|January 8, 2014|
Previously published on January 5, 2014
The Contract Disputes Act gives prime contractors a straightforward procedure for resolving claims against the federal government. But there is no mandatory approach to resolving disputes between contractors and subcontractors. Private parties may agree to arbitrate their disputes or designate a specific court to hear them. They may identify the applicable law, provide for the recovery of attorney’s fees, and prescribe any number of other details.
The Supreme Court’s decision in Atlantic Marine Constr. Co. v. United States District Court for Western District of Texas, No. 12-929 (U.S. Dec. 3, 2013), holds that forum selection clauses in subcontracts on federal projects are enforceable. In this first blog post of a two-part series, we discuss the decision in Atlantic Marine and the limits of the Supreme Court’s analysis. In the subsequent one, we will discuss the use of subcontract dispute resolution clauses more broadly.
Atlantic Marine was the prime contractor on a Corps of Engineers project for the construction of a child-development center at Fort Hood, Texas. Atlantic Marine subcontracted a portion of the work to J-Crew Management, Inc., a Texas corporation. Since Atlantic Marine was a Virginia corporation, its subcontract contained a provision stating that disputes between J-Crew and Atlantic Marine “shall be litigated in the Circuit Court for the City of Norfolk, Virginia, or the United States District Court for the Eastern District of Virginia, Norfolk Division.” The only stated exception to the requirement for Virginia courts was for pass-through claims.
When Atlantic Marine withheld J-Crew’s final payment based on alleged defective work, J-Crew sued Atlantic Marine in Texas. Citing the contract requirement for disputes to be resolved in Virginia courts, Atlantic Marine moved to dismiss or transfer the case to Virginia. The Texas district court denied the motion because the evidence was in Texas and because it would have been difficult to compel Texas witnesses to testify at trial in Virginia. The Fifth Circuit Court of Appeals then denied Atlantic Marine’s petition for a writ of mandamus directing the district court to dismiss or transfer the case to Virginia. See In re Atlantic Marine Constr. Co., 701 F.3d 736 (5th Cir. 2012).
Despite the losses at the trial court and the appellate court, the Supreme Court sided with Atlantic Marine. In a unanimous decision written by Justice Alito, the Court held that forum selection clauses will be enforced except when there are truly exceptional circumstances that will affect the public. The Court explained that private interests (such as convenience for the parties or the witnesses) were simply not relevant. “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.”
In the Court’s view, the interest of justice is best served by holding parties to their contractual agreements:
When parties have contracted in advance to litigate disputes in a particular forum, courts should not unnecessarily disrupt the parties’ settled expectations. A forum selection clause, after all, may have figured centrally in the parties’ negotiations and may have affected how they set monetary and other contractual terms; it may, in fact, have been a critical factor in their agreement to do business together in the first place. In all but the most unusual cases, therefore, “the interest of justice” is served by holding parties to their bargain.
The Supreme Court’s decision in Atlantic Marine does not offer much practical guidance on drafting a strong forum selection clause. We address that subject in the next post.