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Second Circuit Court of Appeals Issues Guidance Regarding Interpretation and Enforceability of Forum Selection Clauses

In a decision issued on January 14, 2014, the Second Circuit Court of Appeals held that where a contract contains both a valid choice-of-law clause and a forum selection clause, the substantive law identified in the choice-of-law clause governs the interpretation of the forum selection clause, while federal law governs the enforceability of the forum selection clause. Martinez v. Bloomberg LP, et al., No. 12-3654-cv (decided Jan. 14, 2014).

Following the termination of his employment by Defendant, Bloomberg LP ("Bloomberg"), the Plaintiff, Brian Anthony Martinez ("Martinez"), commenced a lawsuit against Defendants in the United States District Court for the Southern District of New York, alleging discrimination based on perceived disability and on the basis of sexual orientation in violation of the Americans with Disabilities Act ("ADA") and various state and local statutes. The Defendants subsequently moved to dismiss the proceeding for improper venue under Rule 12(b)(3) of the Federal Rules of Civil Procedure, relying on the combined choice-of-law and forum selection clause contained in Martinez's employment contract, providing that the agreement would be "interpreted and construed in accordance with English law and any dispute arising [t]hereunder shall be subject to the exclusive jurisdiction of the English Courts." The District Court granted the motion, concluding that the forum selection clause in the employment agreement was enforceable and encompassed all of Martinez's claims. Martinez appealed.

On appeal, the Second Circuit affirmed. The Court first noted its prior decisions, applying a four-part analysis in which to review a district court's dismissal of a claim based on a forum selection clause. First, the Court is to consider whether the clause was reasonably communicated to the party resisting enforcement. Second, the Court looks to whether the clause is "mandatory" (i.e. requires parties to bring any dispute to the designated forum, rather than simply permitting them to do so). Third, the Court considers whether the claims involved in the suit are subject to the forum selection clause. If the first three (3) questions are answered in the affirmative, the clause is presumptively enforceable. The Court must then conduct the fourth step of the analysis, by considering whether the party resisting enforcement can defeat the presumption of enforceability by establishing that enforcement would be unreasonable or unjust, or that the clause was invalid for such reasons as fraud or overreaching.

In performing this analysis, the Second Circuit first considered whether federal law or the body of law specified in the choice-of-law clause would govern the effect of the forum selection clause brought in a U.S. federal district court. The Court determined that the interpretive questions of whether the clause is mandatory or permissive, and whether the clause's scope encompasses the claims or parties involved in the lawsuit, are questions that must be decided under the law chosen by the parties in the contract's choice-of-law clause. The Court concluded that applying federal law to questions of enforceability reflected the U.S. public policy that parties should be held to their freely negotiated agreements, which would be undermined if another body of law governed enforceability. However, it would undermine the predictability created by forum selection clauses if federal law – rather than the body of law specified in the contract – were to govern interpretation of the contract.

Applying this holding to the facts at issue in Martinez, the Second Circuit first noted that it was undisputed that the forum selection clause was reasonably communicated to Martinez, and that its terms were mandatory. The Court then concluded that the District Court had properly applied English law to the issue of whether the forum selection clause encompassed Martinez's claims. Following consideration and analysis of the various decisions from the English Court system cited by the parties and the District Court, the Second Circuit rejected Martinez's argument that his discrimination claims were not "disputes arising under" his employment contract. Concluding that the forum selection clause was presumptively enforceable, the Second Circuit then considered whether Martinez could overcome the presumption of enforceability by showing that enforcement would be "unreasonable or unjust". Considering this non-interpretive issue under U.S. law, the Court followed the four (4) part analysis articulated by the U.S. Supreme Court in MS Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972), asking: (1) was incorporation of the clause the result of fraud or overreaching; (2) whether the law to be applied in the selected forum is fundamentally unfair; (3) whether enforcement contravenes a strong public policy of the forum in which suit was brought; or (4) whether trial in the selected forum would be so difficult and inconvenient that the Plaintiff would be deprived of his day in Court. Martinez argued that proceeding in England would require him to forfeit his statutory rights under the ADA, subverting U.S. policy, and that enforcement of the forum selection clause would deprive him of any remedy, due to the costs of proceeding in England and the shorter statute of limitations. The Second Circuit rejected both arguments, noting that Martinez made no showing of any inadequacies with English anti-discrimination law and no showing of personal difficulties in litigating the matter in England that would lead them to decline to enforce the clause. The District Court's decision was affirmed in full.

In a brief concurring opinion, Judge Newman clarified that the basic principle of freedom of contract permits parties to specify via a choice of law clause which jurisdiction's law should apply to the interpretation of their forum selection clause.

To read a copy of the Second Circuit's decision, click here.

For more information about the Court's decision and how it may apply to specific facts and circumstances, please do not hesitate to contact us at info@chaloslaw.com.

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