August 28, 2015 Practice Points

Contractual Forum Selection Clause Enforced Against Non-party to Agreement

The Third Circuit affirmed the enforcement of a contractual choice-of-forum clause against parties that didn't sign the contract in question, at the behest of parties that didn't sign the contract, ei­ther.

by Stuart M. Riback

In a precedential decision earlier this year, the Third Circuit affirmed the enforcement of a contractual choice-of-forum clause against parties that didn't sign the contract in question, at the behest of parties that didn't sign the contract, ei­ther. The case is Carlyle Inv. Mgmt. LLC v. Moonmouth Co., SA779 F.3d 214 (3d Cir. 2015).

The case arose from a failed 2006 investment in a Carlyle-sponsored in­vest­ment vehicle, CCC. The investor was an overseas company called Moonmouth. The Subscription Agreement for Moonmouth's investment provided that all disputes "with respect to" the Subscription Agreement must be heard exclusively in Delaware state courts.

CCC fell victim to the financial crisis and was placed in liquidation overseas. The financial crisis led as well to a fair number of other interactions, posturing and threats between the Carlyle par­ties and the parties affiliated with Moonmouth about, among other things, claimed breaches of fiduciary duty. Finally, in 2012, Carlyle and some of its affiliates sued Moonmouth and some related parties in Delaware state court. One of the defendants was Pla­za Investment Management Overseas SA (Plaza), which had been the director of Moonmouth and had signed the Subscription Agree­ment for Moonmouth.

At this point the procedural maneuvering started. Plaza removed the case to federal court in Delaware. The plaintiffs filed a motion to have the case sent back to state court. They relied on the forum selection clause in the Subscription Agreement, which specified that disputes should be heard in Delaware state court—not federal court. That motion was granted. Plaza and the other defend­ants appealed.

Plaza itself was not a party to the Sub­scription Agreement. It had signed the Sub­scription Agreement as a director of Moonmouth, not for itself. Plaza thus objected that it couldn't be bound by the forum selection clause. It also objected that the plaintiffs hadn't signed the Subscription Agreement either—that agreement was with CCC, which was in liquidation. CCC was not a plaintiff. So Plaza argued that the plaintiffs couldn't rely on the Sub­scription Agreement to compel Plaza to litigate in Delaware state court.

The Third Circuit was unimpressed with these arguments. First, it held that Plaza was bound by the forum selection clause. The court's analysis involved a three-part test, but it boiled down to a fairly simple issue. The court ruled that Plaza was bound because Plaza and Moonmouth were so closely re­lated in the context of the CCC investment that it was reasonably foreseeable Plaza would be sued in disputes about the CCC investment and the Subscription Agreement. Thus, because the relevant claims were "with respect to" the Subscrip­tion Agreement, the choice-of-forum clause applied.

Next, the Third Circuit held that the Carlyle parties—the plaintiffs—could rely on the fo­rum selection clause even though they had not signed the Subscription Agreement either (it had been signed by CCC, the Carlyle-sponsored investment vehicle). The court noted that the reasons the Carlyle plaintiffs could rely on the forum selection clause were very similar to the reasons Plaza was bound by it. The plaintiffs were closely related to CCC, so it was foreseeable that disputes relating to CCC might pull them in as well. Since the Subscription Agreement required a Delaware state forum for all claims "with respect to" the Subscription Agreement, this case was covered by the forum selection clause as to both sides. Accordingly, the Third Circuit affirmed the district court's remand to the Delaware state court from which the case had originated.

Keywords: commercial and business, forum selection, litigation, non-parties, remand, removal

Stuart M. Riback is with Wilk Auslander LLP in New York, New York.

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