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Enforcement of Forum Selection Clauses Gains Wobbly Foothold in the State of Texas

In re AIU Insurance Company, 148 S.W.3d 109 (Tex. 2004), reinforces, if only by a slim margin, the viability of forum selection clauses in Texas. In AIU Insurance, the Texas Supreme Court, in a 5-4 decision, enforced a forum selection clause by issuing a writ of mandamus directing a trial court in Hidalgo County to grant AIU’s motion to dismiss the case based on improper forum. Louis Dreyfus Natural Gas Corporation, a subsidiary of the insured, was added as a defendant in an environmental contamination lawsuit pending in Hidalgo County. AIU provided a defense to Dreyfus under a reservation of rights and disputed coverage of the claims. In response, Dreyfus filed suit against AIU in Hidalgo County for breach of contract and sought a declaratory judgment that coverage existed. AIU filed a motion to dismiss based on the forum selection clause in the insurance policy naming New York as the litigation forum, and subsequently filed its own declaratory judgment action in New York. The Hidalgo County trial court denied AIU’s motion to dismiss, and the court of appeals refused to grant mandamus relief. The Texas Supreme Court granted AIU’s petition for issuance of a writ of mandamus. JENNIFER NOWLIN

The Texas Supreme Court held that the forum selection clause was enforceable. The Court recognized that forum selection clauses should be enforced unless (1) a party can demonstrate that enforcement would contravene the public policy of the state in which the litigation is pending, or (2) the forum contained in the selection clause would be seriously inconvenient for trial.

The Court rejected Dreyfus’ contentions that, based on certain provisions in the Texas Insurance Code and the state’s interest in litigating coverage disputes, public policy mandated Texas as the forum. The Court first noted that neither article 21.42 nor former article 21.43 section 9 of the code require that lawsuits be filed or maintained in Texas. The Court proceeded to “categorically reject” Dreyfus’ reasoning that Texas had a public interest because Hidalgo County citizens would benefit from insurance proceeds, and the insurance could mitigate negative financial effects on Dreyfus’ successor, which employed a large number of Texans. The Court rebuked Dreyfus’ “provincial attitude” and suggestion that “tribunals

should consider . . . benefits to the local community in deciding whether there is insurance coverage.”

Dreyfus also argued that inconvenience rendered the forum selection clause unenforceable because most of the potential witnesses on coverage issues resided in Texas. The Court deemed this reasoning equally unpersuasive, finding that Dreyfus had failed to demonstrate that difficulty and inconvenience of litigating in New York would essentially deprive Dreyfus of its day in court. According to the Court, any inconvenience was foreseeable, even for the insured’s subsidiaries, at the time the contract was formed; New York was not a “remote alien forum”; there was no evidence that AIU chose a New York forum in an effort to dissuade insureds from pursuing claims against it; and there was no evidence that AIU obtained the forum selection clause through fraud or overreaching.

Having decided the forum selection clause was enforceable, the Court further determined that the appeals process provided AIU an inadequate remedy. The Court stated that forcing AIU to enforce the forum selection clause on appeal was harassing because such protracted litigation only benefits parties that breach the clause. Further, it places on the party seeking enforcement a heavy burden, financial and otherwise, that may result in premature and extracted settlement. Also, when a trial court fails to enforce a valid forum selection clause, the judgment of that court is subject to automatic reversal upon request of the party seeking to enforce the clause. In light of this, the Court concluded that conducting trial in a forum other than the one contractually agreed upon is a “meaningless waste of judicial resources.” For these reasons, the Texas Supreme Court justified the issuance of a writ of mandamus instructing the trial court to dismiss the lawsuit in order to enforce the forum selection clause.

The dissenting minority, while challenging whether the forum selection clause was in fact enforceable, specifically disavowed the majority’s decision to employ such an extraordinary remedy as an enforcement mechanism. While enforcement of forum selection clauses in Texas is settled momentarily, the reasoning upon which it is grounded could soon prove to be shifting sands.

Texas Court Clarifies Application of Statute of Repose

BRAD BROWN A Texas appellate court has ruled that Texas’ 15 year statute of repose applies to negligent failure to warn and failure to inspect claims. In Saporito v. Cincinnati Inc., 2004 WL 234378 (Tex. App. – Houston [14th Dist.] 2004), plaintiff injured his hand while attempting to bend metal on a press brake machine. The machine, manufactured and sold in 1953, was more than 15 years old, thus falling under the statute of repose. Plaintiff, however, asserted claims against the manufacturer for failure to warn and to inspect and argued these claims were not “products liability actions” under the Texas repose statute.

After examining the statutory language, the court concluded that plaintiff ’s claims arose out of his personal injury and were subject to the 15 statute of repose since the definition of “products liability action” included “any action” against a manufacturer or seller in which a plaintiff seeks to recover damages caused by a defective product.1

1 The court examined the statute of repose as it existed prior to its amendment in 2003. Howeve , the definition of “products liability action” found in the revised statute is nearly identical to the definition examined by the court.

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