Benzion Rabinowitz v. Levi Kelman, No. 22-1747 (2d Cir. July 24, 2023) [click for opinion]
Benzion Rabinowitz ("Rabinowitz") and Levi Kelman ("Kelman") signed a Settlement Agreement in 2018 to settle a dispute between them. The Settlement Agreement contained an arbitration agreement and a forum selection clause. After the Settlement Agreement was executed, another dispute arose and the parties submitted their dispute to a panel of arbitrators. The parties signed an Arbitration Agreement that contained its own forum selection clause, different from that in the Settlement Agreement. Ultimately, the arbitral panel ordered Kelman to pay $4,000,000.
Rabinowitz moved to confirm the award in the United States District Court for the Southern District of New York. The district court dismissed the petition for lack of subject matter jurisdiction because it interpreted the forum selection clause in the parties' Arbitration Agreement to require that any confirmation action be brought in the state courts of New Jersey or New York, and that this deprived the court of subject matter jurisdiction.
On appeal, the Second Circuit concluded that the district court erred in dismissing Rabinowitz's petition. First, the Second Circuit held that the petition adequately pleaded subject matter jurisdiction based on diversity of citizenship. Because parties cannot contractually strip a district court of its subject matter jurisdiction, it was error to conclude that the forum selection clause did so. Second, the court looked to the language of the forum selection clauses in the parties' agreements and interpreted the relevant forum selection clauses as permissive arrangements that merely allowed litigation in certain fora, rather than mandatory provisions that required litigation to occur only in certain courts.
The Second Circuit noted that, to exercise subject matter jurisdiction over a motion to confirm an arbitral award under the Federal Arbitration Act (the "FAA"), a court must identify an independent jurisdictional basis to resolve the matter. In this case, the court found that the petition adequately pleaded such a basis—diversity of citizenship between the parties. The Second Circuit clarified that forum selection clauses have no bearing on a court's subject matter jurisdiction, and that the parties have "no power by private contract to oust a federal court of [subject matter] jurisdiction."Accordingly, the district court erred in dismissing the petition for lack of subject matter jurisdiction.
Turning to the analysis of the forum selection clauses, the Second Circuit found that the United States Supreme Court has made clear that the appropriate way to enforce a forum selection clause was through the doctrine of forum non conveniens. Where the parties have contractually selected a forum, however, the forum selection clause substantially modifies the forum non conveniens doctrine. A four-part framework applies when determining whether to dismiss a claim based on a forum selection clause under the modified doctrine of forum non conveniens: (1) "whether the clause was reasonably communicated to the party resisting enforcement," (2) "whether the clause is mandatory, that is, whether the parties are required to bring any dispute to the designated forum or simply permitted to do so," and (3) "whether the claims and parties involved in the suit are subject to the forum selection clause." If the answer to all three questions is yes, the clause is "presumptively enforceable." At the fourth step, the court asks (4) "whether the resisting party has rebutted that presumption by making a sufficiently strong showing that enforcement would be unreasonable or unjust, or that the clause was invalid for such reasons as fraud or overreaching."
The Second Circuit focused on the second forum non conveniens consideration—whether the clauses were mandatory—finding that both forum selection clauses in the parties' agreements were instead permissive. First, the language in the Arbitration Agreement that the decree "shall be enforceable" in certain courts meant only that the award would be capable of enforcement; it did not impart any clear intent that the award must be enforced exclusively in the selected fora. Second, the language in the forum selection clause of the Settlement Agreement that the parties "submit to the jurisdiction of the New Jersey State Courts located in Ocean County or the courts of Israel" did not clearly indicate that the parties must enforce an award in only those courts. Because the forum selection clauses were permissive, the district court erred in determining that the district court was an improper forum to confirm the arbitral award.
Accordingly, the Second Circuit held that the forum selection clauses did not bar the motion to confirm the arbitral award from going forward in the United States District Court for the Southern District of New York. The Second Circuit vacated the judgment of dismissal, and remanded the case to the district court for further proceedings.
Courtney Giles of the Houston office contributed to this summary.