Ghosts have rights too! A new era in contractual rights: third-party invocation in forum selection clauses.

• Author: Woodard, Monika L.
• Position: Symposium on Contracts

1. THE LEGEND OF THE GHOST PARTY

   Imagine for a moment that you own a business that operates as a normal business would; regularly developing relationships and conducting business with other businesses that, in turn, conduct additional business with other outside parties. Suppose further that you have representatives, employees, sub-contractual workers, umbrella corporations, or simply general business affiliates that represent or do business with your overall organization, signing separate contracts with outside entities on occasion and potentially putting your business in the crossfires of future contractual litigation. (1) Would you think to review these separate contracts to ensure that you and your business would not be subject to a lawsuit in a random jurisdiction (2) due to a forum selection clause (3) within their contract?

   On the opposite end of the hypothetical, suppose you are an average consumer that entered into a contractual relationship with a business and for whatever reason you have been damaged and you are attempting to file suit against the business for relief. You would not think that a non-contracting party who has been included in the suit would be able to step into the shoes of an actual contracting party and assert certain rights against you under the contract. Thus, the ultimate question is whether a party who has not agreed to the terms of a contract can actually enforce or be bound to those terms.

   The Court of Appeals in Adams v. Raintree Vacation Exchange LLC, (4) found itself at the cusp of this hybrid question in contract and procedural law, (5) as the court affirmed the trial court in support of a determination asserting that a non-party to a contract in dispute may potentially be bound by the contract's forum selection clause, and in addition, may bind other applicable parties to these clauses as well. (6) The Illinois district court set the stage (7) and Seventh Circuit Court of Appeals Judge Richard Posner (8)

   later agreed that the application of the clause to non-parties may very well be possible. (9) These two courts do not appear to be the only ones asserting this determination. (10) Raintree (11) has officially brought to light the numerous unanswered questions concerning subrogation (12) in forum selection clauses that have gone unanswered in the past. (13)

   The Raintree plaintiffs had purchased a timeshare unit in Mexico. (14) The Adams bought the timeshare from a Mexican company named Desarollos Turisticos Regina ("DTR"), which became an affiliate of Raintree Vacation Exchange ("Raintree"). (15) The contracts involving the purchase of the timeshares included a forum selection clause requiring any litigation take place in Mexico City federal district courts. (16) The plaintiffs alleged that Starwood Vacation Ownership ("Starwood") (17) and Raintree conspired to defraud them using a fake Mexican subsidiary to accept their money even though they did not intend to build a timeshare resort as promised. (18) Raintree and Starwood filed a motion to dismiss due to the existence of the forum selection clause. (19) On appeal, the plaintiffs argued that the defendants were not afforded the use of the forum selection clause because neither party was a signatory to the contract that the plaintiffs had signed with DTR. (20) Judge Posner noted that the plaintiffs were unable to point to any authority to support their claim that "litigants who are not parties to a contract cannot rely on such a contract's choice of forum provision" thus he "trudged on" in search of a determinative test to apply to non-signatories in similar circumstances. (21)

   In the wake of non-party adhesion becoming an increasingly large problem for the federal and state courts, this comment proposes a modification to the test set forth by Judge Posner in Raintree. This comment also makes a call to the Supreme Court for action in determining a ceiling standard for non-party invocation of forum selection clauses. Part II of this comment considers the direction of the Supreme Court in past decisions on forum selection clauses in general and the implications of these decisions on the future of the clauses. (22) Part III discusses the relatively new question surrounding forum selection clauses with respect to non-party invocation of the clause and the issues it creates in general. (23) Part IV discusses the test created by Judge Posner and the Raintree court, which suggests a compartmentalized approach to the issue. (24) Part V further considers the Raintree test as a portion of a more cumulative test that breaks the analysis down to consider parties that have a relationship to the actual contract itself versus those with a relationship to the signatory parties of the contract. (25) Part VI provides final conclusive thoughts and a call to the Supreme Court to take action and create a ceiling standard for nonparty invocation that may be followed by the lower courts. (26)

2. WE DID NOT EVEN KNOW THEY WERE AMONG US: THE EVOLUTION OF CONTRACTUAL RIGHTS TO FORUM SELECTION CLAUSES

   "There is a sacred realm of privacy for every man and woman where he makes his choices and decisions--a realm of his own essential rights and liberties into which the law, generally speaking, must not intrude." (27) Even though the forum selection clause as we know it today is a very broad concept, potentially encompassing even non-parties to a contract at this point, the rise of these clauses has been rather disheartening through the years, and oftentimes splintered in its application in a number of ways. The lack of consistency seen through the main Supreme Court decisions on forum selection clauses has left enforcement of such clauses uncertain and confusing for lower courts.

   1. INITIAL RESISTANCE TO FORUM SELECTION CLAUSES BY UNITED STATES COURTS

      The United States only recently changed its attitude towards forum selection clauses by finally beginning to accept these clauses. (28) In the Nineteenth Century, unlike other courts around the world, (29) United States courts had uniformly refused to enforce forum selection clauses, (30) particularly because the clauses arose from a private agreement between the parties that ultimately imposed a "characterization" problem for the courts. (31) The clauses appeared to limit a party's constitutional objection to personal jurisdiction (32) while attempting to "oust the courts of [their] jurisdiction." (33) This became known as the "ouster doctrine," as it has been referred to by commentators, (34) and was imposed for a host of various reasons by courts across the country. (35) However, a complete change occurred during the second half of the Twentieth Century (36) as courts finally began to acknowledge the wishes and rights of contracting parties to determine in advance where a dispute may be litigated. (37) As forum selection clauses became more widely accepted, courts continuously emphasized the importance of using proper terminology within the clause, as incorrect ambiguous language could potentially render a contract unenforceable. Unfortunately, the simplistic language of forum selection clauses has proven to be anything but simplistic and has thus prompted the Court to provide much needed guidance on the matter. (38)

   2. THE SUPREME COURT WEIGHS IN

      In the 1964 United States Supreme Court case, National Equipment Rental, Limited v. Szukhent, (39) the Court approved the use of forum selection clauses, particularly recognizing the rights of parties to enter into "nonexclusive" forum selection clauses, (40) holding "that parties to a contract may agree in advance to submit to the jurisdiction of a given court...." (41) Since Szukhent, the Court has addressed forum selection clauses on three other occasions.

      i. M/S Bremen v. Zapata Off-Shore Company

      The first time the Court weighed in about forum selection clauses was in 1972 in M/S Bremen v. Zapata Off-Shore Company f where rights to enter into "reasonable" and "negotiated" forum selection clauses were given by the Court, thus following an international trend towards enforcement. (43) This holding reversed the American courts' longstanding complete rejection of enforcement of such clauses. (44) Thus, since 1972 forum selection clauses have been widely and unanimously accepted in federal courts. (45)

      Bremen was an admiralty case arising from an international towage contract between the parties. (46) Zapata, a Texas corporation, contracted with Unterweser, a German corporation, to tow Zapata's ocean drilling rig--the Chaparral--from the Gulf of Mexico to a location off the coast of Italy, where Zapata planned to drill wells. (47) The contract contained a forum selection clause providing that "[a]ny dispute arising must be treated before the London Court of Justice." (48) In January 1968, Unterweser's deep-sea tugboat--the Bremen--departed the Gulf of Mexico intending to tow the Chaparral to the agreed location. (49) Due to a severe storm while in international waters, the Chaparral suffered substantial damage and did not reach its intended destination. (50) Zapata instructed the Bremen to tow the damaged rig to the nearest port of refuge in Tampa, Florida. (51)

      In an effort to seek relief for the damage sustained to the rig, Zapata filed suit in a Florida district court ignoring the forum selection clause requiring litigation in London. (52) Unterweser invoked the forum selection clause and moved for dismissal due to lack of jurisdiction or on forum non conveniens (53) grounds in the alternative, while initiating an identical action in the forum agreed to within the contract. (54)

      After the district court and appellate court denied both motions, the Court reversed and--for the first time--recognized the rights of contracting parties to enter into reasonable "exclusive" forum selection clauses. (55) The Court held that forum selection clauses were prima facie valid and should be enforced unless the resisting party can show the clause is...