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Monday, December 31, 2012

Judge Posner on Third-Party Invocation of Forum Selection Clauses

At issue in Adams v. Raintree Vacation Exchange, LLC was "the enforceability of a forum selection clause by entities not named as parties to the contract in which the clause appears."  

Plaintiffs bought timeshare interests in villas at a resort called Club Regina in Baja California, in Mexico (pictured).   Apparently, the villas in question were never built, and plaintiffs filed suit in Illinois against Raintree Vacation Exchange (Raintree) and its business partner in the venture, Starwood Vacation Ownership (Starwood).  Plaintiffs alleged that Raintree owed Starwood $10 million and that Starwood used plaintiffs' money to pay off its debts instead of building the villas.

TijuanaEach contract contained a choice of forum provision providing for jurisdiction in Mexico City federal district courts.  Although that provision also implied that Mexican law should apply, neither party relied on Mexican law, so Judge Posner found that the provision had been waived.  Defendants moved to dismiss the claim based on the choice of forum provision and the District Court granted the motion.

On appeal, plaintiffs alleged that defendants could not rely on the forum selection clause because they were not parties to the original contract, which had been with a Mexican entity that became a Raintree affiliate.  Judge Posner noted that plaintiffs cited to no authority for their claim that litigants who are not parties to a contract cannot rely on such a contract's choice of forum provision, and that lack of authority would be grounds enough for affirming the District Court's decision.  Nonetheless, Judge Posner decided to "trudge on."  

There rule in such cases is that a nonparty to a contract containing a forum selection clause may rely on it if it is "closely related" to the suit.  Judge Posner acknowledges that the standard is rather vague but he breaks it down into two elements, “affiliation” and “mutuality,” which apply in this case to Raintree and Starwood respectively.  Forum slection clauses can sometimes be enforced by companies related to the original party to the agreement that contains the clause.  Thus Raintree may invoke the clause in this case because of its relationship to the Mexican company that entered into the agreement with plaintiffs.  As Judge Posner noted, if courts were not willing "in appropriate circumstances to enforce forum selection clauses against affiliates of signatories, such clauses often could easily be evaded."

Starwood can rely on the forum selection claues because plaintiffs allege that Starwood was an undisclosed principal (Posner calls it a "secret principal") of the Mexican entity with which plaintiffs contracted.  Under agency law, plaintiffs could have invoked the forum selection against Starwood, and as a result of the principle of mutuality, that means that Starwood can also invoke the clause against plaintiffs.

Plaintiffs make the additional argument that since the entire agreement was fraudulent, defendants cannot rely on the forum selection clause.  Seems sensible, but Posner says it is wrong.  Even the contract is fraudulent, that does not make the forum selection clause fraudulent.  There is nothing unclear or misleading about the clause.  Nothing about it suggest an intent to mislead.

 [JT]

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