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Del. Exclusive Forum Selection Clause Does Not Bind Contracting Party’s Managers, Principals, Owners Who Do Not Directly Benefit From Contract

Articles & Publications

May 22, 2024
By: Barnaby Grzaslewicz
Delaware Business Court Insider

Parties to transaction agreements often choose Delaware as the exclusive forum for disputes arising out of their transactions. This is common, where the parties are from diffuse geographic locations, but desire a single forum well-versed in corporate and commercial law—like Delaware—to resolve their disputes. Also common in this setting, is that there are multiple parties involved in a transaction beyond just the business entities, which are the actual parties to the agreement—for example, the managers, principals, or owners of the contracting-entity party to an agreement. If relations between the parties subsequently sour—for instance, where one party believes it was fraudulently induced into entering the transaction—the aggrieved party often targets not only its contractual counterparty, but also the related individuals, who negotiated the agreement.

While Delaware may be the exclusive jurisdiction for the claims against the contractual counterparty, the forum selection clause will rarely extend to the claims against the nonsignatory managers, principals or owners. As the Delaware Superior Court’s recent decision in Chumash Capital Investments v. Grand Mesa Partners, C.A. No. N23C-07-209 SKR CCLD (Del. Super. Ct. Apr. 10, 2024) demonstrates, Delaware courts respect the corporate form and, absent limited circumstances, such as when the individuals receive a direct benefit under the contract or the foreseeability of Delaware as a forum, Delaware courts will not bind the contracting party’s managers, principals, or owners to the forum selection clause.

Background and The Superior Court’s Decision

The plaintiff, a business entity headquartered in California (buyer), entered into a transaction to purchase a company from defendant Grand Mesa Partners LLC, a business entity headquartered in Colorado (seller). The remaining 14 defendants—comprised of either the seller’s managers or owners—are all entities or individuals from various states, including Illinois, Texas, Colorado, Oregon and Florida. The buyer and seller memorialized the transaction in a purchase agreement, in which they agreed that the exclusive forum for any dispute related to the purchase agreement was Delaware.

The seller also made a number of representations and warranties in the purchase agreement— including, with respect to the target company’s financial statements, accounting practices and business relationships. Following the sale, the buyer allegedly discovered that the seller’s representations and warranties were false. Seeking redress, the buyer filed suit against the seller and 14 of its managers and owners in the complex commercial litigation division of the Delaware Superior Court, asserting fraud and unjust enrichment claims. In response, the defendants named as managers and owners of the seller, who were not signatories to the purchase agreement in their individual capacity, and who are not based in Delaware, moved to dismiss the complaint on the grounds that they were not subject to personal jurisdiction in Delaware. The plaintiff-seller opposed, arguing that the purchase agreement’s Delaware forum selection clause also bound the nonsignatory defendants.

In resolving the motion to dismiss, the Superior Court held that a contracting party’s managers or owners are generally not subject to an agreement’s forum selection clause. However, where the nonsignatory: receives a direct benefit under the contract; or it was foreseeable that the nonsignatory would be subject to suit in Delaware, the forum selection clause can bind the nonsignatory, under a theory of equitable estoppel. Here, the plaintiffs argued that the nonsignatory defendants received a direct benefit from the purchase agreement in the form of distributions of the sale proceeds from the Seller and that it was foreseeable that they could be sued in Delaware because they helped negotiate the contract. The court rejected both of these arguments.

As to the direct benefit theory, the court ruled that distributions from the seller failed to meet the criteria because—fundamentally—they were not direct. The court reasoned that the benefit to the nonsignatories was indirect because their distributions depended wholly on the seller’s discretion. Turning to the foreseeability exception, the court explained that there are only two recognized circumstances where it is foreseeable that the non-signatory will be sued in Delaware: when the non-signatory seeks to enforce the forum selection clause against signatory; or the nonsignatory is controlled by the signatory. Simply negotiating the purchase agreement—as  the plaintiffs argued the nonsignatories had here—did not, however, qualify under these two recognized exceptions. Relying on the negative implications affecting the principle of corporate separateness, the court declined to extend the scope of the foreseeability exception. Accordingly, the court granted the non-signatory defendants’ motion to dismiss.

Key Takeaways

The Superior Court’s Chumash decision recognizes that the corporate form is not lightly disturbed in Delaware and that fundamental contract principles of privity control who is bound by the contract. A contractual forum selection clause will generally only bind the signatories to the contract, and Delaware courts will not look past the corporate form absent circumstances indicating that the nonsignatory has either directly benefited under the contract or is controlled by the signatory, or has sought to enforce the clause. An indirect benefit or merely negotiating the contract will not suffice.

Delaware Business Court Insider | May 22, 2024

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