Can parties contract out of federal court subject matter jurisdiction? The Second circuit says no, but they can opt out of federal court as an inconvenient forum

The United States Court of Appeals for the Second Circuit has ruled that parties cannot contractually strip a district court of its subject matter jurisdiction through a forum selection clause, though a clause selecting an exclusive state court forum could provide support for dismissal based on forum non conveniens from a federal court to state court. 

The case arose out of a real estate deal.  After disputes arose, the parties entered into a settlement agreement and subsequent arbitration agreement, pursuant to which the parties agreed to binding arbitration conducted by a rabbinical court known as the Bais Din Maysharim (Bais Din).  Both the settlement and arbitration agreements contained forum selection clauses whereby the parties submitted to the jurisdiction of, inter alia, the courts of the states of New York and New Jersey for purposes of enforcing any resulting arbitration award. After the Bais Din tribunal issued an award, the award creditor sought to confirm the award in the US District Court for the Southern District of New York, alleging federal subject matter jurisdiction based on diversity.

The district court, finding that the relevant forum selection clause required any enforcement action to be filed in the state courts of New York or New Jersey, dismissed the petition for lack of subject matter jurisdiction. But the Second Circuit, on appeal, held that the district court erred in dismissing the case for lack of subject matter jurisdiction.  It explained that “forum selection clauses, however interpreted, have no bearing on a court's subject matter jurisdiction,” because “parties have no power by private contract to oust a federal court of [subject matter] jurisdiction otherwise obtaining.”

The Second Circuit, acknowledged, however, that parties’ selection of a state court forum may be considered under a “modified” doctrine of forum non conveniens.  Under this this, courts in the Second Circuit must consider:

(1) “whether the clause was reasonably communicated to the party resisting enforcement”

(2) “whether the clause is mandatory”

(3) “whether the claims and parties involved in the suit are subject to the forum selection clause”; and, if the answer to all three of those questions is yes, then

(4) “whether the resisting party has rebutted [the] presumption [that the clause is enforceable] by ‘making a sufficiently strong showing that enforcement would be unreasonable or unjust, or that the clause was invalid for such reasons as fraud or overreaching.’”

Applying this test, the Second Circuit found that the parties’ forum selection clauses failed the second prong, as they were merely permissible and not mandatory.  Specifically, the court found that by providing that the resulting award “shall be enforceable” in the state courts, the parties merely identified the state courts as “possible fora where an award of the Bais Din could be enforced.” 

This decision clarifies the impact of forum selection clauses upon subject matter jurisdiction and the doctrine of forum non conveniens.  It also provides a useful lesson in interpretation to contracting parties wishing to limit the courts in which arbitration awards can be enforced:  they must carefully tailor their forum selection clauses so that courts are more likely to interpret them as mandatory.  This may include, for example, language that requires that disputes must be brought in a designated forum, to the exclusion of all other fora where jurisdiction may lie, because such language will strengthen the enforceability of forum selection clauses based on the modified doctrine of forum non conveniens.