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Uncertainty in California over Forum Selection Clauses

In international business transactions, contracting parties from different countries often select a neutral third country to supply the applicable governing law as well as the exclusive forum for resolving disputes.  The reason for this is obvious:  each party is wary of agreeing to litigate disputes in the adverse party’s home country or governed by the law of the adverse party’s home country.  In such circumstances, the parties perceive the choice of an unrelated third jurisdiction to supply the governing law and forum to be most fair to both parties.  A recent California Court of Appeal opinion, however, unfortunately creates uncertainty for foreign entities as to whether California choice of law and forum selection clauses, even though expressly agreed upon by the parties, will be enforced by California state courts.

In Quanta Computer Inc. v. Japan Communications Inc., 2018 DJDAR 2576 (March 16, 2018), Quanta Computer (“Quanta”), a Taiwanese company, entered into a contract to manufacture and sell cellular telephones to Japan Communications (“JCI”), a Japanese company.  During negotiations for this contract, JCI initially proposed Japan as the choice of law and forum.  Quanta rejected Japan and proposed Singapore.  JCI rejected Singapore, and ultimately the parties agreed to California as the choice of law and forum.  When a dispute arose between the parties, Quanta filed a lawsuit in Los Angeles County Superior Court.  JCI then filed a motion to dismiss or stay the Los Angeles lawsuit for forum non conveniens, asserting that the forum selection clause in the parties’ agreement should not be enforced because the lawsuit lacked any nexus to California.  The Superior Court granted JCI’s motion based on forum non conveniens but also held that despite the forum selection clause it would decline to exercise jurisdiction over the case as a matter of discretion.

On appeal, the Court of Appeal held that the forum selection clause precluded JCI from moving to dismiss based on forum non conveniens.  The Court stated:

As the party who most likely suggested California as a mandatory forum, JCI is hard pressed to justify granting its motion on traditional forum non conveniens grounds.  JCI’s contention does not warrant extended discussion.

After so quickly rejecting JCI’s forum non conveniens motion, however, the Court then paradoxically held that the Superior Court on its own motion had the discretion to decline to exercise jurisdiction.  Essentially, the Court of Appeal held that in exercising that discretion the Superior Court should consider the private and public interest factors considered in a forum non conveniens motion.  In other words, the Court of Appeal basically held that considerations that did “not warrant extended discussion” when JCI moved to dismiss based on forum non conveniens grounds justified the Superior Court’s exercise of discretion to decline jurisdiction when it acted on its own motion.

The Court of Appeal then went on to hold that Section 410.40 of the California Code of Civil Procedure does not preclude a Court from exercising its discretion to dismiss a purely foreign dispute on forum non conveniens grounds.  Section 410.40 provides that any person “may maintain an action” against a foreign corporation when the action arises out of or relates to any contract “for which a choice of California law has been made in whole or in part by the parties thereto,” and where the contract relates to a transaction with a minimum aggregate value of $1,000,000, and contains a provision whereby the foreign corporation submits to the jurisdiction of California.  Applying a seemingly results-oriented analysis, the Court held that Section 410.40’s provision that a party “may maintain an action” in California does not mean that that party is entitled to have its lawsuit heard in California and that pursuant to California Civ. Proc. Code 410.30(a) the Superior Court could exercise its discretion to decline to exercise jurisdiction when there is a suitable alternative forum, the parties to the dispute have no connection to California, and the trial court concluded that it was unreasonable to require California courts to accept the burden of the litigation.  Ironically, the Court held that Japan was a suitable alternative forum even though Quanta had rejected Japan during the parties’ negotiations over the forum selection clause.

In light of this decision, contractual parties with no connection to California should consider carefully whether to select California courts as the forum for resolution of their disputes and perhaps avoid it.  Otherwise, they risk having a California court exercise its discretion on its own motion to decline to exercise jurisdiction over the dispute.  In such circumstances, the dispute may end up being litigated in a forum the parties had rejected during their contract negotiations.  To avoid such risk, the contracting parties should instead consider forums in which judges do not have the discretion to decline to exercise jurisdiction whenever the court feels the courts are already overburdened with other disputes.