The Closely-Related-and-Foreseeable Test and Choice-of-Law Clauses

As a general rule, the law does not vest contractual rights in (or impose contractual obligations upon) persons who are not parties to an agreement. Over the past few decades, however, the courts have relaxed this rule for forum selection clauses. As previously discussed here and here and at great length here, many U.S. courts now hold that a non-signatory to a contract containing a forum selection clause is bound by the clause if the non-signatory is so “closely related” to the contract signatory that it is “foreseeable” that the non-signatory would be bound.

In two recent cases, U.S. courts were asked to apply this test to bind non-signatories to a choice-of-law clause. In Pitman Farms v. Kuehl Poultry LLC, the federal district court for the District of Minnesota (Judge Eric C. Tostrud) held the test did not bind the non-signatory to the choice-of-law clause because it could not foresee that it would be bound. In Frontier Airlines, Inc. v. AMCK Aviation Holdings Ireland Ltd., the federal district court for the Southern District of New York (Judge Paul A. Engelmayer) reached a similar conclusion on a different set of facts. Although both courts questioned whether the closely-related-and-foreseeable test applied to choice-of-law clauses, neither found it necessary to decide the issue.

In this post, I argue that the closely related and foreseeable test should not be used to bind non-signatories to choice-of-law clauses. It should be used only in the context of forum selection clauses. Although there are doctrines that one may use to bring non-signatories within the scope of a choice-of-law clause, the closely-related-and-foreseeable test is not one of them.

History and Purpose

The closely-related-and-foreseeable test seeks to promote litigation efficiency by ensuring that claims against related defendants are heard in the same forum. To understand how the test furthers this goal, consider Manetti-Farrow, Inc. v. Gucci America, Inc., a case decided by the Ninth Circuit in 1988. An American perfume distributor sued an Italian perfume manufacturer—along with several of its Italian affiliates—in federal court in California.  The affiliates argued that the case against them should be dismissed because the distribution agreement between the distributor and the manufacturer contained an Italian forum selection clause.  The distributor responded that the affiliates were not parties to the distribution agreement and so were ineligible to invoke the clause.

At this point, the Ninth Circuit faced a dilemma. Under existing contract doctrine, there was no way to bring the Italian affiliates within the scope of the Italian forum selection clause. If the clause applied only to the Italian manufacturer, however, the litigation proceedings would be fragmented. The suit against the manufacturer would proceed in Italy, while the suit against the affiliates would continue in California. The prospect of litigating the same factual dispute involving the same parties on two different continents prompted the Ninth Circuit to announce a new legal rule: the closely-related-and-foreseeable test.

The closely-related-and-foreseeable test posits that a non-signatory to a contract containing a forum selection clause is bound by the clause if the non-signatory is so “closely related” to the contract signatory that it is “foreseeable” that it would be bound. The purpose of the test is to prevent fragmented litigation proceedings by making it easier to bring non-signatory defendants within the scope of a forum selection clause. In Manetti-Farrow, the Ninth Circuit invoked the test to dismiss the suit against the Italian affiliates, thereby consolidating the litigation in the Italian courts.

The Limits of the Test

The closely-related-and-foreseeable test has an important role to play in preventing fragmented litigation proceedings with respect to forum selection clauses. There is, however, no similar justification for applying the test to choice-of-law clauses because these clauses do not select courts. They select laws. The act of enforcing a choice-of-law clause as written can never lead to the sort of fragmented litigation proceedings that the closely-related-and-foreseeable test was created to avoid.

Consider a scenario where a New York plaintiff brings a lawsuit in federal court in New York against an English company and its English affiliate. The English company is a party to a contract with the plaintiff that contains a New York choice-of-law clause. The English affiliate is not a party to this agreement. After applying New York’s choice-of-law rules, the court concludes that the plaintiff’s claims against the affiliate are governed by English law. The court is perfectly capable of applying New York law to the claims against the company and English law to the claims against the affiliate. There is no danger of fragmented litigation proceedings and, hence, no reason to apply the closely-related-and-foreseeable test on these facts.

There are, importantly, other legal rules that one may use to bring a non-signatory within the scope of a choice-of-law clause should the need arise. The courts have at their disposal a range of doctrines—including agency law, alter ego doctrine, assumption, incorporation by reference, successor liability, equitable estoppel, and the law of third-party beneficiaries—that may be invoked to realize this end. The courts should not, however, look to the exceedingly relaxed standard embodied in the closely-related-and-foreseeable test to do that work. That test should only be used in cases involving forum selection clauses where there is a risk of fragmented litigation proceedings. There is no such risk when the clause at issue merely selects the law of a particular jurisdiction.