Forum Selection Clause in Broker Agreement Insufficient to Confer Personal Jurisdiction

June 29, 2017

The Second Department recently handed down a harsh reminder of the importance of obtaining an executed broker’s agreement.  Oral agreements for broker fees are apt to run afoul of the statute of frauds, and personal jurisdiction cannot be conferred by the mere insertion of a forum selection clause in the brokered sale agreement.

In Ausch v Sutton, the plaintiff alleged he was owed a broker’s fee pursuant to an oral agreement with the defendants for arranging the sale of the first defendant’s (Defendant 1) interest in a company to Defendant 2. Defendant 3 co-owned the company with Defendant 1 and resided outside New York. Aside from the purchase agreement, which contained a forum selection clause designating New York for the resolution of any disputes arising from the purchase agreement, Defendant 3 had no contacts with New York.

Defendant 3’s motion to dismiss pursuant to CPLR 3211(a)(8) was denied by the Kings County Supreme Court (Knipel, J.) on the ground that the forum selection clause in the purchase agreement conferred jurisdiction over all disputes arising from the purchase agreement, which included alleged oral agreements for related broker fees. But the Appellate Division reversed, citing Magdalena v Lins,  which held that a forum selection clause among defendants was insufficient to confer personal jurisdiction in a suit brought by the plaintiff, where the plaintiff was neither a party to the agreement containing the forum selection clause nor a third party beneficiary. In essence, the Appellate Division distinguished between the purchase agreement and the alleged oral agreement for a broker’s commission–the forum selection clause in the former was insufficient to confer personal jurisdiction with respect to the latter.

If the lack of personal jurisdiction over Defendant 3 were not enough, then the statute of frauds ultimately would have proved fatal to the plaintiff’s causes of action against all three defendants. General Obligations Law § 5-701[a][10] states that an agreement to pay a commission for arranging a sale transaction is void unless in writing. As held by the Court of Appeals, a claim for unjust enrichment or quasi-contract in connection with a brokered transaction cannot be used to get around the statute of frauds (see Snyder v Bronfman).

The bottom line for brokers of sale transactions is that they cannot rely on protections contained within the sale documents unless they are parties to those documents. To ensure that the dispute will be heard in New York and not dismissed out of hand under the statute of frauds, a broker would be well advised to obtain a signed agreement declaring the terms of her commission before engaging in any work to consummate a potential business opportunity.