By Jerry Meek (January 24, 2016)
It is common for distribution agreements to have both choice of law and choice of forum clauses.
Through a choice of law clause, the parties agree that the contract will be interpreted – and usually any dispute decided – under the laws of a particular State or country. Through a choice of forum clause, the parties agree that any dispute between them will be resolved exclusively (or at either party’s election) before a particular Court or arbitrator.
Choices of law and forum are especially important in international distribution agreements. In the international setting, the decision where to litigate a dispute or under which laws could dramatically alter the parties’ rights or render the decision to pursue a claim impractical. U.S. courts generally enforce both types of clauses, regardless of where the parties sign the contract or where it is to be performed.
Recently, a New York State Court – relying on choice of law and forum clauses – ordered a distributor to halt its pending action in the Australian courts, even after an Australian Court refused to enforce those same clauses. In Madden International Ltd. v. Lew Footwear Holdings Pty Ltd., 2016 N.Y. Slip. Op. 50061 [U] [Sup. Ct. New York County 2016], Madden’s distributor for Australia and New Zealand filed suit in Australia, asserting claims in part under the Australian Trade Practices Act of 1974 and the Australian Consumer Law.
The distribution agreement between the parties provided that the agreement “shall be governed by and construed in accordance with the laws of the State of New York” and that “any and all actions or proceedings arising out of or relating to this Agreement or the transactions contemplated herein shall be exclusively heard only in [New York] state or federal court.”
The distributor acknowledged that it brought suit in Australia only because Australian law permitted it to pursue claims unavailable to it in New York. Invoking the choice of law and forum clauses, Madden attempted to stop the Australian proceeding, but the Australian Court rejected Madden’s argument, citing Australia’s public policy interest in enforcing laws designed to protect the people of Australia. “[I]f it were otherwise,” the Australian Court noted, “foreign corporations could place themselves outside the protection provided by this fundamental and important legislation which governs commercial interaction throughout Australia.”
Undeterred, Madden then filed suit in New York, asking the Court to enjoin the Australian proceedings and to prevent the distributor from pursuing any legal action outside of New York. In granting the relief sought by Madden, the Court observed that the distributor “has purposely flouted” the parties’ choice of law and forum clauses and “deliberately ignored” its contractual obligations. The Court also rejected the argument that it should defer to the judicial decisions of the Australia courts, under principles of international comity. “New York courts,” it ruled, “have a particularly strong public policy commitment to protecting New York based corporations’ New York contractual forum selection and New York choice of law provisions.” This “strong public policy” and the distributor’s “purposeful disregard of its contractual obligations in favor of an unsanctioned suit in its home country of Australia,” according to the Court, did not favor the exercise of comity.
The New York Court’s decision is a reminder that choice of law and forum clauses can have real consequences and that U.S. Courts will apply them, even in the unusual case in which doing so contradicts the decision of a foreign sovereign’s Courts.
Of course, the New York Court has no power over the Australian Courts and the distributor is an Australian company. So, one can suppose that this dispute is far from over.