Garthon Bus. Inc. v. Stein, 2016 NY Slip Op 3102 (N.Y. App. Div. 1st Dept. 2016) [click for opinion]
Plaintiffs entered into two consulting agreements with Defendants effective January 1, 2000. The relevant agreement, known as the "Quennington Agreement," provided that "the Courts of the United States of America shall have exclusive jurisdiction to settle any claim, dispute, or matter of difference, which may arise out of or in connection with this Agreement . . . or the legal relationship established by this Agreement."
A few years later, Plaintiffs entered into new agreements with Defendants. One of these subsequent agreements, known as the "Quennington Termination Agreement," expressly terminated the earlier "Quennington Agreement," contained a release of liability provision and a standard merger clause, and stated that "[a]ny dispute arising out of or in connection with this Agreement, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the London Court of International Arbitration Rules."
After Plaintiffs brought suit for breach of contract and breach of fiduciary duty in New York state court, the trial court dismissed the action, on the condition that Defendants not object to arbitration proceedings. The trial court's decision was based on the forum selection clauses in the subsequent agreements.
Plaintiffs appealed the trial court's dismissal, arguing that the claims alleged in the complaint related to the services Defendants provided under the Quennington Agreement, and that the subsequent Quennington Termination Agreement did not nullify the Quennington Agreement's forum selection clause. In a 3-2 decision, a divided New York appellate court agreed with Plaintiffs and reversed the trial court's dismissal of the action.
The majority held that the mere termination of a contract containing a forum selection clause does not necessarily terminate the clause itself. Instead, the parties must demonstrate a clear manifestation of their intent to terminate the forum selection clause in order to disregard it. Because the forum selection clause in the Quennington Termination Agreement only applied to disputes "arising out of or in connections with this Agreement," it did not indicate a clear manifestation of the parties' intent to abandon the forum selection clause in the original Quennington Agreement. Thus, the court held that the forum selection contract in the Quennington Agreement survived the contract's termination and was still controlling over claims that arose under the Quennington Agreement.
The court further held that the merger clause in the Quennington Termination Agreement did not change this result. The court noted that "the purpose of a merger clause is to give full effect to the parol evidence rule, which bars extrinsic evidence tending to vary the terms of the agreement in which the merger clause is included." Because the forum selection clause in the Quennington Agreement did not alter or modify the forum selection clause contained in the Quennington Termination Agreement, the merger clause in the later agreement did not negate the forum selection clause in the earlier agreement. Likewise, the court found that the language in the release of liability provision "only served to alter the substantive rights of the parties; absent express language to the contrary, it cannot be interpreted as having altered the forum selection provisions contained in the Quennington Agreement."
Finally, the court rejected Defendants' alternative argument that, at a minimum, those claims which arose after the effective date of the later agreements must be dismissed in favor of arbitration. Relying on a rule applied by other Departments, the court concluded that, even if some of the claims arose out of the earlier agreements and others out of the later agreements, "they are cut from the same cloth, and are, unquestionably, inextricably bound together and therefore should be litigated in court."
In dissent, the minority took no position as to whether the later agreements negated the effectiveness of the forum selection clauses of the earlier agreements. Instead, the minority argued that "the determination of that issue belongs to the arbitrators." In contrast, the majority held that "the general rule is that the question of arbitrability is an issue for the courts" and it was thus appropriate for the court to decide it.