When a business relationship turns sour and one party feels obliged to sue the other, one of the first issues that must be addressed is forum. Business contracts often specify which state or court will have jurisdiction over any dispute arising from the contract. But such “forum selection” clauses are not written in stone and may be disregarded by New York courts if the circumstances warrant.
C. Mahendra (NY), LLC v. National Gold & Diamond Center, Inc.
Here is a recent example from a decision by the Appellate Division, First Department. This is a fairly straightforward breach of contract case. The plaintiff is a wholesaler of diamonds based in New York. The defendant is a jewelry retailer based in California. For many years, the plaintiff sold diamonds to the defendant “on memorandum,” meaning they were shipped from New York to California so the defendant could examine the diamonds before deciding to purchase them.
The parties did business primarily by telephone. But, when the defendant decided to keep and purchase diamonds, the plaintiff sent a written invoice. The invoice contained a number of terms and conditions, including a forum selection clause designating New York law and the courts of New York County as having “exclusive jurisdiction” over any dispute.
In 2011, the plaintiff sued the defendant in Manhattan Supreme Court, alleging failure to pay for nearly $64,000 worth of merchandise shipped to California. The defendant moved to dismiss the complaint, arguing New York courts did not have lawful jurisdiction here. The defendant said the forum selection clause of the invoices did not constitute a binding contract with the plaintiff. Furthermore, the New York courts could not exercise “personal jurisdiction” over the defendant, which conducted business exclusively in California.
Manhattan Supreme Court granted the motion to dismiss, but the First Department reversed in a Feb. 10 decision. The First Department agreed with the defendant and the Supreme Court that the forum selection clause was not binding; but the appeals court said New York nonetheless could exercise “long-arm” jurisdiction over the defendant. Accordingly, the case was returned to Supreme Court for trial.
Regarding the forum selection clause, the Appellate Division cited the Uniform Commercial Code (UCC), the law that governs contracts for the sale of tangible goods. As noted above, the parties did business over the telephone. In legal terms, they entered into oral contracts under specific terms. The forum selection clause in the invoices constituted additional conditions that were not previously agreed to by the defendant. (The defendant never signed the invoices or otherwise accepted the conditions.) Under the UCC, the forum selection clause was therefore not a valid part of the contract.
That said, the Appellate Division said the New York courts could still hear the plaintiff's complaint. A court must have “personal jurisdiction” over a defendant. Normally this means the defendant lives in the judicial district (in this case, Manhattan) where the lawsuit is filed. But, New York law gives courts “long-arm” jurisdiction over non-resident defendants who transact business within New York. And, while the First Department noted this rule generally does not apply to out-of-state companies doing business with New York by telephone, under the facts of this case, there were “sufficient” contacts between the defendant and plaintiff—multiple dealings over a period of years—to establish long-arm jurisdiction.
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Even simple business deals can lead to complicated legal questions. If you are involved in a potential breach of contract or other civil litigation matter and need advice from an experienced New York business attorney, contact our office right away.