Forum selection clauses have become a ubiquitous feature of modern contracts, an unsurprising development considering the benefits of convenience and predictability that such clauses can provide to the parties. But complex commercial disputes frequently involve non-parties to such agreements who may be surprised to find that they, too, may be bound by a forum selection clause in a given contract. New York courts allow non-parties to enforce or be bound by a forum selection clause where the non-signatory is (1) a third-party beneficiary of the agreement, (2) a party to a "global transaction" but not to a specific agreement within that transaction, or (3) "closely related" to a signatory.1
The application of these exceptions arose recently in Gottwald v. Sebert,2 a New York County Commercial Division case addressing the well-publicized contentious dispute between the popular recording artist Kesha and her former record producer "Dr. Luke," also known as plaintiff Lukasz Gottwald.3 This column discusses the grounds under which non-parties to a contract may enforce or be bound by a forum selection clause, and reviews Gottwald and other recent Commercial Division cases that address and clarify the standards for applying these exceptions.
Under New York law, the general rule is that forum selection clauses may be used only by, or enforced against, parties in privity of contract. New York courts have recognized, however, exceptions to this
George Bundy Smith is an arbitrator and mediator with JAMS in New York City, and is a former associate judge of the New York Court of Appeals. Thomas J. Hall is a partner at Chadbourne & Parke. Daniel Kacinski, a law clerk at Chadbourne, assisted in the preparation of this article.
general requirement where non-parties could reasonably foresee they would be bound by the forum selection clause. As established by the First Department in Freeford Ltd. v. Pendleton,4 this exception can arise in various circumstances. First, a third-party beneficiary to an agreement can enforce a forum selection clause even if not a signatory to the agreement in question. Non-parties that are intended, rather than incidental, beneficiaries of a contract can enforce a forum selection clause within that agreement. Second, non-parties to one specific contract within "an integrated, global transaction" may exercise a forum selection clause in another contract within that transaction as long as "the agreements are executed at the same time, by the same parties, or for the same purpose." This exception is permitted in such circumstances because non-parties to one agreement can reasonably foresee being bound by a forum selection clause in another portion of the global transaction.5 Both the third-party beneficiary and global transaction exceptions are, however, relatively limited in their application.
The large majority of recent Commercial Division cases revolve around the third category, the "closely related" exception. Under this, a non-party found to be sufficiently "closely related" to a contract signatory can also enforce and be bound by a forum selection clause.
MOTHERS, DAUGHTERS, CONTROL
In Gottwald v. Sebert, the issue facing Justice Shirley Werner Kornreich of the New York County Commercial Division was whether a mother was sufficiently "closely related" to her daughter such that she was bound by a forum selection clause in a contract signed by her daughter's management companies. In that case, Gottwald and corporations he owned had sued Kesha, as well as her manager, management company and mother, alleging that Kesha breached multiple agreements requiring her to record a certain number of albums and share royalties, and that the other defendants tortiously induced her to do so.6 The management company defendants were parties to these agreements, and thus bound by the included forum selection
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clause. Kesha's mother, Pebe Sebert, was not party to any such agreement and, moreover, as a California resident with no contacts to New York, was not otherwise subject to New York jurisdiction. Thus, the forum selection clause would not bind her unless she fell within an exception to that general rule. In the context of forum selection clauses, "closely related" means more than an association. A natural reading of the phrase might suggest that "closely related" refers to related persons or individuals, such as parent and subsidiary companies, or as in the case of Gottwald, mother and daughter. As made clear by Justice Kornreich, however, "being a parent of an adult is not enough to establish control." Instead, Commercial Division decisions find parties are closely related where the relationship between them is "sufficiently close so that enforcement of the clause is foreseeable by virtue of the relationship between them." Courts interpret this as requiring the nonparty to control the signatory to the contract, based on a fact-intensive analysis to determine whether such a relationship exists.7 As plaintiffs in Gottwald presented no evidence of such control, Justice Kornreich held that the close relation exception did not apply. In Pegasus Strategic Partners v. Stroden,8 New York County Commercial Division Justice Anil C. Singh addressed the application of the close relation exception to corporations, their officers and directors. In that case, the court found that board members of a corporation were bound by the forum selection clauses in agreements entered into by the corporation, even if not individually party to the agreements. In conducting the fact-intensive analysis, Justice Singh focused on whether the nonparty exercised significant control at the time the signatory entered into the agreement, and whether the non-parties had any "nexus to the dispute," either by being directly involved with the transaction at issue or by receiving any benefit from it. Thus, that defendants in Pegasus were directors of the signatory company at the time the agreement was made, and benefitted directly from it, weighed toward finding that they were closely related.
NOT CLOSELY RELATED
Certain other factors weigh against finding that a non-party has sufficient control over a signatory to support finding a sufficiently close relationship. First, any exercise of control by a non-party must be close in time to when the signatory entered into the agreement. The Pegasus court refused to apply the exception to a board member who joined the corporation after the agreement was signed, noting that a non-party cannot be closely related when it has "no relationship to the underlying transaction."9 Second, intent of the non-party is critical: Conduct of the signatory can also indicate a lack of control by a non-party. In Gottwald, the court noted that representation of the signatory "by sophisticated and experienced...lawyers" when the agreement was signed "contradicts control" by a non-party.10 Finally, express language in the agreement evidencing an intent not to bind non-parties could preclude non-parties from enforcing or being bound by a forum selection clause in that agreement. In Universal Inv. Advisory v. Bakrie Telecom PTE,11 Justice Saliann Scarpulla of the New York County Commercial Division was faced with whether the forum selection clause in an indenture and note offering of an Indonesian telecommunications company bound that company's commissioners and directors, even though they were not signatories to those agreements. While observing that non-signatories could be bound under the closely related doctrine, the court noted that "unequivocal language...objectively evidenc[ing an] intent not to" hold non-signatories liable weighed against any argument contending that such parties should be bound by a forum selection clause in the same agreement. The indenture in question contained a waiver clause that prohibited any "recourse...against any incorporator, stockholder, officer, director, employee, or controlling person of the Issuer, the Company or any of the Subsidiary Guarantors or of any successor Person thereof." As plaintiffs had provided no other objective evidence beyond the indenture, which in fact showed an intent to avoid binding nonparties, Justice Scarpulla refused to apply the closely related exception. It may still be possible, however, for this exception to apply in the face of such a waiver clause if conduct of the parties evincing an intent to bind non-parties to the forum selection clause outweighs the waiver clause.
The exceptions allowing a non-party to enforce or be bound by a forum selection clause are well established in New York law. As these recent Commercial Division cases demonstrate, however, the core question usually is just how much control the nonparty has over the signatory at the time the agreement is executed. While many mothers and daughters might disagree, in the view of the Commercial Division, just being related is not enough to establish such control.