SMITH VALENTINO SMITH INC v. LIFE ASSURANCE COMPANY OF PENNSYLVANIA (1975)

This case involves the effect to be given an agreement between the parties concerning the forum in which they will conduct litigation arising out of their contract. We hold that in the circumstances of this case the trial court properly decided that the agreement should be given effect in the absence of evidence that its enforcement would be unreasonable.

Petitioner Smith, Valentino & Smith, Inc., (Smith) is a California corporation. Real party in interest Life Assurance Company of Pennsylvania (Assurance) is a Pennsylvania corporation transacting business in California. On March 1, 1973, Smith and Assurance entered into an agreement appointing Smith as the ‘managing general agent’ (‘MGA’) to represent Assurance (‘the Company’) for the purpose of soliciting group insurance policies in certain western states, including California. The agreement contains the following provision:

‘17. DISPUTES AND ARBITRATION

‘In all matters concerning the validity, interpretation, performance, effect or otherwise of this Agreement, the laws of the Commonwealth of Pennsylvania shall govern and be applicable. Any actions or proceedings instituted by the MGA under this Agreement with respect to any matters arising under or growing out of this Agreement, shall be brought and tried only in courts located in the County of Philadelphia, State of Pennsylvania, and the MGA expressly waives their right under Part II, Title IV of the Code of Civil Procedure of the Commonwealth of Pennsylvania, to cause any such actions or proceedings to be brought or tried elsewhere. Any such actions or proceedings instituted by the Company under this Agreement with respect to any matters arising under or growing out of this Agreement, shall be brought and tried only in courts located in the County of Los Angeles, State of California, and the Company expressly waives any rights to cause any such actions or proceedings to be brought or tried elsewhere.’

Notwithstanding this provision, in November 1974 Smith filed a ‘Complaint For Breach of Contract, For Intentional Interference With Advantageous Business Relationships, and for Unfair Competition’ against Assurance in the Superior Court of Los Angeles County.¹

Assurance filed a motion that the action be dismissed, based upon the agreement of the parties that any action instituted by Smith shall be brought only in Philadelphia, and Code of Civil Procedure section 410.30, subdivision (a), which provides: ‘When a court upon motion of a party or its own motion finds that in the interest of substantial justice an action should be heard in a forum outside this state, the court shall stay or dismiss the action in whole or in part on any conditions that may be just.’

The attorney for Smith filed a declaration in opposition to the motion to dismiss, stating that the 14 witnesses Smith intended to call at trial were all residents of California, and that Smith was financially unable to bear the extra costs necessary to prosecute the action in Pennsylvania.

The trial court denied the motion to dismiss, but granted a stay of all proceedings in this action until further order of the court, finding that the proper forum was Philadelphia, Pennsylvania, under the terms of the agreement.

Smith seeks a peremptory writ of mandate commanding the superior court to vacate its stay order and to permit the action to proceed. We issued an alternative writ to the superior court to vacate the order or show cause why it had not done so.

Smith contends that the terms of its agreement to institute proceedings against Assurance only in Philadelphia, Pennsylvania, are void and unenforceable and that Smith is not bound by them. Under the circumstances of this case we find no merit to this contention.

DISCUSSION

According to the first sentence of paragraph 17, the parties agree that Pennsylvania law is to govern disputes concerning this contract. Such choice of law provisions are usually respected by California courts. (Windsor Mills, Inc. v. Collins & Aikman Corp., 25 Cal.App.3d 987, 995, fn. 6, 101 Cal.Rptr. 347; Ury v. Jewelers Acceptance Corp., 227 Cal.App.2d 11, 17–18, 38 Cal.Rptr. 376; Boole v. Union Marine Ins. Co., Ltd., 52 Cal.App. 207, 209, 198 P. 416; cf. Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 20 Cal.App.3d 668, 673, 97 Cal.Rptr. 811.)

Under Pennsylvania law the agreement between the parties specifying the forum of litigation is to be enforced in the absence of evidence that the agreement is unreasonable. In Central Contracting Co. v. C. E. Youngdahl & Co., 418 Pa. 122, 209 A.2d 810 (1965), the Pennsylvania Supreme Court considered the effect to be given a provision in the contract that ‘’[t]he Subcontractor agrees that it will not commence any action, whether in law or in equity, against the Contractor or its sureties on bonds, if any, because of any matter whatsoever arising out of the alleged breach or performance of this subcontract agreement, in any Courts other than those in the County of New York, State of New York * * *.” (209 A.2d at p. 815.) The court reviewed earlier cases which had stated that such provisions were contrary to public policy because they would ‘oust the jurisdiction’ of the courts. The Pennsylvania Supreme Court criticized these cases and formulated the correct rule as follows:

‘In our opinion, these cases are correct to the extent that they hold that private parties cannot change by contract the rules of jurisdiction or venue embodied in the various laws of this Commonwealth. Jurisdiction over the party or the subject matter or venue of the cause is not a thing to be determined by private bargaining. However, we do not agree with these cases to the extent that they hold that an agreement between the parties, purporting to determine the forum where future disputes between them should be litigated, is per se invalid and without legal effect. The modern and correct rule is that, while private parties may not by contract prevent a court from asserting its jurisdiction or change the rules of venue, nevertheless, a court in which venue is proper and which has jurisdiction should decline to proceed with the cause when the parties have freely agreed that litigation shall be conducted in another forum and where such agreement is not unreasonable at the time of litigation. See Restatement of Contracts § 558; L. Hand, J., concurring in Krenger v. Pennsylvania R. Co., 174 F.2d 556, 560–561, (2d Cir. 1949); Wm. H. Muller & Co., Inc. v. Swedish American Line Ltd., 224 F.2d 806 (2d Cir. 1955); Cerro De Pasco Copper Corp. v. Knut Knutsen, O.A.S., per Frank, J., 187 F.2d 990 (2d Cir. 1951); Euzzino v. The London & Edinburgh Insurance Company Ltd., 228 F.Supp. 431 (N.D.ill.1964); Takemura & Company v. The S. S. Tsuneshima Maru, 197 F.Supp. 909 (S.D.N.Y.1961). Such an agreement is unreasonable only where its enforcement would, under all circumstances existing at the time of litigation, seriously impair plaintiff's ability to pursue his cause of action. Mere inconvenience or additional expense is not the test of unreasonableness since it may be assumed that the plaintiff received under the contract consideration for these things. If the agreed upon forum is available to plaintiff and said forum can do substantial justice to the cause of action then plaintiff should be bound by his agreement. Moreover, the party seeking to obviate the agreement has the burden of proving its unreasonableness.’ (Id., 209 A.2d at p. 816.)

We note that there is considerable and growing support for the Pennsylvania view as representing the modern trend. The trend was summarized by the United States Court of Appeals for the Third Circuit when it endorsed the Pennsylvania view as follows, in Central Contracting Co. v. Maryland Casualty Co., 367 F.2d 341, 344–345 (1966):

‘We need not consider whether in this diversity case we are bound to apply the Pennsylvania rule, for both federal and state courts have increasingly in recent years recognized the same principle which the Supreme Court of Pennsylvania has now adopted. It is becoming more widely recognized that for reasons of business or convenience the parties may have bargained that all litigation arising out of their complex activity under a contract shall be drawn into one jurisdiction. So long as there is nothing unreasonable in such a provision there is no basis for viewing it as an affront to the judicial power, which must be stricken down. On the contrary, it should be respected as the responsible expression of the intention of the parties so long as there is no proof that its provisions will put one of the parties to an unreasonable disadvantage and thereby subvert the interests of justice.’ (Fn. omitted.)

(See Reeves v. Chem Industrial Co. (1972) 262 Or. 95, 495 P.2d 729, 731–732 (observing the ‘obvious trend in the law as exhibited by the decisions from other jurisdictions and the opinions of the scholars in the field,’ and adopting the modern rule for Oregon).)

The Restatement also supports this view. The restatement of the Law (Second), Conflict of Laws 2d, section 80, provides:

‘The parties' agreement as to the place of the action cannot oust a state of judicial jurisdiction, but such an agreement will be given effect unless it is unfair or unreasonable.’

Significantly, the Pennsylvania view was endorsed by the United States Supreme Court and adopted in admiralty cases in The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 92 S.Ct. 1907, 32 L.Ed.2d 513.²

Commenting upon the trend of the law, the Supreme Court said:

‘Forum-selection clauses have historically not been favored by American courts. Many courts, federal and state, have declined to enforce such clauses on the ground that they were ‘contrary to public policy,’ or that their effect was to ‘oust the jurisdiction’ of the court. Although this view apparently still has considerable acceptance, other courts are tending to adopt a more hospitable attitude toward forum-selection clauses. This view, advanced in the well-reasoned dissenting opinion in the instant case, is that such clauses are prima facie valid and should be enforced unless enforcement is shown by the resisting party to be ‘unreasonable’ under the circumstances. We believe this is the correct doctrine to be followed by federal district courts sitting in admiralty.' (Id. at pp. 9–10, 92 S.Ct. at p. 1913; fns. omitted.)

The court further commented:

‘Courts have also suggested that a forum clause, even though it is freely bargained for and contravenes no important public policy of the forum, may nevertheless be ‘unreasonable’ and unenforceable if the chosen forum is seriously inconvenient for the trial of the action. Of course, where it can be said with reasonable assurance that at the time they entered the contract, the parties to a freely negotiated private international commercial agreement contemplated the claimed inconvenience, it is difficult to see why any such claim of inconvenience should be heard to render the forum clause unenforceable. . . . [¶] Whatever ‘inconvenience’ Zapata would suffer by being forced to litigate in the contractual forum as it agreed to do was clearly foreseeable at the time of contracting. In such circumstances it should be incumbent on the party seeking to escape his contract to show that trial in the contractual forum will be so gravely difficult and inconvenient that he will for all practical purposes be deprived of his day in court. Absent that, there is no basis for concluding that it would be unfair, unjust, or unreasonable to hold that party to his bargain.' (407 U.S. at pp. 16–18, 92 S.Ct. at p. 1916; emphasis in original.)

Applying the Pennsylvania rule to the facts of the instant case, we conclude that the trial court properly stayed the proceedings on the ground that Pennsylvania was the proper forum as agreed by the parties.

First, there is no evidence that the agreement is the result of unequal bargaining power or overreaching. (See Reeves v. Chem Industrial Co., supra, 495 P.2d at p. 732; Restatement, supra, comment to § 80.) On the contrary, the provision appears to be a freely negotiated agreement which is fair to both parties. It is reciprocal in nature: an action instituted by Smith must be brought in Philadelphia whereas an action instituted by Assurance must be brought in Los Angeles. Thus each party gave consideration to the other, in agreeing that actions between them would be instituted in the court convenient to the defendant.

Second, we find no evidence that the courts of Philadelphia are not ‘available’ to Smith, or that said forum cannot ‘do substantial justice to the cause of action’ (Central Contracting Co. v. C. E. Youngdahl & Co., supra, 209 A.2d at p. 816) or that Smith ‘will for all practical purposes be deprived of his day in court’ (The Bremen v. Zapata Off-Shore Co., supra, 407 U.S at p. 18, 92 S.Ct. at p. 1917). Furthermore, the order of the trial court in this case merely stays the proceedings, and if for some unforeseen reason the courts of Philadelphia are not available to Smith, the trial court here could reconsider the matter.

Smith argues that the expense and difficulty of prosecuting the action in Pennsylvania will prevent substantial justice being done. The declaration of Smith's attorney submitted in oppositon to the motion in the trial court states as follows:

‘2. As of the date of this Declaration, your declarant and the members of your declarant's firm have interviewed 14 witnesses which plaintiff will call at the trial of this action to testify as to defendant's breach and damages sustained by plaintiff therefrom. 13 of these 14 witnesses are residents of and maintain places of business and employment in the Counties of Orange and Los Angeles, State of California. 1 witness is a resident of and maintains employment in the County of San Francisco, State of California. These witnesses are not amenable to process of Pennsylvania courts and have stated that travel to Pennsylvania to testify would seriously inconvenience them and cause economic hardship. Only two of these 14 witnesses have stated that they would voluntarily appear in Pennsylvania without subpoenas, thus making it practically impossible to try this case in Pennsylvania courts.

‘. . ..

‘4. Your declarant has examined the books and records of plaintiff and by virtue of damages to its business, caused by defendant's breach of the instant contract, plaintiff would be financially unable to bear the extra costs and expense necessary to prosecute this action in Pennsylvania.’

We find no merit to this contention. ‘Mere inconvenience or additional expense is not the test of unreasonableness since it may be assumed that the plaintiff received under the contract consideration for these things.’ (Central Contracting Co. v. C. E. Youngdahl & Co., supra, 209 A.2d at p. 816; The Bremen v. Zapata Off-Shore Co., supra, 407 U.S. at pp. 16, 17–18, 92 S.Ct. 1907.) The declaration does not preclude the possibility of the witnesses going to Philadelphia at Smith's expense. Furthermore Smith may be able to rely upon depositions. (See The Bremen v. Zapata Off-Shore Co., supra at p. 19, 92 S.Ct. 1907.) Smith's claim that it cannot offord to litigate the dispute in Pennsylvania might also be discounted by the fact that in its complaint Smith claimed approximately $740,000 in compensatory damages and $1,000,000 in exemplary damages. The additional expense and inconvenience of suing Assurance in Pennsylvania is an expense Smith bargained for when it agreed to the provisions of paragraph 17.

Smith contends that the application of the Pennsylvania rule ‘shifts the burden’ to Smith to justify its forum selection, contrary to the normal burden of the moving party under Code of Civil Procedure section 410.30 to show that the forum selected by the plaintiff is inconvenient, and that the burden of proof is a ‘procedural’ issue as to which California law should apply. There is no merit to this contention. Assurance was the party which made the initial showing that ‘in the interest of substantial justice’ (Code Civ. Proc., § 410.30, subd. (a)) the action should be tried in Philadelphia, because that is where the parties agreed to try it. The courts which have considered the question hold that it is then perfectly proper to require the party seeking to be excused from the agreement to make a showing why the agreement should be disregarded. (See Central Contracting Co. v. C. E. Youngdahl Co., supra, 209 A.2d at p. 816; Central Contracting Co. v. Maryland Casualty Co., supra, 367 F.2d at p. 345; The Bremen v. Zapata Off-Shore Co., supra, 407 U.S. at p. 15, 92 S.Ct. 1907; In re Unterweser Reederei, GMBH, supra, 428 F.2d at p. 910.) To adopt Smith's argument that Assurance must sustain the normal burden of showing that the Los Angeles forum is inconvenient would be to render meaningless the parties' agreement. No purpose would be served by entering into such agreements if the defending party was thereafter required to make the same showing of ‘inconvenient forum’ that it would have to make in the absence of any agreement.

We know of no strong public policy of California which should preclude the application by our trial court of the Pennsylvania rule, as agreed by the parties. (See Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc., supra, 20 Cal.App.3d 668, 673, 97 Cal.Rptr. 811; The Bremen v. Zapata Off-Shore Co., supra, 407 U.S. at p. 15, 92 S.Ct. 1907.)

Of course, in the absence of agreement by the parties, it can be said California has a strong policy favoring access to its courts by resident plaintiffs. (See Thomson v. Continental Ins. Co., 66 Cal.2d 738, 742, 59 Cal.Rptr. 101, 427 P.2d 765; Goodwine v. Superior Court, 63 Cal.2d 481, 485, 47 Cal.Rptr. 201, 407 P.2d 1; Hedler v. Western Greyhound Racing Circuit, 34 Cal.App.3d 1, 5–6, 109 Cal.Rptr. 502.) But that protection has no application where the resident plaintiff has freely and fairly negotiated it away in return for other consideration.

Smith argues that under California law an agreement limiting the forum in which the action may be brought is void as against public policy. In an early annotation on this subject ((1957) 56 A.L.R.2d 306) California is listed as among the jurisdictions following the then majority rule that such clauses are invalid or at least do not bar litigation in courts other than those specified in the agreement, citing General Acceptance Corp. v. Robinson, 207 Cal. 285, 277 P. 1039, and General Motors Accept. Corp. v. Codiga, 62 Cal.App. 117, 216 P. 383. A more recent case cited to us by Smith is Beirut Universal Bank v. Superior Court, 268 Cal.App.2d 832, 843, 74 Cal.Rptr. 333. We find nothing in these cases which would preclude the trial court from granting the stay in question in this case.

In the first place, these cases are based upon the notion that the parties cannot ‘stipulate away the jurisdiction of any court.’ (General Motors Accept. Corp. v. Codiga, supra at p. 119, 216 P. at p. 384.) But it has been repeatedly pointed out by the modern cases that this argument misses the point: ‘[S]uch a provision does not oust the jurisdiction of the courts; in effect it merely constitutes a stipulation in which the parties join in asking the court to give effect to their agreement by declining to exercise its jurisdiction. There will always be open to either party the opportunity to present whatever evidence will move a court in the particular circumstances not to decline to exercise its undoubted jurisdiction. No such showing has been made in the present case.’ (Central Contracting Co. v. Maryland Casually Co., supra, 367 F.2d at p. 345.) “[I]t is, of course, true that the parties cannot by their agreement oust a court of jurisdiction. But a court is not always required to exercise such jurisdiction as it may possess. Courts often refuse to hear a case because of forum non conveniens considerations. Why cannot they likewise dismiss a suit on the ground that it was not brought in a forum selected by the parties?” (Reeves v. Chem Industrial Company, supra, 495 P.2d at p. 732. See The Bremen v. Zapata Off-Shore Co., supra, 407 U.S. at p. 12, 92 S.Ct. 1907; In re Unterweser Reederei, GMBH, supra, 428 F.2d at p. 905.)

In the instant case it cannot be contended that the effect of the agreement is to ‘oust the jurisdiction’ of the court. The trial court here was not without jurisdiction of the case; it merely exercised its discretion not to hear the case because Pennsylvania was a more appropriate forum in light of the parties' agreement. The court stayed proceedings until further order, and may still assert jurisdiction if for some reason the courts of Pennsylvania are closed to Smith.

Furthermore, the cited California cases are not inconsistent with the result in this case. In General Acceptance Corp. v. Robinson, supra, 207 Cal. 285, 277 P. 1039, the court affirmed the trial court's granting of a change of venue to the defendant, notwithstanding that the plaintiff had brought the action in the county specified in the agreement. In Beirut Universal Bank v. Superior Court, supra, 268 Cal.App.2d 832, 74 Cal.Rptr. 333, the court upheld the assertion of jurisdiction by the California court over a Lebanese bank, and stated that the trial court was not divested of jurisdiction by a contractual provision that the courts of Beirut, Lebanon, be the sole forum. Only in General Motors Accept, Corp v. Codiga, supra, 62 Cal.App. 117, 216 P. 383, was the trial court reversed after denying the defendant's motion for change of venue. However, the provision in question there was not similar to the agreement in this case. It purported to permit “any attorney at law, to appear for me (us) in any court of record in the United State and . . . confess a judgment against me (us) . . ..” (Id., at p. 118, 216 P. at 393.) Under the modern rule such an agreement would probably be viewed as an unreasonable contract of adhesion and would not be enforced.

In Jack Winter, Inc. v. Koratron Company, 326 F.Supp. 121 (1971), the federal court for the Northern District of California adopted the modern rule in a patent license case, and commented:

‘[A]s to the application of California law we are not convinced that California would not follow the modern rule discussed above. In the California case relied on by Oxfore, the court said:

‘[B]ut, in the event that the parties stipulate (to the forum), their stipulation will have no force or effect unless the trial court sees fit to make an ender changing the place of trial in accordance with the stipulation of the parties.’

‘General Motors Acceptance Corp. v. Codiga, 62 Cal.App. 117, 216 P. 383, 384 (1923).’ (326 F.Supp. at p. 126; emphasis by the federal court.)

Thus the record supports the conclusion that it is reasonable to enforce the provision of the parties' agreement that actions instituted by Smith be filed only in the courts of Philadelphia, Pennsylvania. The parties agreed that Pennsylvania law would govern. Pennsylvania law would enforce the choice of forum provision if reasonable. The agreement was reasonable and fairly negotiated. There is no showing the courts of Philadelphia are not available to Smith. Although Smith face-certain inconvenience and expense in prosecuting the action in Philadelphia, Smith presumably received consideration in the agreement for this inconvenience and expense. Smith has not shown as a matter of law that the inconvenience and expense are so burdensome as to deprive Smith of its day in court. There is no strong public policy of California which precludes application of the Pennsylvania rule. The instant action is merely stayed, not dismissed. The trial court did not abuse its discretion in staying the proceedings. (See National Life of Florida Corp. v. Superior Court, 21 Cal.App.3d 281, 288, 98 Cal.Rptr. 435.) Furthermore we agree with the trial court that its order was in the interest of substantial justice. (Code Civ.Proc., § 410.30, subd. (a).)

Finally, Smith contends that Assurance is precluded from relying on paragraph 17 of the agreement because Assurance had itself previously violated that paragraph by prosecuting an action against Smith in Philadelphia. In September 1974 Assurance filed a ‘Complaint of Foreign Attachment’ in the Court of Common Pleas of Philadelphia County against Smith, with Provident Mutual Life Insurance Company of Philadelphia, a Pennsylvania corporation, as garnishee. It was alleged that due to a clerical error Smith had been paid commissions of $16,650 in June 1974, which it refused to return. Assurance sought to attach funds in the hands of Provident which were to be paid to Smith as commissions for services rendered to Provident. Assurance contends, and Smith does not deny, that Smith was served notice of the proceedings, but failed to enter an appearance. A default judgment was entered.

Thus we observe that a major difference between the instant action and the previous Pennsylvania action is that in this case Assurance made timely objection to venue in Los Angeles, whereas Smith waived change of venue in the Pennsylvania case by failing to object. (See Hohlstein v. Hohlstein, 223 Pa.Super. 348, 352, 296 P.2d 886, 888.)

We do not agree with Smith's contention that previous full compliance with paragraph 17 by Assurance was a ‘condition precedent’ to reliance by Assurance on paragraph 17 in the Los Angeles court. Assurance's prior conduct was simply an additional factor to consider in determining whether in the interest of substantial justice the action should be tried in Pennsylvania. We cannot say that this additional factor rendered the enforcement of the agreement unreasonable.

The alternative writ is discharged. The application for a peremptory writ is denied.

FOOTNOTES

1.  The complaint alleged that the agreement provided for terms of one year and for automatic renewal in the absence of notice of termination 60 days prior to the anniversary date, that no termination was tendered prior to March 1, 1974, that the agreement was therefore automatically renewed, and that Assurance thereafter breached the contract by refusing to allow Smith to underwrite new policies or to renew existing policies.

2.  See also the dissenting opinion prepared for the Court of Appeals in that case by Judge Wisdom, which was approved in the Supreme Court opinion. In re Unterweser Reederei, GMBH, (5th Cir. 1970) 428 F.2d 888, 896–912.

ASHBY, Associate Justice.

STEPHENS, Acting P. J., and LORING,* J., concur.