The Small Potatoes Problem with New York Forum Selection Clauses
August 28, 2024
New York has long sought to attract cases to its courts—and to generate business for New York lawyers—by enforcing New York forum selection clauses when they appear in commercial contracts worth at least $1 million that are governed by New York law. This policy is codified in New York General Obligations Law 5-1402. What happens, however, when a New York forum selection clause is written into a commercial agreement worth less than $1 million? Does this change its legal effect?
If the contracting parties are foreign corporations, the answer is yes. A valid New York forum selection clause will always support the assertion of personal jurisdiction over a defendant. And a forum selection clause that satisfies Section 5-1402 will always support the exercise of subject-matter jurisdiction. But when a clause is written into a contract worth less than $1 million, and when the litigants are foreign corporations, the state courts in New York may lack subject-matter jurisdiction to hear the case. This outcome is curious because, as a general rule, the presence or absence of a forum selection clause in a contract has no bearing on subject-matter jurisdiction. Under New York’s unique statutory scheme, however, the two concepts are yoked together for contracts involving relatively small potatoes.
New York General Obligations Law 5-1402
The facts of Robin Funding Group LLC v. Kalo Transport, LLC illustrate the relationship between Section 5-1402 and personal jurisdiction. The plaintiff and the defendants had entered into a commercial agreement for the sale of receivables worth roughly $30,000. The contract included a New York forum selection clause and a New York choice-of-law clause. After the defendants allegedly breached the agreement by blocking the plaintiff from collecting the amount due, the plaintiff sued in New York state court.
The defendants moved to dismiss for lack of personal jurisdiction. The plaintiff opposed the motion on the ground that the defendants had consented to jurisdiction in New York via the forum selection clause. The defendants responded that the clause was unenforceable because it appeared in a contract worth less than $1 million. They argued that Section 5-1402 “limits this court from exercising [personal] jurisdiction over cases involving foreign corporations with less than $1 million in controversy.”
The court rightly rejected this argument. Although New York forum selection clauses in commercial agreements worth more than $1 million are always enforceable by virtue of Section 5-1402, this does not mean that clauses in commercial agreements worth less than $1 million are never enforceable. Indeed, Section 5-1402(b) specifically provides that “nothing contained in this section shall be construed to affect the enforcement of any provision respecting choice of forum in any other contract, agreement or undertaking.” The enforceability of these other clauses must simply be evaluated by applying New York common law. Under that law, a forum selection clause is “prima facie valid” and should be given effect “unless it is shown by the challenging party to be unreasonable, unjust, in contravention of public policy, invalid due to fraud or overreaching, or it is shown that a trial in the selected forum would be so gravely difficult that the challenging party would, for all practical purposes, be deprived of its day in court.”
The defendants failed to prove that the clause at issue in this case was unenforceable for any of these reasons. Accordingly, the court held that their motion to dismiss for lack of personal jurisdiction should be denied. In agreeing to the forum selection clause, the defendants had consented to personal jurisdiction in New York. This reasoning is utterly uncontroversial and clearly correct.
New York Business Corporation Law § 1314
In the course of its decision, the Kalo Transport court also discussed several cases where New York state courts had invoked Section 5-1402 in the context of deciding whether the court had subject-matter jurisdiction. New York Business Corporation Law 1314 limits the subject-matter jurisdiction of the New York state courts in cases where both the plaintiff and the defendant are foreign corporations. The courts only have subject-matter jurisdiction to hear such cases when (1) a contract was made in or was to be performed in New York, (2) the subject matter of the litigation is located in New York, (3) the cause of action arose in New York, (4) the defendant is doing business or is authorized to do business in New York, (5) the defendant would be subject to personal jurisdiction in New York under N.Y. CPLR 302, or (6) the parties have written a New York forum selection clause into a commercial contract worth more than $1 million that also contains a New York choice-of-law clause.
This final provision—which is codified in Section 5-1402(a) as an exception to Section 1314—yokes subject-matter jurisdiction to personal jurisdiction. If two foreign corporations enter into a contract with a forum selection clause that satisfies the criteria in Section 5-1402, that clause will support the assertion of both personal jurisdiction and subject-matter jurisdiction in state court. Conversely, if two foreign corporations enter into a contract containing a forum selection clause that does not satisfy the criteria listed in Section 5-1402, that clause will support the assertion of personal jurisdiction but not subject-matter jurisdiction in state court. In such cases, the state court only has subject-matter jurisdiction if one of the criteria in Section 1314 is met.
In Kalo Transport, the issue of subject-matter jurisdiction did not arise because the dispute was not between foreign corporations; the plaintiff was based in New York. In other cases, however, New York state courts have held that they lacked subject-matter jurisdiction to resolve a dispute between foreign corporations because the contract containing the forum selection clause was worth less than $1 million. In Mobile Programming LLC v. Tallapureddy, for example, the plaintiff was a Wyoming corporation, the defendant was an Ohio corporation, and the contract contained a New York forum selection clause. The contract was, however, worth only $560,000. Since none of the criteria in Section 1314 were satisfied, the court held that it lacked subject-matter jurisdiction to hear the case. Similarly, in Funding Metrics, LLC v Letha’s Pies, LLC, the plaintiff was a Delaware corporation, the defendant was an Arkansas limited liability company, and the contract contained a New York forum selection clause. The contract was, however, worth only $22,000. Again, the court held that it lacked subject-matter jurisdiction because none of the criteria in Section 1314 were met. These cases are representative. There are a number of others where the New York state courts reached the same conclusion on similar facts.
On the one hand, these cases showcase the enduring popularity of tying subject-matter jurisdiction to the amount of money at stake; the federal diversity statute and state small claims court statutes adopt similar approaches. On the other hand, these cases highlight the problems that may arise when foreign corporations write New York forum selection clauses into their contracts. They may think that these provisions will allow them to litigate in a neutral forum with a robust body of case law and state judges who are familiar with commercial issues. If their transaction is worth less than $1 million in the aggregate, however, they may discover—to their dismay—that the New York state courts lack subject-matter jurisdiction to resolve their dispute.
Conclusion
As a general rule, forum selection clauses have no bearing on subject-matter jurisdiction. Litigants cannot confer subject-matter jurisdiction on a federal court by choosing it in a forum selection clause. Nor can they deprive a federal court of subject-matter jurisdiction by agreeing to litigate exclusively in the courts of a foreign country. Subject-matter jurisdiction is an issue for Congress. It cannot be altered by private agreement.
In New York, however, the state legislature has chosen to link personal jurisdiction and subject-matter jurisdiction in cases involving foreign corporations. Forum selection clauses choosing New York state courts and New York law will give rise to both personal jurisdiction and subject-matter jurisdiction when the contract is worth more than $1 million. But when the contract is worth less than $1 million, and when the litigants are foreign corporations, then subject-matter jurisdiction will only exist if the plaintiff can show that Section 1314 is satisfied. Contract drafters representing entities with no obvious connection to New York should therefore check (and recheck) the aggregate value of the transaction before choosing the New York state courts in their forum selection clause. If their contract is for small potatoes, they may find themselves locked out of these courts even though everyone has consented to personal jurisdiction there.