When the contract was signed, the drafter had its principal place of business in Maryland.Footnote 116 At the time of litigation, the drafter had assigned the contract to a company with its principal place of business in Alabama.Footnote 117 That assignee sued the defendant in Alabama court and argued that the clause provided a valid basis for the assertion of personal jurisdiction in Alabama.Footnote 118 The defendant countered that it was not subject to personal jurisdiction in Alabama because there was no way for it to foresee that it was consenting to jurisdiction in that state at the time of signing.Footnote 119
The court held that the exercise of personal jurisdiction by the Alabama court was proper on these facts.Footnote 120 It acknowledged that the defendant could not have “specifically imagine[d] litigating in Alabama” when the contract was signed.Footnote 121 The court reasoned, however, that the defendant knew that the chosen forum was tied to its counterparty’s principal place of business.Footnote 122 It also knew that the contract expressly granted the counterparty the right to assign the contract to someone else.Footnote 123 In light of these facts, the court held that the contract provided “ample notice” that the defendant “might have to litigate in a different forum—including, potentially, Alabama.”Footnote 124
The outcome in AFC Franchising is typical. U.S. courts have generally held that floating clauses are reasonable, and hence enforceable, for three reasons. First, the language in the clause puts the defendant on notice that the identity of the chosen forum might change over the life of the contract.Footnote 125 Second, the parties to many contracts containing these provisions are sophisticated actors capable of looking after themselves.Footnote 126 Third, enforcing these clauses facilitates the loan assignment market and, in so doing, lowers the cost of servicing lease portfolios in certain industries.Footnote 127
Viewed through the lens of notice, however, the decisions involving floating clauses are difficult to reconcile with the decisions involving vague and unilateral clauses. At the time of signing, the party resisting the enforcement of a floating clause is just as much in the dark about the location of the chosen forum as he would be if the clause were vague or unilateral. The key difference between these situations, it would seem, is that the initial court selected in a floating clause is ascertainable at the time of signing whereas the court selected in a vague or unilateral clause is not.
A few U.S. courts have declined to enforce floating clauses by pointing out that they are no different from vague and unilateral clauses. In Preferred Capital, Inc. v. Power Engineering Group., Inc., for example, the Ohio Supreme Court was asked to enforce a clause stating that all litigation had to occur in the state where the one party’s principal office was located.Footnote 128 The clause further stated that all litigation would take place in the state where the assignee’s principal office was located if it were ever assigned.Footnote 129
At the time of signing, the relevant party’s principal office was located in New Jersey.Footnote 130 Shortly after the contract was signed, however, that party assigned the contract to a company whose principal offices were located in Ohio.Footnote 131 The assignee then sued the counterparty in Ohio and invoked the clause as a basis for the assertion of personal jurisdiction.Footnote 132 The Ohio Supreme Court concluded that enforcing the clause under these circumstances would be unreasonable:
[T]he clause is unreasonable because even a careful reading of the clause by a signatory would not answer the question of where he may be forced to defend or assert his contractual rights. At the time the contract was entered into, the appropriate forum would have been New Jersey; the very next day, in most cases, the lease was assigned to Preferred Capital and the appropriate forum became Ohio. Nothing prevented Preferred Capital from assigning its interest and changing the forum yet again. It is one thing for a contract to include a waiver of personal jurisdiction and an agreement to litigate in a foreign jurisdiction. It is quite another to contract to litigate the same contract in any number of different jurisdictions, located virtually anywhere. Nothing in the record indicates that appellants were fully apprised of the potential for a truly floating forum. The record indicates that [the original contracting party] knew that it intended to assign these leases and that no matter how carefully appellants read the contract, they could never have anticipated the appropriate forum for litigating issues relating to their leases.Footnote 133
Having concluded that this particular floating clause was indistinguishable from a vague or unilateral clause, the court went on to announce the following rule for future cases:
[W]hen one party to a contract containing a floating forum-selection clause possesses undisclosed information of its intent to assign its interest in the contract almost immediately to a company in a foreign jurisdiction, the forum-selection clause is unreasonable and against public policy absent a clear showing that the second party knowingly waived personal jurisdiction and assented to litigate in any forum.Footnote 134
This is the prevailing rule in Ohio. In other U.S. jurisdictions, however, floating clauses are routinely enforced.
E. Notice as a Substitute for Consent
The discussion above focused on situations where the courts considered whether a lack of notice with respect to (1) the existence of the clause, or (2) the identity of the chosen forum might provide a valid basis for non-enforcement. This Part addresses a somewhat different question. It examines whether a contract non-signatory may be bound by a choice-of-jurisdiction clause merely because it was put on notice of the clause’s existence.
At first blush, the answer to this question seems like it must be no. It is black-letter contract law that a party cannot be bound by a contract without its consent. In a striking number of cases, however, U.S. courts have held that the answer to this question is yes. The courts have held that a non-consenting party may be bound by a choice-of-jurisdiction clause in a contract that it never signed if it is closely related to the transaction or the contracting party. In these cases, the courts have effectively held that notice plus proximity equals consent.
Consider the facts of AAMCO Transmissions, Inc. v. Romano.Footnote 135 In 1992, Robert Romano entered into a franchise agreement with AAMCO Transmissions, Inc. (“AAMCO”).Footnote 136 Romano was a resident of Florida. AAMCO was a Pennsylvania corporation. The agreement contained an exclusive choice-of-jurisdiction clause selecting the state and federal courts of Pennsylvania.Footnote 137 In 2013, Romano and AAMCO mutually agreed to terminate the franchise agreement.Footnote 138 Pursuant to the termination agreement, Romano promised that he would not engage in the transmission repair business within ten miles of any AAMCO repair center for at least two years.Footnote 139
In 2014, AAMCO sued Romano and his wife, Linda, in the U.S. District Court for the Eastern District of Pennsylvania, alleging violations of the covenant not to compete.Footnote 140 Linda appeared pro se to argue that the court lacked personal jurisdiction over her because she lacked minimum contacts with Pennsylvania.Footnote 141 The court rejected this argument. It held that Linda was subject to personal jurisdiction in Pennsylvania by operation of the choice-of-jurisdiction clause in the franchise agreement to which she was not a party.Footnote 142 “Given her spousal relationship with Robert Romano,” the court reasoned, Linda Romano was “so closely related to Robert Romano’s dispute with AAMCO that she should have foreseen being bound by the forum selection clause in the Franchisee Agreement.”Footnote 143
This line of reasoning is dubious. The mere fact that someone is married to a contract signatory is not ordinarily sufficient to bind that party to the agreement. Nevertheless, the court in AAMCO held that the closeness of Linda’s relationship with Robert made it foreseeable that she, too, would be bound by the agreement.Footnote 144
Over the past three decades, the U.S. courts have regularly applied the “closely related and foreseeable” test invoked in AAMCO to bind non-consenting non-signatories to choice-of-jurisdiction clauses.Footnote 145 The courts only apply this test to determine the rights and obligations of third parties with respect to choice-of-jurisdiction clauses; they never apply it to other contract provisions.Footnote 146 The courts justify the use of the test on the grounds that it promotes litigation efficiency. It is a waste of judicial resources, they argue, to litigate the same dispute in two different courts. If Pennsylvania lacks personal jurisdiction over Linda Romano, then AAMCO will have to litigate its dispute with the Romanos in two different jurisdictions. The closely-related-and-foreseeable test avoids this outcome by bringing Linda within the scope of the clause, thereby allowing for consolidated proceedings in Pennsylvania.
The widespread adoption of this test in cases involving non-consenting non-signatories has been criticized on two grounds. First, critics have argued that it is inconsistent with the principle that a party may not be bound by a contract without her consent.Footnote 147 Traditional doctrines used to bind a non-signatory are grounded in notions of consent. A contract signed by an agent, for example, is binding on a non-signatory principal because the principal consented to the creation of the agency relationship. Similarly, a contract signed by one party may be voluntarily assumed by another party. The closely related and foreseeable test does away with the need for consent. If the non-signatory is closely related to a signatory or a transaction, such that it is foreseeable that the non-signatory will be bound by the clause, then the non-signatory is bound. One may reasonably inquire how a non-signatory could reasonably foresee becoming bound by an agreement that it did not sign. The courts applying the doctrine have exhibited a striking lack of interest in answering this question.
Second, critics have argued that it violates due process for a court to assert personal jurisdiction over a non-consenting defendant on the basis of a choice-of-jurisdiction clause in a contract that the defendant never signed.Footnote 148 In Guaranteed Rate, Inc. v. Conn, for example, the court expressed “serious concerns over whether it would be reasonable and just to apply a ‘close relationship’ test that relies on ‘foreseeability’ to find implied consent to personal jurisdiction.”Footnote 149 In Truinject Corp. v. Nestlé Skin Health S.A., the court observed that “[e]xercising personal jurisdiction solely on the basis that a non-signatory is ‘closely related’ to a contract with a forum selection clause—absent facts establishing ‘minimum contacts’ with the forum—would not, in my view, satisfy constitutional due process.”Footnote 150
The closely-related-and-foreseeable test certainly has its place. In cases where a non-signatory defendant is clamoring to be covered by a choice-of-jurisdiction clause, there is no reason not to apply it because there is no issue with consent. In cases where the clause is imposed upon a non-signatory plaintiff or a non-signatory defendant over their objections, however, a different situation is presented.Footnote 151 In these cases, the court is holding that proximity plus notice serves as a valid substitute for consent with respect to choice-of-jurisdiction clauses. This proposition is difficult to reconcile with basic principles of contract law.
F. Conclusion
Choice-of-jurisdiction clauses straddle the line between two bodies of law. On the one hand, they are contractual provisions subject to the regular rules of contract law. On the other hand, they interact with doctrines of civil procedure and conflict of laws. In recognition of this duality, the courts in the United States have developed a number of rules that they apply exclusively to choice-of-jurisdiction clauses. Several of these rules relate specifically to notice.
The general contract rule is that a contract is fully binding on a signatory even if that person never reads it. Some U.S. courts have, however, held that a different rule applies when a choice-of-jurisdiction clause is inconspicuous or when disclosure of the clause is delayed. The general contract rule is that parties are free to waive their right to sue or object to being sued in a particular place. But U.S. courts have held that a different rule may apply when a choice-of-jurisdiction clause is vague, unilateral, or floating. Finally, the general rule of contract law is that a person may not be bound by an agreement without her consent. This rule has been cast aside by a number of U.S. courts that have held that proximity and notice may serve as a substitute for consent when it comes to choice-of-jurisdiction clauses.
Acknowledgements
The author declares none.
Competing Interests
The author declares none.
Funding Statement
No specific funding has been declared in relation to this Article.
Author Biographical Information
John F. Coyle is the Reef C. Ivey II Distinguished Professor of Law at the University of North Carolina at Chapel Hill.
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