On October 23, 2009, the Second Circuit definitively ruled in Aguas Lenders Recovery Group LLC v. Suez, S.A. (ALRG) that U.S. forum selection clauses are enforceable against successors in interest under ordinary principles of contract law - even when the successor is a non-U. S. entity. The opinion (found here) clarifies this key legal issue, further strengthening predictability in international transactions. Applying ordinary successorship law to forum selection clauses prevents a defaulting successor from escaping liability on a jurisdictional theory when substance and jurisdiction were negotiated as one contractual package.
In ALRG, Proskauer represents the PlaintiffAppellant in claims against an Argentine entity, AySA. ALRG sued AySA to recover on more than $125 million in loans made to Aguas Argentinas - a now defunct Argentine entity that ran Buenos Aires' water and sewage system. ALRG alleges that AySA is Aguas' successor in interest. Among other things, ALRG alleges that AySA (owned 90 percent by the Argentine government) was specifically created to, and did, take over Aguas' contracts and operations after Aguas' shareholders opted to get out of their arrangement with Argentina and that, as part of that takeover, AySA received the physical assets that had been built, improved or acquired using money borrowed by Aguas, the accounts receivable, and assumed various of Aguas' employment and other contracts - yet shirked its obligations under Aguas' loan agreements (which were expressly binding on all successors). Proskauer filed claims against AySA (and others) in the Southern District of New York based, in part, on express forum selection clauses in the operative agreements.
The District Court dismissed ALRG's claims against AySA under the doctrine of forum non conveniens. The District Court reasoned that the contractual clauses were irrelevant because AySA was not a signatory to the agreements, even if AySA were otherwise contractually bound as Aguas' successor in interest. On this reasoning, the District Court applied a traditional forum non conveniens analysis under Gulf Oil Corp. v. Gilbert, 330 U.S. 501 (1947) and ignored the longstanding rule under M/S Bremen v. Zapata OffShore, 407 U.S. 1 (1972), that written forum agreements are presumptively enforceable. Using the Gulf Oil analysis, and without discovery on the issues of successorship or convenience, the District Court ruled that New York was not a convenient forum for AySA and, therefore, it dismissed ALRG's claims against AySA.
The Second Circuit vacated the District Court judgment. The Circuit reasoned that M/S Bremen extends to nonsignatories. If a nonsignatory would be bound by a contact under ordinary principals of law (as a successor or by assumption or otherwise), any contractual forum selection clauses also are presumptively enforceable against the nonsignatory. In that case, the Gulf Oil analysis does not apply. The Circuit recognized that, in the case of AySA, the issue is whether AySA is Aguas' successor in interest. The Circuit declined to decide whether that issue should be a question of New York or Argentine law (although ALRG argues that it wins under either system). The Circuit instead ordered that the District Court must permit discovery and litigation on the issue of successorship, after which the District Court will make specific findings on the issue. The Circuit Court declined to reach AySA's additional arguments for dismissal under the Foreign Sovereign Immunities Act and actofstate doctrines.
The Second Circuit's opinion is a key development for crossborder commercial disputes.
First, it holds for the first time at the appellate level in this Circuit that M/S Bremen applies to nonsignatories. Second, it strengthens predictability by ensuring that expectations that the substantive aspects of contracts that bind successors will be enforced in the procedural setting negotiated and agreed to by the parties. Third, the opinion reaffirms that successorship is a factual issue that requires discovery and hearing, even when raised as a purported threshold jurisdictional issue.
Jennifer Scullion is Co-chair of Proskauer's International Practice Group. She argued the appeal for ALRG, with IPG cochair Lou Solomon and IPG member Daniella Rudy on the brief.