Northwestern National Insurance Company v. William F. Donovan
1990 U.S. App. LEXIS 18260, 916 F.2d 372 (1990)
Rule of Law:
Under federal common law, forum selection clauses in contracts are generally enforceable unless they are shown to be unreasonable, unjust, or subject to a conventional contractual infirmity such as fraud, duress, or unconscionability, particularly when adverse effects on third parties are slight.
Facts:
- In the early 1980s, several wealthy individuals, mostly Texans, bought limited partnerships in one of two closely related tax-shelter enterprises.
- Around 1984, the tax-shelter enterprise required more money and secured promissory notes from a lender.
- The lender required the enterprise to secure its promissory notes with a financial obligation bond, issued by Northwestern National Insurance Company.
- Northwestern National Insurance Company in turn required the limited partners to agree to indemnify it should it be forced to make good on its bond to the lender.
- Each of the limited partners executed the indemnification agreement that Northwestern furnished, a two-page printed form.
- The indemnification agreement contained a clause stating: 'Venue, at the Company’s option for litigation and/or arbitration, shall be in the County designated on the front page under the description of the Company’s address,' which was Milwaukee County.
- The tax-shelter enterprise later defaulted on its loan, requiring Northwestern National Insurance Company to pay off the notes.
Procedural Posture:
- Northwestern National Insurance Company filed five diversity breach of contract suits against the limited partners in a federal district court in Wisconsin.
- The federal district court dismissed the suits, holding that it lacked personal jurisdiction over the out-of-state defendants.
- The district court specifically refused to enforce the forum selection clause, finding it 'not compelling' because it was 'not freely negotiated,' 'buried in the fine print,' and would compel individuals with no Wisconsin contacts to litigate there.
- Northwestern National Insurance Company appealed the dismissal to the Seventh Circuit Court of Appeals.
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Issue:
Is a forum selection clause, contained in a non-negotiated form contract and appearing in small print, enforceable to establish personal jurisdiction over out-of-state defendants, or is it rendered invalid if not 'freely negotiated' or if 'buried in fine print'?
Opinions:
Majority - Posner, Circuit Judge
Yes, a forum selection clause in a contract is generally enforceable, even if it appears in a non-negotiated form contract and in small print, unless it is subject to conventional contractual infirmities like fraud, duress, unconscionability, or mistake, or if it causes significant adverse effects on third parties. The court clarifies that the enforceability of forum selection clauses is governed by federal common law, citing M/S Bremen v. Zapata Off-Shore Co. and Heller Financial, Inc. v. Midwhey Powder Co., which reject outdated judicial hostility to such clauses and treat them 'basically like any other contractual provision.' A defendant can waive objections to personal jurisdiction or venue in advance by signing such a clause. The court distinguishes the present case from Stewart, which concerned § 1404(a) change of venue criteria, and Shute v. Carnival Cruise Lines, where a passenger received the ticket with the clause after purchasing it, raising issues of fraud/unconscionability. The court rejects the defendants' arguments that the clause was 'buried in the fine print' or 'not freely negotiated.' It finds the print legible and the clause conspicuous enough, and notes that form contracts ('contracts of adhesion') are generally upheld against unconscionability claims unless they involve actual fraud, duress, illegality, or violation of a fiduciary relationship. The court emphasizes that the defendants were wealthy, sophisticated investors who knew they were incurring substantial liability and should have read the agreement carefully or consulted lawyers. Any inconvenience to the defendants is balanced by the convenience to Northwestern, and potential cost savings from such clauses are likely passed on to purchasers in the form of lower premiums. Finally, the court reaffirms that a valid forum selection clause constitutes a waiver of the right to move for a change of venue on grounds of inconvenience to the moving party, per Heller Financial, Inc. v. Midwhey Powder Co.
Analysis:
This case significantly reinforces the enforceability of forum selection clauses under federal common law, extending the principles of M/S Bremen and Heller Financial to situations involving non-negotiated form contracts. It clarifies that mere 'small print' or 'non-negotiability' does not automatically invalidate such clauses, shifting the burden to the party seeking to avoid the clause to demonstrate a conventional contractual infirmity like fraud or unconscionability. The decision underscores the importance of reading contracts, especially for sophisticated parties, and limits the use of Section 1404(a) motions to circumvent valid forum selection agreements. This ruling makes it harder for defendants to challenge jurisdiction based on inconvenience when they have previously agreed to a forum.
