|January 8, 2014|
Previously published on January 3, 2014
Contracting parties often agree to settle disputes in a preselected court or arbitration proceeding, in a preselected location. Such agreements are called “forum-selection clauses” in contracts. The United States Supreme Court recently addressed a challenge to forum-selection clauses, in Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas, et al., --- S. Ct. ----, 2013 WL 6231157 (U.S. Dec. 3, 2013). The Supreme Court showed an inclination to enforce forum selection clauses as the parties agreed, but the Court’s decision also recognized that such clauses may be attacked and avoided under some circumstances. For reasons discussed below, this is likely to be an evolving issue over the next few years.
Atlantic Marine Construction Company, Inc. (“Atlantic Marine”), a Virginia corporation, was awarded a contract by the United States Army Corps of Engineers to construct a child development center at Fort Hood in Killeen, Texas. Atlantic Marine subcontracted some of the work to J-Crew Management, Inc. (“J-Crew”), a Texas corporation. The subcontract included a forumselection clause, stating that all disputes would be litigated in Virginia. When a payment dispute arose, J-Crew filed a lawsuit in a federal district court in Texas. J-Crew’s originally filed complaint included a claim brought pursuant to the Miller Act, 40 U.S.C. §§ 3131-3134, which specifies venue for lawsuits. However, J-Crew voluntarily dismissed the Miller Act claim, leaving this as an ordinary breach-of-contract case in federal court. Atlantic Marine argued that venue in Texas was “wrong” and “improper”, because the subcontract’s forum-selection clause required the suit to be brought in Virginia. Atlantic Marine sought to have the Texas suit dismissed or transferred to Virginia.
The Texas federal district court denied both motions and left the suit pending in Texas, based in large part on the convenience and availability of witnesses in Texas. The court held that Atlantic Marine had not demonstrated that a transfer of this case to Virginia would be in the interest of justice or increase the convenience to the parties and their witnesses, despite the fact that this is what the parties had agreed.
The United States Court of Appeals for the Fifth Circuit (which covers Texas) affirmed. The court of appeals held that, although a contracted-for choice of forum is a significant factor, it is not controlling, and “institutional concerns” such as availability of witnesses cannot be contracted away by private parties. Circuit Judge Haynes wrote a separate, concurring opinion, noting that he was compelled to agree with the court’s judgment to affirm the district court’s decision, due to “the very high standards for mandamus review coupled with the majority opinion’s approach,” but he concluded that the district court had erred because “[a] forum-selection clause that was negotiated and agreed to by sophisticated parties and is not challenged on fraud, unreasonableness, or anything similar should be given effect.”
Atlantic Marine—the party seeking to enforce the forum-selection clause—sought to have the United States Supreme Court hear the case, and the Court agreed to do so.
The Supreme Court’s Decision
The United States Supreme Court found that, while “plaintiffs are ordinarily allowed to select whatever forum they consider most advantageous . . . when a plaintiff agrees by contract to bring suit only in a specified forum—presumably in exchange for other binding promises by the defendant—the plaintiff has effectively exercised its ‘venue privilege’ before a dispute arises.” The Court held that the district court should not consider the parties’ private-interests (e.g., availability of witnesses) in determining whether to enforce a forum-selection clause. “When parties agree to a forum-selection clause, they waive the right to challenge the preselected forum as inconvenient or less convenient for themselves or their witnesses, or for their pursuit of the litigation.”
Two aspects of the Court’s decision are significant. First, recall that the trial court denied the request to dismiss or transfer the case because the party seeking to enforce the forum-selection clause had not demonstrated that there were valid reasons to enforce the clause. The Supreme Court reversed the analysis, holding that the party seeking to avoid enforcement of the forumselection clause—often the plaintiff, who has selected a different forum—has the burden of showing “institutional concerns” sufficient to ignore the parties’ agreement. This decision emphasizes the deference federal courts will give to the parties’ contractual freedom. A party seeking to challenge a valid forum-selection clause for which it has bargained must show a compelling reason why the agreement should not be enforced.
Second, the Supreme Court did not outright say that a forum-selection clause will always be enforced as written. Rather, the Court remanded the case to allow the lower courts to decide whether there are any public-interest factors that would warrant non-enforcement of the forumselection clause, thereby leaving it to the lower courts to decide just what public interests may successfully defeat the forum-selection clause. This is significant because the Court did not establish any objective or “bright line” test to the enforceability of forum-selection clauses. Sending the case back to the lower courts to develop the important factors almost assures us that further appellate litigation on this topic is coming, as trial courts struggle to articulate the factors and courts of appeal weigh in to agree or reject what the lower courts have done.
It should be noted that the Supreme Court’s decision addresses the enforceability of forum-selection clauses as a matter of contract in general. Some of the amicus curiae (“friend of the court”) briefs filed with the Court, however, sought to distinguish construction contracts from other contracts in general. In discussing public-interest factors that may be relevant in construction disputes, these briefs point to the many states (including both Texas and Virginia) with laws that either void or make voidable forum-selection clauses that require construction disputes to be litigated in a state other than the state where the construction project is located. But the Supreme Court did not address this or any other potential public-interest factor, leaving that analysis to the lower courts. It will be up to the lower courts to decide what weight, if any, to give to legislative policy concerns underlying these state laws.
The Supreme Court also did not address whether a Miller Act claim would change the court’s analysis when ruling on a motion to transfer. Recall that J-Crew’s complaint initially included a Miller Act claim, which J-Crew voluntarily dismissed. The only discussion regarding the Miller Act came from Circuit Judge Haynes’ concurring opinion, which noted that the United States Court of Appeals for the Fifth Circuit “has found that forum-selection clauses may trump even seemingly mandatory venue statutes.” Judge Haynes noted that while “Congress provided that any action under the Miller Act, 40 U.S.C. §§ 3131-3134 ‘must be brought . . . in the United States District Court for any district in which the contract was performed and executed,’” the Fifth Circuit’s decision in In re Fireman’s Fund Ins. Cos., 588 F.2d 93 (5th Cir.1979), held that this provision in the Miller Act “‘is not jurisdictional but only a venue provision . . . [which] may be varied by contract unless under the circumstances the agreement is unreasonable.’” While not binding legal precedent, Judge Haynes’s concurring opinion suggests that, even when analyzing a Miller Act claim, some lower federal courts may be inclined to defer to the contractual forum-selection clause.
The Supreme Court’s decision makes it clear that the plaintiff carries a heavy burden of showing that public-interest factors “overwhelmingly disfavor a transfer” as the Court noted “those factors will rarely defeat a transfer motion.” Given what appears to be a high standard set by the Supreme Court for parties challenging a contractual forum-selection clause, the decision limits uncertainty by preventing parties from ignoring a clause to which they agreed. Thus, the law now is that, while forum-selection clauses will not always be enforced as written, they will be given great weight when a contracting party sues in another forum. On the other hand, the decision establishes that there may be circumstances in which deference to private agreements will give way to other circumstances. Stand by for further developments on this issue.