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Which Comes First, Rescission Or Choice Of Forum?

A recent ruling by U.S. District Court Judge Arthur D. Spatt raises the interesting question of whether a choice of law provision can be vitiated by rescission.  The case, Hatteras Enterprises, Inc. v. Forsythe Cosmetic Group, Ltd., 2016 U.S. Dist. LEXIS 100352 (July 30, 2016), involved six separate agreements, each containing a New York choice of law provision.  Four of the agreements also included a New York choice of forum clause.  The case began in California Superior Court, was removed to the U.S. District Court for the Central District of California, and then transferred to the Southern District of New York.

The plaintiffs were not happy litigating in New York and advanced several arguments against enforcement of the forum selection clauses.  One of these arguments was that the plaintiffs had rescinded the agreements, including the forum selection clause, pursuant to Section 1691 of the California Civil Code.  That statute generally requires that a party entitled to rescission to give notice to the other party and to restore to the other party "everything of value which he has received from him under the contract or offer to restore the same upon condition that the other party do likewise, unless the latter is unable or positively refuses to do so".  Civil Code Section 1688 provides that a contract is extinguished by rescission.  According to the plaintiffs, that means that the forum selection clauses were null and void.

Unfortunately for the plaintiffs, Judge Spatt found that they did not raise the argument before the judge who transferred venue to the Southern District of New York.  Judge Spatt also found that because all of the Agreements contained New York choice of law clauses and he had not yet determined which law applies, it was not clear that Section 1691 applies to the plaintiffs' case.  He further intimated that he may not be sympathetic to the plaintiffs' argument:

 In addition, even if the Plaintiffs had properly satisfied the requirements of Section 1691, they offer no legal authority for the proposition that satisfying the requirements for the unilateral rescission of an agreement also renders a forum selection clause null and void. Indeed, most courts appear to have rejected similar arguments. [citations omitted]

Id.  So this leaves the interesting question, should Judge Platt apply California or New York law governing the effect of a rescission on a forum selection clause?

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30172DBAB0084D3A8F39D7AF0A8E79BC.ashx Keith Paul Bishop
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