Contractual Forum-Selection Clause
What Must Be Shown to Avoid Its Effects?
Venue
Fraud
(“Severability and Waiver” Clause)
(Integration Clause)
(Choice-of-Law Clause)
Contract Drafting
Iowa Law
This case, involving an alleged scheme to
inflate the purchase price of a general aviation jet aircraft, presents the
question of what must be shown to avoid the effects of a contractual
forum-selection clause. Is fraud in general enough, or does the fraud
have to relate specifically to the clause? Joining the Restatement
(Second) of Conflict of Laws, the United States Supreme Court, and a number of
our fellow state supreme courts, we conclude that the fraud must relate to the
clause itself. This is a logical corollary to our prior holding that the fraud
necessary to set aside an agreement to arbitrate must relate to the arbitration
clause itself. See Dacres v. John Deere Ins., 548 N.W.2d 576, 578 (Iowa
1996).
In the present case, the plaintiffs contend that
the defendants cheated them, but they have not alleged fraud with respect to
the forum- selection clause in the written contract. Accordingly, we affirm the
district court’s order dismissing this action without prejudice and requiring
any future action to be brought in Kansas.
Karon wanted Peddler to sell the Bravo and
purchase a Citation X in a tax-free exchange pursuant to § 1031 of the Internal
Revenue Code. See 26 U.S.C. § 1031 (2012).
If Peddler did not use a § 1031 exchange, it
would presumably be liable for income tax on recaptured depreciation when it
sold the Bravo.
The Purchase Agreement contained the following
paragraph: CHOICE OF LAW AND JURISDICTION. [Elliott Aviation Aircraft Sales]
and [Peddler] agree this Agreement will be deemed made and entered into and
will be performed wholly within the State of Kansas, and any dispute arising
under, out of, or related in any way to this Agreement, the legal relationship
between [Elliott Aviation Aircraft Sales] and [Peddler], or the transaction
that is the subject of this Agreement will be governed and construed under the
laws of the State of Kansas, USA, exclusive of conflicts of laws. Any dispute
arising under, out of, or related in any way to this Agreement, the legal
relationship between [Elliott Aviation Aircraft Sales] and [Peddler] or the
transaction that is the subject of this Agreement will be adjudicated solely
and exclusively in the United States District Court for the State of Kansas, in
Wichita, Kansas, or, if that court lacks jurisdiction, Kansas state courts of
the 18th Judicial District. Each of the parties consents to the exclusive,
personal jurisdiction of these courts and, by signing this Agreement, waives
any objection to venue of the Kansas courts.
The Purchase Agreement also had a “severability
and waiver” clause:
If any provision of this Agreement is or becomes
null or unenforceable by operation of law, the other provisions will remain
valid and enforceable. The waiver by either party of a breach of any provision
of this Agreement will not constitute a waiver of any subsequent breach of the
same or any other provision nor will it be considered a waiver of the provision
itself.
Furthermore, the Purchase Agreement contained an
integration clause: “This Agreement constitutes the entire agreement between
the parties with respect to its subject matter and supersedes all prior written
or oral agreements, representations, negotiations, proposals or discussions
between the parties with respect to its subject matter.”
(…) On June 13, the district court issued an
order dismissing the case without prejudice based on improper venue.
Thus, the problem before the Court is similar to one that sometimes arises in the context of arbitration: If a contract contains an arbitration clause, and if the plaintiff claims that the entire contract was fraudulently induced, should the arbitration clause be enforced?
Iowa has adopted the Prima Paint rule. [The court went on to quote from Dacres, 548 N.W.2d at 578].
Of course, Paragraph 9 is not an arbitration clause. Instead, it contains venue and choice of law provisions. Courts have held, however, that the Prima Paint rule applies with equal force to venue and choice of law provisions. See, e.g., Stamm v. Barclays Bank of N.Y., 960 F. Supp. 724, 729 (S.D.N.Y. 1997) (citing Prima Paint and other authorities for the proposition that a “claim of fraud in the inducement of a contract is insufficient to invalidate a forum selection or choice-of-law clause found in that contract”). As Magistrate Judge Walters correctly observed, venue and choice of law provisions “would be practically unenforceable if they could be avoided simply by an allegation of fraud in the inducement.” Morris v. McFarland Clinic P.C., No. CIV. 4:03- CV-30439, 2004 WL 306110, at *2 (S.D. Iowa Jan. 29, 2004).
The Court concludes, therefore, that the Prima Paint rule should be used to determine whether Paragraph 9 is enforceable. See Dacres, 548 N.W.2d at 578. As already explained, Plaintiffs’ claims of fraud are about the transaction as a whole. Plaintiffs do not claim that Paragraph 9 itself was fraudulently induced. Therefore, under the Prima Paint rule, Paragraph 9 should be enforced.
Unlike in the arbitration context, where the FAA applies, there is no federal legislation that governs state court proceedings when a forum-selection clause is at issue. Cf. Stewart Org., Inc., 487 U.S. at 28–29, 108 S. Ct. at 2243 (holding that 28 U.S.C. § 1404(a) governs the enforceability of a forum-selection clause in a diversity case in federal court). Accordingly, enforcement of a forum-selection clause in state court is a matter of state law. See Perkins v. CCH Computax, Inc., 415 S.E.2d 755, 757 (N.C. Ct. App. 1992) (declining to apply federal law), rev’d, 423 S.E.2d 780, 781 (N.C. 1992), superseded in part by statute, 1993 N.C. Sess. Laws ch. 436.
(In The Supreme Court of Iowa, January 10, 2020, Roy Karon and Peddler LLC, v. Elliott Aviation, Docket No. 18-1199, all justices concur except Appel, J., who dissents)
No comments:
Post a Comment