Northwestern Nat. Ins. Co. v. Donovan

• Citation: 916 F.2d 372
• Decision Date: 17 October 1990
• Docket Number: Nos. 90-1366,s. 90-1366
• Parties: NORTHWESTERN NATIONAL INSURANCE COMPANY, Plaintiff-Appellant, v. William F. DONOVAN, et al., Defendants-Appellees. to 90-1369, 90-1377.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 372

916 F.2d 372

59 USLW 2261

NORTHWESTERN NATIONAL INSURANCE COMPANY, Plaintiff-Appellant, v. William F. DONOVAN, et al., Defendants-Appellees.

Nos. 90-1366 to 90-1369, 90-1377.

United States Court of Appeals,

Seventh Circuit.

Argued Sept. 7, 1990.

Decided Oct. 17, 1990.

John A. Rothstein, Richard C. Ninneman, Quarles & Brady, Milwaukee, Wis., for plaintiff-appellant.

Stephen E. Kravit, K. Scott Wagner, Kravit, Waisbren & Debruin, Milwaukee, Wis., Martha B. Lawley, Glenda Kirsch, Ryan, Shoss, Sudan, & Lawley, Houston, Tex., for defendants-appellees.

Before POSNER, MANION, and KANNE, Circuit Judges.

POSNER, Circuit Judge.

An insurance company appeals from the dismissal, for want of personal jurisdiction, of five diversity breach of contract suits that it brought in a federal district court in Wisconsin. The principal ground of appeal and the only one we need discuss is that the defendants consented, in a valid forum-selection clause contained in the contract on which the suits are based, to defend the suits in Wisconsin.

The parties agree that the validity of the clause is a matter of federal common law even though state law controls the substantive issues in the suits. There is a division between the circuits on the question, with the Ninth and Eleventh agreeing with the parties to this case that federal common law does indeed govern the question, Manetti-Farrow, Inc. v. Gucci America, Inc., 858 F.2d 509, 512 (9th Cir.1988); Stewart Organization, Inc. v. Ricoh Corp., 810 F.2d 1066, 1068 (11th Cir.1987) (per curiam), aff'd on other grounds, 487 U.S. 22, 108 S.Ct. 2239, 101 L.Ed.2d 22 (1988), while the Third believes that the validity of a forum selection clause is a matter of state law. General Engineering Corp. v. Martin Marietta Alumina, Inc., 783 F.2d 352, 356-57 (3d Cir.1986). The former position is supported by Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22, 108 S.Ct. 2239, 101 L.Ed.2d 22 (1988), and perhaps the circuit split will not survive it. The specific question in Stewart was whether, if a party moves for a change of venue under 28 U.S.C. Sec. 1404(a) to the forum designated in the parties' forum selection clause, the court in considering the motion should treat the issue of the clause's validity as one of federal law; the Court said "yes," over a strong dissent by Justice Scalia which argued on grounds independent of the existence of section 1404(a)--particularly the spur to forum shopping that is created when the choice of a federal court over a state court determines the validity of a forum selection clause and hence the venue of the suit--that state law should apply. Probably, therefore, the parties before us are correct to concede that the issue of validity is one of federal law, though we need not decide this, since litigants are, within limits not exceeded here, permitted to designate what law shall control their case. Casio, Inc. v. S.M. & R. Co., 755 F.2d 528, 531 (7th Cir.1985); Restatement (Second) of Conflict of Laws Sec. 187 (1971).

Validity and interpretation are separate issues, and it can be argued that as the rest of the contract in which a forum selection clause is found will be interpreted under the principles of interpretation followed by the state whose law governs the contract, so should that clause be. But this is another issue we need not decide; neither side invokes any interpretive principles founded on a particular state's law.

The defendants are well-to-do individuals (millionaires, in fact, though millionairehood is not what it used to be), Texans for the most part, who early in the last decade bought limited partnerships in one of two closely related tax-shelter enterprises that for simplicity we shall treat as one. In 1984 the enterprise decided it needed more money. The lender to whom it turned required it to secure its promissory notes by a financial obligation bond, issued by Northwestern National Insurance Company, the plaintiff in these cases. Northwestern in turn required the limited partners to agree to indemnify it should it be forced to make good on its bond to the lender. Each of the partners in the cases before us executed the indemnification agreement that Northwestern furnished it, and this is the agreement that contains the forum selection clause. The enterprise later defaulted and Northwestern had to pay off the notes, after which it sued the limited partners to enforce their agreement to indemnify it.

The agreement is a two-page printed form. The first page is dominated by a blank table that the indemnitor is to fill in with his financial statement. The second page, which is on the back of the first, consists of six paragraphs in a small but fully legible typeface. The first and longest paragraph sets forth the indemnitor's obligation to indemnify the insurance company upon the occurrence of stated conditions. The second paragraph, much shorter, sets forth several reservations of no relevance here designed to protect the company. The third and shortest paragraph is the one in issue. It states: "Venue, at the Company's option for litigation and/or arbitration, shall be in the County designated on the front page under the description of the Company's address." That county, we see if we turn back to the first page, is Milwaukee County. The fourth through sixth paragraphs are also short: they are a severability clause, a clause binding heirs and other successors, and a clause fixing the date on which the indemnity is to become effective. At the bottom is a space for signatures by the indemnitor and by a notary.

The district judge refused to enforce the forum selection clause and went on to hold that there was no other basis for obtaining jurisdiction over these out-of-state defendants. "In this case the forum selection clause is not compelling ... The clause was not freely negotiated. It is buried in the fine print. It does not clearly state where the case should be litigated. It compels an individual with no contacts with Wisconsin to travel to Wisconsin to defend a case brought by a Wisconsin insurance company. I cannot find that it would be reasonable or just, on the basis of this forum selection clause, to say that [the defendants] waived [their] rights to object to the court's personal jurisdiction over [them]. Because no other basis for personal jurisdiction exists, this action is DISMISSED."

In holding that a forum selection clause should be enforced only if reasonable and just, the district court relied on the Stewart case. The question in Stewart, however, was not the validity of the forum selection clause, but the criteria for granting a motion for a change of venue under 28 U.S.C. Sec. 1404(a). The question here is not the most convenient place for trying these suits; it is whether the defendants consented to being sued in Wisconsin and by doing so waived their right to object to the jurisdiction of the courts (including federal courts) in Wisconsin over them. This case is governed by M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972), and Heller Financial, Inc. v. Midwhey Powder Co., 883 F.2d 1286 (7th Cir.1989), decisions in which the enforceability of a forum selection clause was the issue. Those decisions bury the outmoded judicial hostility to forum selection clauses. They make clear that since a defendant is deemed to waive (that is, he forfeits) objections to personal jurisdiction or venue simply by not making them in timely fashion, a potential defendant can waive such objections in advance of suit by signing a forum selection clause. Their approach is to treat a forum selection clause basically like any other contractual provision and hence to enforce it unless it is subject to any of the sorts of infirmity, such as fraud and mistake, that justify a court's refusing to enforce a contract, or unless it does not mean what it seems to mean--unless, in other words, properly interpreted it is not a forum selection clause at all.

The attentive reader will have noticed a hedge word in the previous paragraph--"basically." Neither Bremen nor Heller says outright that a forum selection clause is just like any other contract. Bremen for example, using the terminology echoed in Judge Evans' opinion in this case, says that the clause will be enforced unless it is "unreasonable and unjust," which may or may not coincide, at least as a matter of semantics, with "subject to a contractual infirmity," another formulation found in the opinion. 407 U.S. at 12-13, 92 S.Ct. at 1914-15. Why might a court be more suspicious of a forum selection clause contained in a contract than of the contract itself? There are two reasons, one bad, one good. The bad reason is that courts used to look askance at agreements to "oust" their jurisdiction. The best-known example is arbitration. Agreements to arbitrate were not enforceable, because they deprived the objecting party of his right to litigate the parties' dispute in court. No reason why that right should not be waivable was ever given, and the rule that it could not be went down the tubes long ago. Kulukundis Shipping Co. v. Amtorg Trading Corp., 126 F.2d 978 (2d Cir.1942); International Ass'n of Machinists v. General Elec. Co., 865 F.2d 902, 903 (7th Cir.1989). Likewise in the bad old days, invoking a forum selection clause as a ground for dismissal of a suit brought in violation of the clause was considered an improper effort to "oust" the court's jurisdiction. M/S Bremen v. Zapata Off-Shore Co., supra, 407 U.S. at 9-12, 92 S.Ct. at 1912-14. Although the use of such a clause not to defeat but, as in this case, to defend a court's assumption of jurisdiction resulted in taking away another court's jurisdiction over the case, so formalistic was the concept of "ouster" that courts treated the use of such clauses to retain rather than to defeat jurisdiction far more leniently. Annot., 69 A.L.R.2d 1324 (1959). The analogy was to waiving objections to...