|December 26, 2013|
Previously published on December 17, 2013
In a unanimous decision issued on December 3, 2013, the U.S. Supreme Court has ruled in a construction case dealing with forum-selection clauses that those clauses should generally be the controlling factor in determining where a lawsuit may be brought. The opinion addresses the procedure that is available for a defendant in a Federal civil case who seeks to enforce a forum-selection clause such as those which are common in the construction industry.
The case, Atlantic Marine Construction Co. v. U.S. District Court for the Western District of Texas, involved a dispute between prime contractor Atlantic Marine Construction of Virginia Beach, Virginia and subcontractor J-Crew Management Inc. of Killeen, Texas. Atlantic Marine, a Virginia corporation with its principal place of business in Virginia, entered into a contract with the U.S. Army Corps of Engineers to construct a child-development center at Fort Hood in the Western District of Texas. Atlantic Marine then entered into a subcontract with J-Crew, a Texas corporation, for work on the project. Their subcontract included a forum-selection clause, which stated that all disputes between the parties “shall be litigated in the Circuit Court for the City of Norfolk, Virginia, or the U.S. District Court for the Eastern District of Virginia, Norfolk Division.”
A dispute about payment arose, and J-Crew sued Atlantic Marine in the Western District in Texas. Atlantic Marine moved to dismiss the suit, arguing that the forum-selection clause rendered venue in the Texas Federal court “wrong” and “improper” under various Federal venue statutes and procedural rules. In the alternative, Atlantic Marine moved to transfer the case to the Eastern District of Virginia. J-Crew opposed these motions.
The District Court denied both motions, holding that it properly had jurisdiction over the parties and the matter, that Atlantic Marine bore the burden of establishing that a transfer would be appropriate, and that the court would “consider a nonexhaustive and nonexclusive list of public and private interest factors,” of which the “forum-selection clause [was] only one such factor.” In rendering its decision, the District Court held that Atlantic Marine had failed to carry its burden of showing that transfer “would be in the interest of justice or increase the convenience to the parties and their witnesses.” Atlantic Marine petitioned the Court of Appeals for a writ of mandamus directing the District Court to dismiss the case or to transfer it to the Eastern District of Virginia. The Court of Appeals denied Atlantic Marine’s petition and concluded that the District Court had not clearly abused its discretion in refusing to transfer the case after conducting a statutory balance-of-interests analysis.
Writing for the Court, Justice Samuel Alito said that dismissal of the suit as sought by Atlantic Marine was inappropriate as venue in the Western District of Texas in which J-Crew had filed its action was neither “wrong” or “improper” when reviewing whether the court in which the case was brought satisfied the requirements of Federal venue laws.
However, Alito said that a forum-selection clause may be enforced by a motion to transfer under a venue statute which states that “[f ]or the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought or to any district or division to which all parties have consented.” His opinion reasons that this language does not condition transfer on the initial forum’s being “wrong” and it permits transfer to any district where venue is also proper or to any other district to which the parties have agreed by contract or stipulation.
Alito wrote, “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. A court accordingly must deem the private-interest factors to weigh entirely in favor of the preselected forum.” As such, a district court may consider arguments about public-interest factors only; Alito adding that “the practical result is that forum-selection clauses should control except in unusual cases.”
Stating, “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,” Alito said, “In all but the most unusual cases, therefore, ‘the interest of justice’ is served by holding parties to their bargain.”
For parties involved in the construction industry, the ruling’s major point is that when parties from differing states have contracted in advance to litigate disputes in a particular Federal forum, Federal courts should not unnecessarily disrupt the parties’ settled expectations. This will bring some certainty in their business relations. However, the case also highlights the need for owners, contractors, subcontractors and materialmen to carefully weigh the benefits and drawbacks of choosing dispute resolution in one forum as opposed to another. For example, the case does not determine the outcome if a forum selection provision seeks to have disputes resolved in a state court.
This Client Alert is not intended to fully analyze all considerations in construction contracting or dispute resolution, and does not provide advice in any particular business situation; as such, it cannot be used or relied upon for those purposes.