What You Should Know About Forum-Selection Clauses and Nonsignatories:
Forum-selection clauses are a staple of commercial contracts, dictating where disputes must be litigated. But what happens when a dispute involves a party that never signed the contract? Until recently, Michigan had no clear rule on whether a nonsignatory could be bound by, or enforce, a forum-selection clause. In Kewadin Casinos Gaming Authority v. Patterson Earnhart Real Bird & Wilson, LLP, the Michigan Court of Appeals addressed this question and adopted the “closely-related doctrine”.
What is the Closely Related Doctrine?
Under the closely-related doctrine, a nonsignatory may be bound by or enforce a forum-selection clause when it has a “sufficiently close nexus to the dispute or to another signatory such that it was foreseeable that they would be bound.” Courts weigh several factors, including but not limited to: (1) common ownership between the signatory and the nonsignatory, (2) direct benefits obtained from the contract, (3) general knowledge of the agreement, and (4) the parties’ awareness of the forum-selection clause.
What Happened in Kewadin:
A Michigan-based tribe retained a law firm as general counsel under a contract requiring disputes to be resolved in tribal court. The firm soon took on the representation of Kewadin Casinos Gaming Authority, a wholly owned instrumentality of the tribe, in pending litigation. Kewadin later sued the firm for legal malpractice in Michigan state court. The firm moved to dismiss, invoking the forum-selection clause, despite the fact that Kewadin had never signed the general counsel contract. The Court of Appeals instructed the trial court to apply the newly adopted closely-related doctrine and decide whether Kewadin’s close relationship to the tribe made the forum-selection clause enforceable against it.
These situations arise frequently in commercial disputes. A parent company may sign an agreement while a subsidiary performs under it, or an affiliate may benefit from a vendor contract without being a named party. In each scenario, the nonsignatory’s relationship to the contracting party and its foreseeable connection to the agreement may determine whether a forum-selection clause reaches it.
Practical takeaways:
Review any forum-selection clauses in your contracts with affiliated entities in mind, and consider explicitly naming related parties when drafting new agreements. In an active dispute, evaluate whether your client or an adversary is “closely related” enough to invoke or be bound by a clause that it did not sign. Forum can be outcome-determinative, and legal guidance on the application of this new doctrine is a worthwhile investment.