Overlooked Contract Terms Can Have Big Consequences

In Pinto Tech v. Sheldon, the Texas Supreme Court considered two key provisions relating to a shareholder agreement’s forum selection clause, which provided for exclusive jurisdiction and venue in Delaware.  In interpreting this contract, the Court determined that dismissal for filing suit in the wrong court was proper as to some, but improper as to others.

The case illustrates how contract terms that many business people overlook can have big consequences.

“Dispute” Is Broader than “Claim”

The plaintiffs are minority shareholders who sued the majority shareholders and certain individuals.  Despite the contract’s forum selection clause, they sued in Texas.  Two of the individual defendants did not sign the contract in their individual capacities.

The Court noted that the contract’s forum selection clause applied to “any dispute arising out of” the contract.  The plaintiffs did not sue for breach of contract, but for tortious interference, breach of fiduciary duty, and other non-contractual matters.

The Court said that the asserted claims depended on the existence and validity of the contract even though the claims did not require enforcement of the contract.  Therefore, the forum selection clause applied to all parties to the contract.

The Court specifically stated that when a forum selection clause encompasses all “disputes,” its scope is broader than “claims” based solely on rights emanating from the contract.  “Dispute” and “claim” may seem similar, especially to business people, but in contracts they have different legal meanings.

Clause Does Not Help Defendants Who Did Not Sign the Contract

Two individual defendants who did not sign the contract argued that they should also get the benefit of the forum selection clause.  The Court acknowledged that other courts have at times allowed non-signatory defendants to enforce forum selection clauses.  However, the Court identified certain “plain language” in this contract that prevented the non-signatories from using the forum selection clause.

The “plain language” that precluded dismissal appeared in the somewhat standard “boilerplate” provision that the contract is not intended to confer on any person, other than the parties, any rights under the contract.  Based on this provision, the Court ruled that the non-signatories should not have been dismissed, and the Court reinstated the case as to these individual defendants.

Drafting Forum Selection and Arbitration Clauses to Protect Individuals

In determining how to apply the forum selection clause, the Court looked at cases interpreting arbitration clauses.  This suggests that the Court’s analysis in this case would apply to determining the extent to which an arbitration clause may be enforced by non-signatory defendants.  A boilerplate provision that the contract does not confer rights on non-signatories may allow plaintiffs to avoid arbitration in non-contract cases asserted against individual officers of the counter party.

To protect these individual officers, contracts should explicitly state that any forum selection or arbitration clause covers non-contract claims against a party’s officers, and that any “does not confer rights” provision does not narrow the enforceability of the forum selection or arbitration clause.

For a copy of the Court’s opinion click here.


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