CHANCERY COURT DISMISSES COMPLAINT, FINDING THAT THE PARTIES’ FORUM SELECTION CLAUSE IS MANDATORY AND ENFORCEABLE
By: Elisabeth Yandell McNeil, Adrienne Wimberly, and Jeremy Crites
In Germaninvestments AG v. Allomet Corp., C.A. No. 2018-0666-JRS (Del. Ch. May 23, 2019), the Delaware Court of Chancery (the “Court”) granted the defendants’ motion to dismiss the action brought to determine the appropriate venue for dispute resolution, finding that the forum selection clause agreed upon by the parties in the agreement that was the subject of the dispute was both mandatory and enforceable, meaning that the action must be brought exclusively in Vienna, Austria.
The plaintiffs sought specific performance of certain provisions of a Restructuring and Loan Agreement (“R&L Agreement”), under which plaintiff Richard Herrling (“Herrling”) had extended loans to defendant Allomet Corporation (“Allomet”), which loans remained unpaid and outstanding. The R&L Agreement was drafted to establish funding for Allomet during the negotiation of a joint venture between Hannjörg Hereth (“Hereth”), the indirect majority owner of Allomet, and Germaninvestments Aktiengesellschaft (AG) (“Germaninvestments”), which is owned by Herrling and members of his family. The parties intended for the joint venture to take the form of a holding company that would ultimately hold equity interests in, and assets of, defendants Allomet and Yanchep LLC (“Yanchep”). The R&L Agreement set forth the terms governing loans made by Herrling to Allomet, along with the framework for future discussions regarding the joint venture and the expected funding obligations of each party to the joint venture. Notably, the R&L Agreement provided that it was subject to Austrian law and identified Vienna, Austria as the “place of jurisdiction.”
While the parties formed AHMR GmbH (“AHMR”) in Austria to act as the joint venture holding company, negotiations among the parties reached an impasse and the parties terminated all discussions before the completion of the contribution of the interests and assets of Allomet and Yanchep to the joint venture. After termination of the negotiations, Herrling offered to withdraw from the R&L Agreement if Allomet repaid the funds contributed by Herrling and Germaninvestments under and in connection with the R&L Agreement. Hereth responded by offering only a fraction of Herrling’s contributed funds and made clear that neither Herrling nor Germaninvestments owned any interest in Allomet.
In response, plaintiffs Germaninvestments and Herrling filed a complaint with the Court against the defendants seeking: (1) to enforce the R&L Agreement and related agreements by having Allomet reissue stock certificates in AHMR’s name, (2) specific performance of the terms of the R&L Agreement and related agreements that require Allomet and Yanchep to transfer their equity interests and certain property to AHMR, and (3) a finding of unjust enrichment in Allomet and Yanchep’s failure to transfer the equity and property to AHMR. The parties agreed to a status quo order and, subsequently, the defendants filed a motion to dismiss under Rule 12(b)(3) asking the Court to declare Delaware as an improper venue for resolution of the dispute.
In determining whether to dismiss a claim based on the applicability of a forum selection clause, the Court will interpret the forum selection clause in accordance with the governing law of the underlying contract, and will generally honor choice-of-law provisions “so long as the jurisdiction selected bears some material relationship to the transaction.” The Court in this case found that Austrian law applied because the R&L Agreement by its terms was governed by Austrian law, and the agreement outlined the formation of an Austrian joint venture, which demonstrated a material relationship with Austria supporting the application of Austrian law. Under Austrian law, choice of forum and consent to jurisdiction provisions are governed by Article 25 of the European Regulation on Jurisdiction and Recognition and Enforcement of Judgments in Civil and Commercial Matters (the “Brussels Regulation”).
The Court will dismiss a claim based on a forum selection clause identifying another jurisdiction as the proper jurisdiction for such claim if the applicable forum selection clause is both mandatory and enforceable. Looking to Article 25 of the Brussels Regulation, the Court found that the forum selection clause at issue in this case was mandatory and enforceable.
Article 25 of the Brussels Regulation states that if parties have agreed that a specified court has jurisdiction to settle disputes, then that jurisdiction will be exclusive, and therefore mandatory, unless the parties have agreed otherwise. Delaware law, in contrast, interprets such forum selection clauses to be permissive rather than exclusive, unless the language clearly provides that the parties intend for jurisdiction to be exclusive. Because the parties had not agreed that the specified jurisdiction was permissive rather than exclusive, under Austrian law, the forum selection clause was exclusive. Under Article 25 of the Brussels Regulation, a forum selection agreement is valid and enforceable if it is “in writing or evidenced in writing,” and this requirement was satisfied here through the written R&L Agreement.
The plaintiffs raised several arguments against the Court’s findings, none of which persuaded the Court. First, the plaintiffs argued that language in the prefatory statements to the Brussels Regulation suggested that the Brussels Regulation does not apply outside of the European Union and also that a connection with a Member State is required. The Court found that this prefatory language is likely not binding and furthermore, that Article 25 is clear that it applies regardless of the parties’ domicile. Next, the plaintiffs argued that Article 8 of the Brussels Regulation permits actions against defendants where they are domiciled, but the Court pointed out that Article 8 applies only to defendants domiciled in Member States, which is not the case for either defendant. The Court further emphasized that there is no conflict between Article 25 and Article 8 by highlighting Article 31(2) of the Brussels Regulation, which requires courts of Member States to stay their proceedings when a court of another Member State has exclusive jurisdiction over the case.
In their final argument, the plaintiffs noted that only a Delaware court should interpret the Delaware General Corporation Law, which they argued functioned to limit the forum selection clause at issue. The Court noted that the dispute in this case was grounded in contract law, not the Delaware General Corporation Law, so the provisions argued by the plaintiffs were not applicable to the case at hand.
The Court dismissed the action without prejudice, recognizing that Delaware is likely an appropriate forum for resolution of this dispute but for the forum selection clause. Lastly, the Court vacated the status quo order in favor of deferring to a Viennese court to as to proper preliminary measures.