Fraud in the Inducement Claim Won’t Defeat Forum Selection Clause Unless Fraud Involved That Clause Specifically

Largoza v. FKM Real Estate Holdings, Inc., 252 N.J. Super. 331 (App. Div. 2022). A line of federal cases that includes Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), as well as, in New Jersey state courts, Goffe v. Foulke Management Corp., 238 N.J. 191 (2019), and Van Syoc v. Walter, 259 N.J. Super. 337 (App. Div. 1992), hold that fraud in the inducement challenges to a contract’s arbitration clause are to be treated differently depending on whether the fraud is alleged to have induced the contract generally or the arbitration clause in particular. Among other things, if the fraud in the inducement challenge is not specific to the arbitration clause, such a clause is enforceable.

Today, in an opinion by Judge Natali, the Appellate Division applied that principle to a fraud in the inducement claim as to a forum selection clause. Though Judge Natali noted that “[n]o published New Jersey decisions have extended the Prima Paint or Goffe courts’ holdings to forum selection clauses,” he observed that in Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974), the Supreme Court of the United States had “held that generalized allegations of fraud are insufficient to invalidate a forum selection clause.”

Judge Natali also cited numerous cases from other jurisdictions that had so ruled, noting that such cases were in the majority. The panel stated that “the majority approach is tailored to dispel the fear that a party could avoid the enforcement of a forum selection clause by merely alleging fraud or coercion in the inducement of the contract at issue,” and that “[i]f a forum-selection clause could be challenged simply based on fraud in an overall transaction, the advantages of predictability and efficiency would be lost.” Therefore, Judge Natali said, “we are persuaded by the logic of the majority approach that invalidating otherwise-enforceable forum selection clauses based solely on generalized allegations of fraud would too easily allow parties to circumvent such clauses, which are presumptively valid and give effect to the legitimate expectations of the parties” (citations omitted throughout this paragraph).

Here, plaintiffs had entered into a loan agreement with defendant Celtic Bank Corporation that contained a forum selection clause requiring any suit to be brought in Utah, where Celtic was headquartered. Plaintiffs sued Celtic and a number of other defendants in New Jersey, and Celtic moved to enforce the forum selection clause. Judge Natali concluded that “[p]laintiffs’ allegations do not relate to the forum selection clause directly, but rather involve claims that Celtic engaged in a larger scheme to fraudulently induce them into entering the contract and later improperly applying for an SBA loan.” Because that was so, “plaintiffs’ allegations of generalized fraud do not provide a basis to invalidate the forum selection clause” under the majority rule that the panel adopted.

Plaintiffs had other arguments against the forum selection clause as well, however. First, they argued that applying that clause would violate the entire controversy doctrine, as plaintiffs had other claims against the many other defendants. Plaintiffs contended that transfer of the Celtic part of the case to Utah “would result in ‘duplicative litigation in two forums of the civil conspiracy claim, arising from the same set of facts, from the same transaction,’ and would result in ‘piecemeal litigation.’” They relied on McNeill v. Zoref, 297 N.J. Super. 213 (App. Div. 1997), for that argument.

Judge Natali found that case distinguishable. “Unlike in McNeil, plaintiffs will not be prejudiced or precluded from adjudicating their claims against the remaining defendants absent Celtic’s participation.” Though plaintiffs alleged that Celtic’s provision of the SBA loan had aided a larger scheme that the other defendants had allegedly perpetrated, the panel was “satisfied those allegations are sufficiently distinct from plaintiffs’ claims against Celtic such that the entire controversy doctrine does not require nullification of the forum selection clause here.”

Plaintiffs also argued that having to proceed against Celtic in Utah presented serious inconvenience, and that if a Utah court applied Utah law instead of New Jersey law, plaintiffs would be prejudiced “in part, because its consumer protection laws are more restrictive than New Jersey’s and the statute of limitations under Utah law has already run on ‘certain’ unidentified claims.” Judge Natali disagreed on both counts.

“[T]he inconvenience exception applies when “trial in the contractual forum will be so gravely difficult and inconvenient that he will for all practical purposes be deprived his day in court.” That was not so on the record here. And on the choice of law issue, “[p]laintiffs have failed to engage in any meaningful conflict of law analysis to support their contention that the Utah court would apply Utah law to disputes arising from a contract entered in New Jersey or to other tortious actions occurring in this jurisdiction. And, Celtic itself maintained that New Jersey law applies to the underlying action” and asserted that on multiple different occasions.

There was, however, one bright spot for plaintiffs. Celtic had waited over eleven months after plaintiffs had filed their suit to invoke the forum selection clause, and in the interim, Celtic had filed a motion to dismiss the case without citing the forum selection provision. Plaintiffs contended that this constituted a waiver of that clause.

The Law Division had not “address[ed] these specific arguments, nor did it engage in necessary findings on the waiver issue.” Citing Cole v. Jersey City Med. Ctr., 215 N.J. 265, 268 (2013), which had addressed whether and when a party waives an arbitration clause by litigating for a period of time without invoking that clause, as well as out-of-state authority that had addressed the waiver issue in the context of forum selection clauses suing criteria similar to that of Cole, the panel remanded the case for “necessary factual findings and legal conclusions through the prism of the Cole test” and for further proceedings depending on the lower court’s findings and conclusions on the waiver issue.