Commercial Division Blog

Posted: July 4, 2016 / Categories Commercial, Forum Selection Clause

Parties Who Did Not Sign Contract With a Forum Selection Clause May Still Be Bound By It

On June 20, 2016, Justice Singh of the New York County Commercial Division issued a decision in Pegasus Strategic Partners, LLC v. Stroden, 2016 NY Slip Op. 31159(U), holding defendants who were not parties to an agreement with a forum selection clause to nonetheless be bound by that clause.

In Pegasus Strategic Partners, three of the defendants were not parties to the agreements that contained the forum selection clauses that formed the basis for the court's assertion of jurisdiction moved to dismiss for lack of personal jurisdiction. The court denied the motion with respect to two of the defendants but granted it for the third, explaining:

Defendants also claim that the motion to dismiss should be granted to those Individual Defendants who are not parties to the SP A and the IRA because they are not subject to the forum selection clauses. The court grants Defendants motion to dismiss as it pertains to defendant Hecht but denies Defendants motion as to defendant Besancon and van Seenus.

There are three circumstances in which a non-signatory may invoke a forum selection clause. First, an entity or individual that is a third-party beneficiary of the agreement may enforce a forum selection clause found within the agreement. Second, parties to a global transaction who are not signatories to a specific agreement within that transaction may nonetheless benefit from a forum selection clause contained in such agreement if the agreements are executed at the same time, by the same parties or for the same purpose. Third, a non-signatory that is closely related to one of the signatories can enforce a forum selection clause. A non-signatory is considered closely related to one of the signatories and can enforce a forum selection clause when the enforcement of the clause is foreseeable by virtue of the relationship between them. The non-signatory defendant must have a sufficiently close relationship with the signatory and the dispute to which the forum selection clause applied.

The determination as to whether defendant Besancon and defendant van Seenus are closely related to BeOn holdings and the dispute is a factually intensive analysis. The closely related analysis is not bound solely to corporations or corporate officers. Directors can also be found to be closely related.

Here, plaintiffs correctly assert that defendant Besancon and defendant van Seenus are closely related for purposes of the forum selection clause. Although both defendants are non-signatories to the SPA, they are both listed as directors of the Company. Additionally, both defendants have a nexus to the dispute as they sought to benefit from this debt offering allegedly at plaintiffs' expense. Defendant Besancon and defendant van Seenus, acting as directors of the Board of the Company, approved the Amended Articles, which allegedly diluted plaintiffs minority interest. Additionally, both defendants allegedly refused to allow plaintiffs to participate in the debt offering. Finally, defendant van Seenus' company was permitted to convert all of its common shares to preferred while only contributing $25,000, which was well below its pro rata ownership interest. Therefore, it was reasonably foreseeable to defendant Besancon and van Seenus that the forum selection clause would be applicable to any lawsuit against these closely related individuals in connection with their role as directors of the Company.

. . .

Defendant Hecht is not closely related to the transaction or to the Company and therefore defendant's motion to dismiss is granted only as it pertains to defendant Hecht. At the time the SPA was signed, defendant Hecht was not a director of the Board. When a non-signatory has no relationship to the underlying transaction, they cannot be held to be closely related nor subjected to the forum selection clause.

(Internal quotations and citations omitted) (emphasis added).