Jarret Hitchings of Duane Morris.

In EnVen Energy v. Dunwoody, No 2019-0579-KSJM, 2020 Del. Ch. Lexis 195 (Del. Ch. May 28, 2020), the Delaware Court of Chancery found that a forum selection clause in an employment agreement between the plaintiff and a defendant did not bar venue of the matter in Delaware. At the same time, however, the Court of Chancery concluded that the Delaware action should be stayed pending resolution of a previously filed action in Texas in accordance with the McWane doctrine. While neither result is necessarily surprising, EnVen is notable for the Court of Chancery's narrow construction of the forum selection clause and its consideration of the identity of claims asserted in parallel state court actions.

Plaintiff EnVen Energy Corp. extracts and produces oil, gas and related hydrocarbons in the Gulf of Mexico. Defendant David Dunwoody co-founded EnVen in 2014 and served as its president until he resigned in June 2019. EnVen alleged that during his tenure as president, Dunwoody engaged in a self-dealing scheme whereby he guaranteed EnVen's business to defendant Oilfield Pipe of Texas, LLC in exchange for kickbacks paid to his father.

In June 2019, Dunwoody sued EnVen in Texas state court asserting that he had validly exercised his right to terminate his employment agreement with EnVen for "good reason" and was therefore entitled to certain benefits. EnVen filed an answer in the Texas action and denied that Dunwoody terminated the employment agreement for "good reason." In addition, EnVen asserted a number of affirmative defenses, including that Dunwoody's claim was barred by the doctrines of unjust enrichment and unclean hands. Specifically, EnVen included a paragraph in its answer that alleged Dunwoody breached his duty of loyalty to EnVen through the kickback scheme.

The following month, in July 2019, EnVen commenced litigation against Dunwoody in the Court of Chancery asserting claims for breach of fiduciary duty of loyalty and equitable fraud. Thereafter, EnVen filed an amended answer in the Texas action which reiterated its affirmative defenses but omitted the paragraph describing the kickback scheme and Dunwoody's alleged breach of his duty of loyalty. In September 2019, Dunwoody moved to dismiss EnVen's Delaware complaint or, in the alternative, to stay the Delaware proceedings in favor of the Texas action.

Court of Chancery Rule 12(b)(3) authorizes the court to dismiss a proceeding if the Court of Chancery is not the proper venue for resolving the dispute. See Del. Ch. Ct. R. 12(b)(3). Pursuant to that rule, "the court 'is not shackled to the plaintiff's complaint' and 'is permitted to consider extrinsic evidence from the outset.'" See Dunwoody, 2020 Del. Ch. Lexis at 195 (citing Luchi v. Luchi, (Del. Ch. Mar. 17, 2020)). In addition, the court may dismiss or stay a matter under Rule 12(b)(3) "in deference to a first-filed case in a different jurisdiction" under the doctrine established in McWane Cast Iron Pipe v. McDowell-Wellman Engineering, 263 A.2d 281 (Del. 1970).

As an initial matter, the court considered whether a form selection clause in Dunwoody's employment agreement with EnVen barred venue of the instant dispute in Delaware. Specifically, the forum selection provision required that "any lawsuit that may be brought by either party involving the enforcement of this agreement or the rights, duties, or obligations of this agreement … be brought exclusively in the state district or federal courts sitting in Harris County, Texas." The court narrowly construed the forum selection clause and held that the references to "this agreement" limited its application only to contractual claims arising from the employment agreement. The claims asserted by EnVen in its Delaware complaint—breach of the duty of loyalty and equitable fraud—derive from common law. Accordingly, the court concluded that these claims did not fall within the scope of the employment agreement's forum selection clause.

In reaching this conclusion, the court rejected Dunwoody's argument that claims based on an alleged breach of the duty of loyalty fell within the terms of the employment agreement because the employment agreement included a section titled "Duty of Loyalty." According to Dunwoody, this section of the employment agreement created a contractual duty of loyalty, and any claims for the breach of that contractual duty were subject to the forum selection provision. Again however, the court narrowly construed the employment agreement, finding that the relevant section provided only an acknowledgement and agreement by Dunwoody that he owed EnVen a duty of loyalty. The section did not create a new contractual duty, nor did it transform an existing common law duty into a contractual one.

Despite its conclusion that the forum selection clause did not bar EnVen's complaint in Delaware, the court was careful to consider whether a stay of the Delaware proceeding was warranted under the "first-filed rule" set forth in McWane. Under McWane, Delaware courts will generally exercise discretion in favor of a stay where a prior action, involving the same parties and issues, is pending elsewhere in a court capable of doing prompt and complete justice. See McWane, 263 A.2d at 283. "Dismissals are rarely granted when the first-filed doctrine is invoked." Rather, "it is preferable to merely stay the later-filed action because it is impossible to predict with certainty the course of earlier-filed litigation in another jurisdiction."

EnVen urged the court not to apply the McWane doctrine, arguing that the Texas and Delaware actions involved different issues. The court rejected this contention. Instead, the court recognized that in determining whether to invoke the McWane doctrine, "the pragmatic focus is on whether the claims 'are closely related and arise out of the same common nucleus of operative facts.'" (quoting EuroCapital Advisors v. Colburn, (Del. Ch. Feb. 14, 2008)). Here, the court recognized the common nucleus of operative fact concerning Dunwoody's termination from his employment with EnVen, especially in light of the likelihood that the EnVen's Delaware fiduciary duty issues would be litigated in connection with Dunwoody's Texas compensation claims. Indeed, the court noted that EnVen had argued as much in its original answer to the Texas complaint—and the omission of that argument from its amended answer was insufficient to avoid the anticipated overlap between the two actions.

In light of EnVen, practitioners and contract parties should be careful when drafting forum selection clauses to make sure that the provision covers all possible claims the parties intend to bring in the selected forum. As EnVen makes clear, Delaware courts will respect the terms of a forum selection clause, but will enforce the terms of such provisions as written.

Jarret P. Hitchings, an associate at Duane Morris, practices in the area of commercial finance, financial restructuring and business bankruptcy and corporate litigation.