In the past, contractors may not have paid much attention to whether their contracts contained forum selection clauses to govern contractual disputes, but thanks to a new U.S. Supreme Court case, Atlantic Marine Construction Company v. U.S. District Court of the Western District of Texas, they would be wise to start paying attention.
In the past, federal courts did not consistently enforce forum selection clauses. Instead, courts considered the parties’ agreement as a factor in determining the forum of a case, but sometimes also heavily considered “the convenience of the parties.” Factors relating to convenience of the parties have included the parties’ access to proof in one forum versus the other, the parties’ ability to compel witnesses to give deposition testimony without the aid of local courts, the travel and lodging costs borne by witnesses who are willing to testify at trial, and the ability to visit the project. Courts also considered the public interest the potential forums had in the case, including a court’s interest in deciding matters that arise within its jurisdiction, familiarity with the applicable state law and whether a case backlog existed in either of the potential forums’ courts. The courts’ goals were to make the case run smoothly and avoid unnecessary expense to the parties. However, as a result, the parties could not be certain that their forum selection agreements would be honored.
In response to this uncertainty, the Supreme Court recently held that forum selection clauses in construction contracts are enforceable absent extraordinary circumstances. In Atlantic Marine, a general contractor headquartered in Virginia (Virginia Co.) and its Texas-based subcontractor, J. Crew Management, Inc.
(Texas Co.), worked together on a project at Fort Hood in Texas. The parties had agreed upon Virginia state or Virginia federal court as the forum for any litigation between them in the subcontract. However, when a payment dispute arose between the two, Texas Co. filed its suit against Virginia Co. in a Texas federal court that had jurisdiction over the project.
The trial and appellate courts put the burden of proving that the parties’ agreed forum was “in the interests of justice or increased the convenience of the parties or their witnesses” on defendant Virginia Co, rather than on plaintiff Texas Co., the party that breached the forum selection agreement by filing the case in Texas. The trial and appellate courts also took into consideration the convenience of the parties and the courts’ public interests in determining whether to transfer the case to Virginia. With respect to the parties’ convenience, the trial court reasoned that the vast majority of the witnesses were in Texas and if the case was tried in Virginia, the parties wouldn’t have the authority to compel witnesses to testify at trial. Moreover, even if the witnesses were willing to testify, it would be expensive for them to attend the trial. The trial court held that Virginia Co. failed to uphold its burden to justify transfer of the case. The appellate court upheld the trial court’s decision, holding that Virginia Co. had not established a “clear and indisputable” right to have the case transferred.
The Supreme Court took the case on review and overruled both the trial court and the appeals court. Ordinarily, a plaintiff has the privilege of picking the forum from one or more appropriate courts, but the Supreme Court held that the plaintiff waives this privilege when it agrees to a forum selection clause, and therefore the plaintiff’s choice of court should not be considered in determining the proper forum. In addition, the Supreme Court clarified that a trial court should not consider the convenience of the parties in determining whether to transfer the case. If parties agree on a forum selection clause, subsequent preferences or appeals of convenience should not be considered by the court. Moreover, a court’s knowledge of the applicable law or ordinary scheduling concerns do not overpower the parties’ forum selection.
The Supreme Court held that whether the agreement says the forum will be decided in a different state, federal or foreign court, the federal rules require the courts to transfer the case to the forum chosen by the parties unless a party proves that there is an extraordinary public interest reason not to do so. The Supreme Court reasoned that the parties should be able to rely on the enforceability of their forum selection agreements, especially since one party may have traded value in exchange for the forum it preferred.
Atlantic Marine stands for the proposition that forum selection clauses are very likely to be enforced in federal court going forward, absent extremely unusual situations, such as devastating natural disasters affecting courts’ ability to hear cases timely. In fact, forum selection clauses are likely to be enforced even if compelling the testimony of critical witnesses is extremely difficult and expensive from the agreed forum, even if witnesses cannot be compelled to attend trial or are forced to travel at their expense to attend trial, and even if the project site is not accessible to illustrate the issues in the case from the agreed forum. Additional potential costs to consider include the parties’ and their counsels’ travel and lodging and the potential added requirement of local counsel. Also, under the Supreme Court’s recently clarified standard, one or more parties to a forum selection agreement may be effectively forfeiting disputed payments because litigating in the agreed forum is prohibitively difficult and/or expensive. These factors make forum selection clauses in construction (and other) contracts worth a second look. In fact, parties to construction contracts are usually agreeable to changing the contract’s forum selection from remote locations to the location of the project or a nearby city. Given the potential downside of litigating in a remote forum, contractors are well served to negotiate and select a forum that meets their needs at the time of contracting—it is very unlikely that they will have that opportunity once a dispute arises. ■
About the Author:
Danielle N. Senn is a construction attorney in the Dallas office of Ford Nassen (www.fordnassen.com), which is nationally recognized in the industry and is one of the largest construction law firms in Texas. Her practice involves counseling and advising all participants in the construction industry in both the public and private sectors on issues including contract creation and review, lien and bond law, dispute resolution and negotiations, and litigation. She can be reached at firstname.lastname@example.org or 214.523.5100.
Modern Contractor Solutions, January 2014
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