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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: February 6, 2021

Forum Selection Clause Mandating Federal Forum Cannot Serve as Basis for Jurisdiction in New York State Court

On January 28, 2021, Justice Cohen of the New York County Commercial Division issued a decision in PBF I Holdings Ltd. v. Valero (Peru) Holdings Ltd., 2021 NY Slip Op. 30289(U), holding that a forum selection clause mandating a forum in the federal courts in New York cannot serve as the basis for jurisdiction in New York state court, explaining:

A contractual forum selection clause is documentary evidence that may provide a proper basis for dismissal pursuant to CPLR 3211 (a)(1). But not here. As discussed below, (i) the forum selection clause in the Transaction Agreement is inapplicable and therefore does not warrant dismissal, (ii) nor does the Transaction Agreement require the parties to renegotiate the forum selection clause under the terms of the severability provision.

Despite its mandatory language, the forum selection clause in the Transaction Agreement cannot be applied here. That is because federal courts are courts of limited jurisdiction and may not entertain matters over which they do not have subject-matter jurisdiction. As constituted, this action fails to meet the requirements of federal subject-matter jurisdiction – the claims raise no federal question and the parties lack diversity of citizenship. When subject-matter jurisdiction does not exist independently, no action of the parties can confer subject-matter jurisdiction upon a federal court. Consequently, the forum selection clause cannot create the federal subject matter jurisdiction necessary to enforce it.

While Defendants insist that the forum selection clause is enforceable, they sidestep the practical matter of enforcing it. Dismissing this case does not enforce the forum selection clause; that would require litigating the case in federal court. And Defendants identify no possible basis for doing so. Defendants wave away these concerns, urging that jurisdictional issues arising from the forum-selection clause should be left for the federal court to resolve. That position is unreasonable when the jurisdictional issue is that the federal court plainly lacks jurisdiction. Plaintiffs’ counsel could not in good faith have brought this action in federal court.

The sole case on which Defendants rely, Spirits of St. Louis Basketball Club, L.P. v Denver Nuggets, Inc., 84 AD3d 454 [1st Dept 2011], is distinguishable. Spirits of St. Louis arose in a unique set of circumstances. The court analyzed a forum selection clause in a settlement agreement reached by the parties in a pending federal action, in which the federal court retained jurisdiction over matters related to the settlement agreement. No such tether to federal jurisdiction is involved in this case. The forum selection clause, as drafted, simply cannot be applied under these circumstances. And because it cannot be applied, the forum selection clause is properly viewed as non-mandatory and alternative fora can be considered.

(Internal quotations and citations omitted).

New York generally enforces contracts as written, including contractual provisions specifying where a lawsuit may be brought. The plaintiff’s problem here was that the forum selection clause required a lawsuit to be brought in federal, not state, court in New York and, as the court held later in the decision, there was no other basis for asserting personal jurisdiction over the defendants in New York. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure whether a contract limits where an action can be brought.

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